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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
COMMISSION FILE NUMBER 001-08106
[GRAPHIC OMITTED MASTEC LOGO]
MASTEC, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
FLORIDA 65-0829355
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
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 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 [ ].
As of October 28, 1999, MasTec, Inc. had 28,156,768 shares of common
stock, $0.10 par value, outstanding.
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<PAGE>
MASTEC, INC.
FORM 10-Q
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Unaudited Consolidated Statements of Operations
for the Three and Nine Months Ended September 30, 1999 and 1998... 3
Consolidated Balance Sheets as of September 30, 1999 (Unaudited)
and December 31, 1998............................................. 4
Unaudited Consolidated Statement of Changes in
Shareholders' Equity for the Nine Months
Ended September 30, 1999.......................................... 5
Unaudited Consolidated Statements of Cash Flows
for the Nine Months Ended September 30, 1999 and 1998............. 6
Notes to Consolidated Financial Statements (Unaudited) ........... 8
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition........................................... 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk........ 22
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.................................. 22
SIGNATURES.................................................................. 23
2
<PAGE>
MASTEC, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------ -----------------------------
1999 1998(1) 1999 1998(1)
-------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenue $ 301,092 $ 288,606 $ 746,576 $ 720,807
Costs of revenue 227,760 218,513 568,126 557,707
Depreciation and amortization 14,037 11,830 40,551 30,994
General and administrative expenses 24,560 31,974 64,493 99,406
-------------- -------------- ------------- -------------
Operating income 34,735 26,289 73,406 32,700
Interest expense 7,273 7,788 20,815 19,916
Interest income 2,753 2,621 8,495 6,010
Other income, net (358) 1,053 (57) 2,467
-------------- -------------- ------------- -------------
Income before provision for income taxes, equity in earnings of 29,857 22,175 61,029 21,261
unconsolidated companies and minority interest
Provision for income taxes 12,405 8,966 25,354 9,769
Equity in earnings of unconsolidated companies - 803 - 1,558
Minority interest (306) (599) (2,000) (2,344)
-------------- -------------- ------------- -------------
Net income $ 17,146 $ 13,413 $ 33,675 $ 10,706
============== ============== ============= =============
Weighted average common shares outstanding 28,052 27,428 27,693 27,640
Basic earnings per share $ 0.61 $ 0.49 $ 1.22 $ 0.39
Weighted average common shares outstanding 28,725 27,672 28,214 28,010
Diluted earnings per share $ 0.60 $ 0.48 $ 1.19 $ 0.38
</TABLE>
- ------------
(1) 1998 results include the Company's Spanish operations which were sold
effective December 31, 1998. Included in the 1998 results above are revenue
and net income of $59.6 million and 2.1 million, respectively for the three
months ended and revenue and net loss of $151.4 million and $4.8 million,
respectively for the nine months ended September 30, 1998.
The accompanying notes are an integral part of
these consolidated financial statements.
3
<PAGE>
MASTEC, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998 (1)
-------------------- --------------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 28,656 $ 19,864
Accounts receivable, unbilled revenue and retainage, net 259,818 283,590
Inventories 21,131 12,658
Assets held for sale 72,179 57,238
Other current assets 29,375 59,601
-------------------- --------------------
Total current assets 411,159 432,951
Property and equipment, net 153,586 137,382
Investments in unconsolidated companies 5,893 5,886
Intangibles, net 152,798 140,461
Other assets 18,103 18,806
-------------------- --------------------
Total assets $ 741,539 $ 735,486
==================== ====================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of debt $ 13,207 $ 11,143
Accounts payable and accrued expenses 84,071 84,372
Other current liabilities 70,886 87,417
-------------------- -------------------
Total current liabilities 168,164 182,932
-------------------- -------------------
Other liabilities 43,760 37,592
-------------------- -------------------
Long-term debt 289,953 310,689
-------------------- -------------------
Commitments and contingencies
Shareholders' equity:
Common stock 2,817 2,738
Capital surplus 164,054 149,479
Retained earnings 90,152 56,477
Foreign currency translation adjustments (17,361) (4,421)
-------------------- -------------------
Total shareholders' equity 239,662 204,273
-------------------- -------------------
Total liabilities and shareholders' equity $ 741,539 $ 735,486
==================== ===================
</TABLE>
- ------------
(1) Does not include financial condition of the Company's Spanish operations,
which were sold effective December 31, 1998.
The accompanying notes are an integral part of
these consolidated financial statements.
4
<PAGE>
MASTEC, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Foreign
Common Stock Currency
----------------------------- Capital Retained Translation
Shares Amount Surplus Earnings Adjustments Total
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance December 31, 1998 27,382 $ 2,738 $ 149,479 $ 56,477 $ (4,421) $ 204,273
Net income 33,675 33,675
Foreign currency translation (12,940) (12,940)
adjustments
Stock issued 784 79 14,575 14,654
- -----------------------------------------------------------------------------------------------------------------------------
Balance September 30, 1999 28,166 $ 2,817 $ 164,054 $ 90,152 $ (17,361) $ 239,662
=============================================================================================================================
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
5
<PAGE>
MASTEC, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------------------
1999 1998
--------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 33,675 10,706
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation and amortization 40,551 30,994
Minority interest 2,000 2,344
Loss (gain) on sale of assets 3,488 (246)
Equity in earnings of unconsolidated companies - (1,558)
Changes in assets and liabilities net of effect of acquisitions:
Accounts receivables, unbilled revenue and retainage, net (16) (31,829)
Inventories and other current assets (11,826) 5,293
Other assets 4,204 (16,374)
Accounts payable and accrued expenses 5,802 (1,407)
Other current liabilities (3,549) 4,616
Other liabilities 1,324 12,362
----------------- -----------------
Net cash provided by operating activities 75,653 14,901
----------------- -----------------
Cash flows from investing activities:
Capital expenditures (57,659) (57,460)
Cash paid for acquisitions (net of cash acquired) and (13,311) (74,946)
contingent consideration
Investment in unconsolidated companies held for sale (20,778) (20,853)
Repayments (advances) of notes receivable 18,667 (30,794)
Proceeds from sale of international subsidiary 15,914 -
Proceeds from sale of assets 12,521 3,623
----------------- -----------------
Net cash used in investing activities (44,646) (180,430)
----------------- -----------------
Cash flows from financing activities:
(Repayments) proceeds, net from revolving credit facilities (21,297) 24,393
Proceeds from Senior Notes - 199,724
Proceeds (repayments) of debt (808) (35,766)
Net proceeds (payments) for common stock issued (repurchased) 3,343 (9,677)
Financing costs - (4,993)
----------------- -----------------
Net cash (used in) provided by financing activities (18,762) 173,681
----------------- -----------------
Net increase in cash and cash equivalents 12,245 8,152
Effect of translation on cash (3,453) 68
Cash and cash equivalents - beginning of period 19,864 6,063
----------------- -----------------
Cash and cash equivalents - end of period $ 28,656 14,283
================= =================
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
6
<PAGE>
MASTEC, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(In thousands, except share amounts)
(Unaudited)
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
During the nine months ended September 30, 1999, we completed certain
acquisitions which have been accounted for as purchases. The fair value of the
net assets acquired totaled $3,478 and was comprised primarily of $6,986 of
accounts receivable, $2,125 of property and equipment, $677 of other assets and
$266 in cash, offset by $6,576 of assumed liabilities. The excess of the
purchase price over the fair value of net assets acquired was $7,250 and was
allocated to goodwill. We also issued 527,597 shares of common stock with a
value of $11,314 related to the payment of contingent consideration from earlier
acquisitions. Of the $11,314, $2,314 was recorded as a reduction of other
current liabilities and $9,000 as additional goodwill.
During the nine months ended September 30, 1998, we completed certain
acquisitions which have been accounted for as purchases. The fair value of the
net assets acquired totaled $88,219 and was comprised primarily of $32,568 of
accounts receivable $26,414 of property and equipment, $7,035 of other assets
and $4,644 in cash, offset by $36,548 of assumed liabilities. The excess of the
purchase price over the net assets acquired was $54,106 and was allocated to
goodwill.
The accompanying notes are an integral part of
these consolidated financial statements.
7
<PAGE>
MASTEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999 AND DECEMBER 31, 1998
(UNAUDITED)
NOTE 1 - BASIS FOR PRESENTATION OF CONSOLIDATED FINANCIAL STATEMENTS
The accompanying unaudited consolidated financial statements of MasTec,
Inc. ("MasTec" or the "Company") have been prepared in accordance with generally
accepted accounting principles for interim financial information and with the
instructions for Form 10-Q and Rule 10-01 of Regulation S-X. They do not include
all information and notes required by generally accepted accounting principles
for complete financial statements and should be read together with the audited
financial statements and notes thereto included in our annual report on Form
10-K for the year ended December 31, 1998. The balance sheet data as of December
31, 1998 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, results of operations and cash
flows for the quarterly periods presented. The results of operations for the
periods presented are not necessarily indicative of our future results of
operations for the entire year.
Our comprehensive income (loss) for the nine months ended September 30,
1999 and 1998 was $20.7 million and $12.2 million, respectively. The components
of comprehensive income (loss) are net income (loss) and foreign currency
translation adjustments.
NOTE 2 - ACQUISITIONS AND INVESTING ACTIVITIES
During 1999, we acquired Directional Advantage Boring, Inc., Central
Trenching, Inc. and Queens Network Cable Corp., three telecommunications
infrastructure service providers. These acquisitions have been accounted for
under the purchase method of accounting. The most significant adjustments to the
balance sheet resulting from these acquisitions are disclosed in the
supplemental disclosure of non-cash investing and financing activities in the
accompanying statement of cash flows.
NOTE 3 - DEBT
Debt is comprised of the following (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
---------------- ----------------
<S> <C> <C>
Revolving credit facility, weighted average rate of 6.96% at September $ 85,276 $ 106,300
30, 1999 and 7.06% at December 31, 1998
Other bank facilities at LIBOR plus 1.25% (6.90% at September 30, 1999 9,290 6,206
and 6.31% at December 31, 1998)
Notes payable for equipment, at interest rates from 7.5% to 8.5% due 4,240 6,145
in installments through the year 2000
Notes payable for acquisitions, at interest rates from 7.0% to 8.0% 4,586 3,431
due in installments through February 2000
Senior Notes, 7.75% due February 2008 199,768 199,750
---------------- ----------------
Total debt 303,160 321,832
Less current maturities (13,207) (11,143)
---------------- ----------------
Long-term debt $ 289,953 $ 310,689
================ ================
</TABLE>
We have a revolving line of credit with a group of banks (as amended,
the "Credit Facility") that provides for borrowings up to an aggregate amount of
$165.0 million. Amounts outstanding under the revolving credit facility mature
on June 9, 2001. We are required to pay an unused facility fee ranging from .25%
to .50% per annum on the facility, depending upon certain financial covenants.
8
<PAGE>
MASTEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999 AND DECEMBER 31, 1998
(UNAUDITED)
The Credit Facility is secured by a pledge of shares of certain of our
subsidiaries. Interest under the Credit Facility accrues at rates based, at our
option, on the agent bank's Base Rate plus a margin of up to .50% depending on
certain financial covenants or 1% above the overnight federal funds effective
rate, whichever is higher, or its LIBOR Rate (as defined in the Credit Facility)
plus a margin of 1.00% to 2.25%, depending on certain financial covenants.
On January 30, 1998, we issued $200.0 million, 7.75% senior
subordinated notes (the "Senior Notes") due in February 2008 with interest due
semi-annually.
The Credit Facility and the Senior Notes contain customary events of
default and covenants which prohibit, among other things, making investments in
excess of a specified amount, incurring additional indebtedness in excess of a
specified amount, paying dividends in excess of a specified amount, making
capital expenditures in excess of a specified amount, creating certain liens,
prepaying other indebtedness, including the Senior Notes, and engaging in
certain mergers or combinations without the prior written consent of the
lenders. The Credit Facility also provides that we must maintain certain
financial ratio coverages at the end of each fiscal quarter such as debt to
earnings and earnings to interest expense.
NOTE 4 - OPERATIONS BY SEGMENTS AND GEOGRAPHIC AREAS
The following table sets forth, for the three months and nine months
ended September 30, 1999 and 1998, certain information about segment results of
operations and segment assets (in thousands):
<TABLE>
<CAPTION>
EXTERNAL INTERNAL EXTERNAL
THREE MONTHS TELECOMMUNICATIONS NETWORK ENERGY INTERNATIONAL
1999 NETWORKS SERVICES NETWORKS (1) OTHER (2) CONSOLIDATED
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenue $ 220,601 $ 31,974 $ 38,626 $ 9,891 $ - $ 301,092
Operating income (loss) 35,082 2,106 2,509 (687) (4,275) 34,735
Depreciation and 8,912 686 3,258 753 428 14,037
amortization
</TABLE>
<TABLE>
<CAPTION>
EXTERNAL INTERNAL EXTERNAL
THREE MONTHS TELECOMMUNICATIONS NETWORK ENERGY INTERNATIONAL
1998 NETWORKS SERVICES NETWORKS (1) OTHER (2) CONSOLIDATED
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenue $ 138,174 $ 26,006 $ 34,086 $ 89,703 $ 637 $ 288,606
Operating income (loss) 21,470 1,235 3,726 3,431 (3,573) 26,289
Depreciation and 5,964 768 2,516 2,383 199 11,830
amortization
</TABLE>
9
<PAGE>
MASTEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999 AND DECEMBER 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
EXTERNAL INTERNAL EXTERNAL
NINE MONTHS TELECOMMUNICATIONS NETWORK ENERGY INTERNATIONAL
1999 NETWORKS SERVICES NETWORKS (1) OTHER (2) CONSOLIDATED
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenue $ 517,121 $ 72,280 $ 113,762 $ 41,991 $ 1,422 $ 746,576
Operating income (loss) 73,860 3,065 8,733 1,883 (14,135) 73,406
Depreciation and 25,728 1,899 9,356 2,381 1,187 40,551
amortization
Total assets 408,070 62,148 89,923 103,408 77,990 741,539
Capital expenditures 47,739 819 8,128 86 887 57,659
</TABLE>
<TABLE>
<CAPTION>
EXTERNAL INTERNAL EXTERNAL
NINE MONTHS TELECOMMUNICATIONS NETWORK ENERGY INTERNATIONAL
1998 NETWORKS SERVICES NETWORKS (1) OTHER (2) CONSOLIDATED
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenue $ 318,939 $ 65,205 $ 82,715 $ 246,428 $ 7,520 $ 720,807
Operating income (loss) 41,631 (3,949) 8,046 (624) (12,404) 32,700
Depreciation and 18,642 1,550 6,407 4,500 (105) 30,994
amortization
Total assets 300,798 65,978 88,337 333,848 105,403 894,364
Capital expenditures 38,197 1,310 10,681 2,725 4,547 57,460
</TABLE>
- ------------
(1) International for 1998 includes the results of the Company's Spanish
operations which were sold effective December 31, 1998.
(2) Consists of non-network construction operations and corporate expenses.
There are no significant transfers between geographic areas and
segments. 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. Consolidated
operating income is net of corporate general and administrative expenses. Total
assets are those assets used in our operations in each segment. Corporate assets
include cash and cash equivalents, investments in unconsolidated companies,
assets held for sale and notes receivable.
NOTE 5 - COMMITMENTS AND CONTINGENCIES
During 1999, we had provided vendor financing to a telecommunications
customer in connection with the sale of our services. All amounts due under this
financing arrangement were paid in full in September 1999.
We have a $28.4 million investment in a PCS wireless system in Paraguay
which is held for sale and are committed to spend an additional $5.0 million to
complete the system. In September 1999, the Paraguayan telecommunications
regulatory agency rescinded its previous revocation of our license to develop
the system, reaffirmed the grant of the license to us and extended the deadline
for us to complete the system. The terms of our license now require us to
complete the system by January 31, 2000. Our Paraguayan subsidiary is under a
preliminary investigation for alleged improper conduct by certain of its
employees in connection with the license. Although, we believe that the
allegations are baseless, we are fully cooperating with the investigators.
10
<PAGE>
MASTEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999 AND DECEMBER 31, 1998
(UNAUDITED)
Included in assets held for sale at September 30, 1999 is approximately
$34.0 million of investments in Argentina and Ecuador, which have defaulted on
their third-party debt obligations. We do not guarantee any of their
indebtedness.
We are monitoring our investments in Argentina, Ecuador and Paraguay
and have determined that the carrying values of these assets as of September 30,
1999 have not been impaired. There can be no assurance that future transactions
or events will not result in a permanent impairment of these assets.
We sold 87% of our Spanish operations effective December 31, 1998 for
$27.2 million in cash payable in four installments and $25.0 million of assumed
debt. As of September 30, 1999, $12.5 million of the cash purchase price plus
accrued interest had not been paid when due, however we received $1.8 million
subsequently (a portion of which is in escrow), which has reduced the
outstanding balance to $10.7 million. We have posted a $3.0 million letter of
credit for the benefit of the Spanish operations to be used for working capital.
11
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
EXCEPT FOR HISTORICAL INFORMATION, THE MATTERS DISCUSSED BELOW ARE FORWARD
LOOKING STATEMENTS MADE PURSUANT TO THE SAFE HARBOR PROVISIONS FOR
FORWARD-LOOKING STATEMENTS DESCRIBED IN THE PRIVATE SECURITIES LITIGATION REFORM
ACT OF 1995. REFERENCE IS MADE TO CAUTIONARY STATEMENTS CONTAINED IN THIS
QUARTERLY REPORT AND IN OUR OTHER FILINGS WITH THE SECURITIES AND EXCHANGE
COMMISSION REGARDING ANY FORWARD-LOOKING STATEMENTS CONTAINED IN THIS QUARTERLY
REPORT.
GENERAL
We design, build, install and maintain internal and external networks
supporting the Internet, Internet-related applications and other communications
and energy facilities for leading telecommunications, cable television, energy
and other Fortune 500 companies. We hold a market leading position as one of the
preeminent end-to-end telecommunications and energy infrastructure service
providers in North America, by offering quality turn-key services to a diverse
group of long-standing customers, which include some of the largest and most
prominent companies in the telecommunications and energy fields. We provide
comprehensive solutions that enable our customers to connect with their
customers.
Our North American revenue and operating income have grown
significantly in the past five years. Our revenue and operating income for the
nine months ended September 30, 1999 increased 49% and 115%, respectively, over
the comparable period of 1998. This 1999 growth was achieved primarily through
internal growth, which has been nearly 40% in 1999. We intend to continue to
emphasize internal growth, although we also intend to grow through selected
acquisitions following a disciplined model to take advantage of consolidation
opportunities in the fragmented infrastructure services industry in the United
States.
Currently we operate from approximately 160 locations throughout North
America, which accounted for 94% of our revenue for the nine months ended
September 30, 1999. We also operate a joint venture in Brazil which accounted
for our remaining revenue in the period. We intend to continue to grow our North
American operations while achieving further operating efficiencies through
economies of scale.
We are organized into eight service lines centered around our customers
which include:
/diamond/ incumbent local exchange carriers,
/diamond/ competitive local exchange carriers,
/diamond/ cable television operators,
/diamond/ long distance carriers,
/diamond/ wireless phone companies,
/diamond/ telecommunications equipment vendors,
/diamond/ co-location facilities providers,
/diamond/ public and private energy companies, and
/diamond/ major retailers, financial institutions and other Fortune 500
companies.
For the three months and nine months ended September 30, 1999,
approximately 12% and 11%, respectively of our domestic revenue was derived from
services performed for BellSouth. Our top 10 customers combined account for less
than 40% of our domestic revenue.
We report our operations in four segments: External Telecommunications
Networks, External Energy Networks, Internal Networks, and International.
External Telecommunication Networks represents our core business and is divided
into five service lines: long haul services, local loops, broadband, wireless
and intelligent transportation systems. External Energy Networks includes
installation and maintenance services for energy companies. Internal Networks
include central switching and transmission services, premise wiring services and
structured cabling services. International operations are currently confined to
Brazil where we operate a 51% joint venture which we consolidate net of a 49%
minority interest after tax.
12
<PAGE>
Our primary types of contracts with our customers include:
/bullet/ design and installation contracts for specific projects,
/bullet/ master service agreements for all specified design,
installation and maintenance services within a defined
geographic territory, and
/bullet/ turnkey agreements for comprehensive design, engineering,
installation, procurement and maintenance services.
The majority of our contracts whether master service agreements or
contracts for specific projects provide that we will furnish a specified unit of
service for a specified unit of price. For example, we contract to install cable
for a specified rate per foot. We recognize revenue as the related work is
performed. Turnkey agreements are invoiced on a unit basis. A portion of our
work is performed under percentage-of-completion contracts. Under this method,
revenue is recognized on a cost-to-cost method based on the percentage of total
cost incurred to date in proportion to total estimated cost to complete the
contract. Customers are billed with varying frequency--weekly or monthly or upon
milestones.
We perform the majority of our services under master services
agreements, which typically are exclusive service agreements to provide all of
the customer's network requirements up to a specified dollar amount per job
within certain geographic areas. These contracts are generally for two to three
years but are typically subject to termination at any time upon 90 to 180 days
prior notice to us. Each master services agreement contemplates hundreds of
individual projects generally valued at less than $100,000 each. These master
services agreements are typically awarded on a competitive bid basis, although
customers are sometimes willing to negotiate contract extensions beyond their
original terms without opening them up to bid. Master services agreements are
invoiced on a unit basis as work is completed. We currently have 87 master
services agreements across all segments.
Direct costs include operations payroll and benefits, subcontractor
costs, materials not provided by our customers, fuel, equipment rental and
insurance. Our customers generally supply materials such as cable, conduit and
telephone equipment, although on certain turnkey projects, we supply these
materials. General and administrative costs include all costs of our management
personnel, rent, utilities, travel and business development efforts and back
office administration such as financial services, insurance administration,
professional costs and clerical and administrative overhead.
Many of our contracts require performance and payment bonds. Contracts
generally include payment provisions under which 5% to 10% is withheld from
payment until the contract work has been completed. We typically agree to
indemnify our customers against certain claims and warrant the quality of our
services for specified time periods, usually one year.
13
<PAGE>
RESULTS OF OPERATIONS
NORTH AMERICA
The following tables set forth income statement data and its related
percentage of revenue for our North American operation for the three and nine
months ended September 30, 1999 and 1998.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
----------------------------------------------- ----------------------------------------------
1999 1998 1999 1998
---------------------- ---------------------- --------------------- ----------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue $ 291,201 100.0% $ 198,903 100.0% $ 704,585 100.0% $474,379 100.0%
Costs of revenue 219,147 75.3 147,045 73.9 535,528 76.0 359,885 75.9
Depreciation and amortization 13,284 4.6 9,447 4.7 38,170 5.4 26,494 5.6
General and administrative 23,348 8.0 19,553 9.9 59,364 8.4 54,676 11.5
expenses
----------- -------- ---------- --------- ---------- -------- ----------- ---------
Operating income $ 35,422 12.1% $ 22,858 11.5% $ 71,523 10.2% $ 33,324 7.0%
=========== ======== ========== ========= ========== ======== =========== =========
</TABLE>
THREE MONTHS ENDED SEPTEMBER 30, 1999 REVENUE AND OPERATING INCOME
COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 1998 REVENUE AND OPERATING INCOME
The following table sets for the revenue and change in revenue by North
American operating segments, in dollar and percentage terms (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30, CHANGE
----------------------------- -------------------------------
1998 1999 $ %
-------------- ------------- ------------- ---------------
<S> <C> <C> <C> <C>
External Telecommunications Networks $ 138,174 $ 220,601 $ 82,427 59.7%
External Energy Networks 34,086 38,626 4,540 13.3
Internal Network Services 26,006 31,974 5,968 22.9
Other 637 - (637) (100.0)
-------------- ------------- -------------
$ 198,903 $ 291,201 $ 92,298 46.4%
============== ============= =============
</TABLE>
Our North American revenue was $291.2 million for the three months ended
September 30, 1999, compared to $198.9 million for the same period in 1998,
representing an increase of $92.3 million or 46.4%. The increase in North
American revenue was due primarily to revenue generated from internal growth
across all service lines. External telecommunications networks revenue increased
primarily due to services provided to local loop and broadband customers.
External energy networks revenue growth was impacted by poor weather conditions
in the mid-Atlantic states. Revenue from our internal networks segment increased
due to growth services provided at central office facilities, resulting
primarily from regulatory co-location requirements to open central office
facilities to new competitors. Internal growth, as adjusted for acquisitions,
approximated 38.3% for the three months ended September 30, 1999. There can be
no assurance that our internal growth will continue at the same rate for the
remainder of the year.
Our North American costs of revenue were $219.1 million or 75.3% of
revenue for the three months ended September 30, 1999, compared to $147.0
million or 73.9% of revenue for the same period in 1998. The reduced gross
margin resulted from an increase in revenue derived from the sale of materials
and reduced productivity in our external energy networks segments due to poor
weather conditions in the mid-Atlantic states.
Depreciation and amortization expense was $13.3 million or 4.6% of
revenue for the three months ended September 30, 1999, compared to $9.4 million
or 4.7% of revenue for the same period in 1998. The increased depreciation and
amortization expense of $3.9 million resulted from our investment in our fleet
to support revenue growth and from intangibles related to acquisitions
consummated in 1998 and 1999. The decline as a percent of revenue was due to
increased revenue.
14
<PAGE>
General and administrative expenses were $23.3 million or 8.0% of
revenue for the three months ended September 30, 1999, compared to $19.6 million
or 9.9% of revenue for the same period in 1998. The decline in general and
administrative expenses as a percent of revenue for the three months ended
September 30, 1999 was due primarily to increased revenue, corporate overhead
reductions and improved receivables collection, which reduced the need for
additional bad debt reserves when compared to the same period in 1998. We intend
to continue to pursue efficiencies in our administrative functions.
Operating income was $35.4 million or 12.1% of revenue for the three
months ended 1999, compared to $22.9 million or 11.5% of revenue for the same
period in 1998. The following table sets forth operating income and change in
operating income by North American operating segments, in dollar and percentage
terms (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30, CHANGE
----------------------------- -------------------------------
1998 1999 $ %
-------------- ------------- ------------- ---------------
<S> <C> <C> <C> <C>
External Telecommunications Networks $ 21,470 $ 35,082 $ 13,612 63.4%
External Energy Networks 3,726 2,509 (1,217) (32.7)
Internal Network Services 1,235 2,106 871 70.5
Other (3,573) (4,275) (702) (19.6)
-------------- ------------- -------------
$ 22,858 $ 35,422 $ 12,564 55.0%
============== ============= =============
</TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 1999 REVENUE AND OPERATING INCOME
COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 1998 OPERATING INCOME
The following table sets forth revenue and change in revenue by North
American operating segments, in dollar and percentage terms (in thousands):
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, CHANGE
----------------------------- -------------------------------
1998 1999 $ %
-------------- ------------- ------------- ---------------
<S> <C> <C> <C> <C>
External Telecommunications Networks $ 318,939 $ 517,121 $ 198,182 62.1%
External Energy Networks 82,715 113,762 31,047 37.5%
Internal Network Services 65,205 72,280 7,075 10.9%
Other 7,520 1,422 (6,098) (81.1%)
-------------- ------------- -------------
$ 474,379 $ 704,585 $ 230,206 48.5%
============== ============= =============
</TABLE>
Our North American revenue was $704.6 million for the nine months ended
September 30, 1999, compared to $474.4 million for the same period in 1998,
representing an increase of $230.2 million or 48.5%. The fastest growing
operating segment is our external telecommunications networks segment primarily
due to the increased demand for bandwith by end-users which has spurred
increased network construction and upgrades by our customers. The growth we are
experiencing in our internal networks services is primarily due to growth in
services provided at central office facilities resulting from regulatory
co-location requirements to open central office facilities to new competitors.
During the nine month period ended September 30, 1999, we completed a total of
three acquisitions, all in our external telecommunication networks segment. This
compares to a total of 10 acquisitions for the nine months ended September 30,
1998, six of wich were in the external telecommunications networks segment, two
in our external energy networks segment and two in our internal network services
segment. Internal growth for North America, as adjusted for acquisitions,
approximated 40.1% for the nine months ended September 30, 1999 and was
primarily driven by growth in external telecommunications networks.
Our North American costs of revenue were $535.5 million or 76.0% of
revenue for the nine months ended September 30, 1999, compared to $359.9 million
or 75.9% of revenue for the same period in 1998. In 1999, margins were slightly
lower due to increased revenue derived from the sale of materials on turnkey
projects, which carry a lower mark-up. Additionally, our external energy
networks experienced reduced productivity due to unusually poor weather
conditions in the mid-Atlantic states during the third quarter. Adverse weather
conditions impacted productivity during the first quarter of 1998.
15
<PAGE>
Depreciation and amortization expense was $38.2 million or 5.4% of
revenue for the nine months ended September 30, 1999, compared to $26.5 million
or 5.6% of revenue for the same period in 1998. The increased depreciation and
amortization expense of $11.7 million resulted from our investment in our fleet
to support revenue growth and from intangibles related to acquisitions
consummated in 1998 and 1999. The decline as a percentage of revenue was due to
increased revenue.
General and administrative expenses were $59.3 million or 8.4% of
revenue for the nine months ended September 30, 1999, compared to $54.7 million
(which included a $4.0 million provision for bad debts related to our internal
network services segment) or 11.5% of revenue (10.7% of revenue, excluding bad
debt) for the same period in 1998. The decline in general and administrative
expenses as a percent of revenue for the nine months ended September 30, 1999
was due primarily to our ability to support higher revenue with a reduced
administrative base.
Operating income was $71.5 million or 10.2% of revenue for the nine
months ended 1999, compared to $33.3 million or 7.0% of revenue for the same
period in 1998. The following table sets forth operating income and change in
operating income by North American operating segments, in dollar and percentage
terms (in thousands):
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, CHANGE
----------------------------- -------------------------------
1998 1999 $ %
-------------- ------------- ------------- ---------------
<S> <C> <C> <C> <C>
External Telecommunications Networks $ 41,631 $ 73,860 $ 32,229 77.4%
External Energy Networks 8,046 8,733 687 8.5%
Internal Network Services (3,949) 3,065 7,014 178.0%
Other (12,404) (14,135) (1,731) (14.0)%
-------------- ------------- -------------
$ 33,324 $ 71,523 $ 38,199 114.6%
============== ============= =============
</TABLE>
BRAZIL
The following tables set forth for the periods indicated our Brazilian
operations in dollar and percentage terms (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
----------------------------------------------- ----------------------------------------------
1999 1998 1999 1998
---------------------- ---------------------- --------------------- ----------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue $ 9,891 100.0% $ 30,114 100.0% $ 41,991 100.0% $ 95,019 100.0%
Costs of revenue 8,613 87.1% 25,093 83.3% 32,598 77.6% 79,610 83.8%
Depreciation and amortization 753 7.6% 1,791 5.9% 2,381 5.7% 2,730 2.9%
General and administrative 1,212 12.2% 2,908 9.7% 5,129 12.2% 7,145 7.5%
expenses ----------- -------- ---------- --------- ---------- -------- ----------- ---------
Operating income $ (687) (6.9)% $ 322 1.1% $ 1,883 4.5% $ 5,534 5.8%
=========== ======== ========== ========= ========== ======== =========== =========
</TABLE>
16
<PAGE>
THREE MONTHS ENDED SEPTEMBER 30, 1999 OPERATING INCOME
COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 1998 OPERATING INCOME
Our Brazilian operations' functional currency is the Brazilian reals.
Brazilian revenue was $9.9 million for the three months ended September
30, 1999, compared to $30.1 million for the same period in 1998, representing a
decrease of $20.2 million or 67.1%. Brazilian revenue decreased primarily due to
the devaluation of the Brazilian real and to a reduction in work performed.
Brazil had revenue of R$18.5 million reals during the three months ended
September 30, 1999, compared to R$33.3 million reals for the same period in
1998, representing a decrease of 44.4%. The average currency exchange rate
increased to 1.87 reals per US dollar for the period ended September 30, 1999
compared to 1.17 reals per US dollar for the same period in 1998. The decline in
reals revenue is due mainly to the overall economic situation in Brazil and the
resulting delays in telephony infrastructure spending. Due to recent economic
conditions in Brazil, it is uncertain when, if at all, previous levels of
telephony infrastructure spending will re-commence.
Brazilian costs of revenue were $8.6 million or 87.1% of revenue for
the three months ended September 30, 1999, compared to $25.1 million or 83.3% of
revenue for the same period in 1998. The decline in gross margin is due to
differences in the staging of projects.
Depreciation and amortization expense was $0.8 million or 7.6% of
revenue for the three months ended September 30, 1999 compared to $1.8 million
or 5.9% of revenue for the same period in 1998. Depreciation and amortization
relates primarily to an intangible asset resulting from one acquisition
completed in early 1998 that is being amortized over a five year period relative
to the volume of work under specified contracts.
General and administrative expenses were $1.2 million or 12.2% of
revenue for the three months ended September 30, 1999, compared to $2.9 million
or 9.7% of revenue for the same period in 1998. General and administrative
expenses were R$1.6 million reals or 8.6% of reals revenue during the three
months ended September 30, 1999, compared to R$1.9 million reals or 5.7% of
reals revenue for the same period in 1998. The decline in general and
administrative expenses in both dollar and reals terms was due to an effort to
reduce overhead as the revenue base has declined.
NINE MONTHS ENDED SEPTEMBER 30, 1999 OPERATING INCOME
COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 1998 OPERATING INCOME
Brazilian revenue was $42.0 million for the nine months ended September
30, 1999, compared to $95.0 million for the same period in 1998, representing a
decrease of $53.0 million or 55.8%. Brazilian revenue decreased primarily due to
the devaluation of the Brazilian reals and to a reduction in work performed.
Revenue in local currency was R$68.5 million reals during the nine months ended
September 30, 1999, compared to R$105.6 million reals for the same period in
1998, representing a decrease of 35.1%. Due to recent economic conditions in
Brazil, it is uncertain when, if at all, previous levels of telephony
infrastructure spending will re-commence.
Brazilian costs of revenue were $32.6 million or 77.6% of revenue for
the nine months ended September 30, 1999, compared to $79.6 million or 83.8% of
revenue for the same period in 1998. The decrease was as a result of a change
order paid by a significant customer in the second quarter.
Depreciation and amortization expense was $2.4 million or 5.7% of
revenue for the nine months ended September 30, 1999 compared to $2.7 million or
2.9% of revenue for the same period in 1998. Depreciation and amortization
relates primarily to an intangible asset resulting from one acquisition
completed in early 1998 that is being amortized over a five year period relative
to the volume of work under specified contracts
17
<PAGE>
General and administrative expenses were $5.1 million or 12.2% of
revenue for the nine months ended September 30, 1999, compared to $7.1 million
or 7.5% of revenue for the same period in 1998. General and administrative
expenses were R$5.4 million reals or 7.9% of reals revenue during the nine
months ended September 30, 1999, compared to R$6.2 million reals or 5.9% of
reals revenue for the same period in 1998. The decrease in general and
administrative expenses in both dollar and reals terms was due to a reduction in
work performed.
SPAIN
The following tables set forth for the periods indicated our Spanish
operations, which were sold effective December 31, 1998, in dollar and
percentage terms (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1998 SEPTEMBER 30, 1998
------------------------------- ---------------------------------
<S> <C> <C> <C> <C>
Revenue $ 59,589 100.0% $ 151,409 100.0%
Costs of revenue 46,375 77.8 118,212 78.1
Depreciation and amortization 592 1.0 1,770 1.2
General and administrative expenses 9,513 16.0 37,585 24.8
--------------- ------------- --------------- ---------------
Operating income (loss) 3,109 5.2 (6,158) (4.1)
Interest expense, net 1,077 1.8 2,875 1.9
Other income (loss) 897 1.5 1,796 1.2
--------------- ------------- --------------- ---------------
Income (loss) before benefit from income taxes, equity in 2,929 4.9 (7,237) (4.8)
earnings of unconsolidated companies and minority
interest
(Provision) benefit from income taxes (1,247) (2.1) 1,587 1.0
Equity in earnings of unconsolidated companies 766 1.3 1,148 0.8
Minority interest (367) (0.6) (323) (0.2)
--------------- ------------- --------------- ---------------
Net income (loss) $ 2,081 3.5% $ (4,825) (3.2%)
=============== ============= =============== ===============
</TABLE>
Effective December 31, 1998, we sold 87% of our Spanish operations.
COMBINED RESULTS - NORTH AMERICA AND BRAZIL ONLY
The following table sets forth for the periods indicated certain
combined income statement data for North America and Brazil only and the related
percentage of combined revenue.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
----------------------------------------------------------------------------------
1999 1998(1) 1999 1998(1)
-------------------- --------------------- ------------------- -------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Operating income $ 34,735 11.4% $ 23,180 10.1% $ 73,406 9.8% $ 38,858 6.8%
Interest expense 7,273 2.4% 6,575 2.9% 20,815 2.8% 16,523 2.9%
Interest income 2,753 0.9% 2,485 1.1% 8,495 1.2% 5,492 1.0%
Other income, net (358) - 156 - (57) - 671 0.1%
----------- -------- ----------- ------------------- ------------------- ---------
Income before provision for income taxes, 29,857 9.9% 19,246 8.3% 61,029 8.2% 28,498 5.0%
equity in earnings of unconsolidated
companies and minority interest
Provision for income taxes 12,405 4.2% 7,719 3.4% 25,354 3.4% 11,356 2.0%
Equity in earnings of unconsolidated (306) - (195) - (2,000) (0.3)% (1,611) 0.3%
companies and minority interest ----------- -------- ----------- ------------------- ------------------- ---------
Net income $ 17,146 5.7% $ 11,332 4.9% $ 33,675 4.5% $ 15,531 2.7%
=========== ======== =========== =================== =================== =========
</TABLE>
- ------------
(1) Adjusted to exclude MasTec's Spanish operations which were sold effective
December 31, 1998.
18
<PAGE>
THREE MONTHS ENDED SEPTEMBER 30, 1999
COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 1998
For a discussion of revenue, costs of revenue, depreciation and
amortization and general and administrative expenses, see "North America" and
"Brazil" above.
Interest income for the three months ended September 30, 1999 includes
interest accrued and collected from a customer financing arrangement which
terminated in September 1999. Interest income for the three months ended
September 30, 1998 was mainly comprised of interest earned on temporary foreign
investments.
Reflected in other income net for the three months ended September 30,
1999 is a fee of $1.2 million collected from a customer related to a financing
arrangement offset by a liability from a 1994 lawsuit from a predecessor
company.
Our effective tax rate for North American and Brazil operations
approximates 42.0% and 33.0% respectively, for the three months ended September
30, 1999.
NINE MONTHS ENDED SEPTEMBER 30, 1999
COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 1998
For a discussion of revenue, costs of revenue, depreciation and
amortization and general and administrative expenses, see "North America" and
"Brazil" above.
Interest expense was $20.8 million or 2.8% of revenue for the nine
months ended September 30, 1999, compared to $16.5 million or 2.9% of revenue
for the same period in 1998. The increase in interest expense of $4.3 million
was due primarily to increased indebtedness resulting from the issuance of the
Senior Notes in early 1998. Additionally, the average outstanding balances on
our revolving line of credit increased to support growth and the customer
financing agreement which was satisfied in full in September 1999.
Interest income includes interest of $4.8 million earned and collected
from a customer to which we extended financing for our services, which
terminated in September 1999.
Reflected in other income, net for the nine months ended September 30,
1999, are the following transactions. We sold assets held for sale with a book
value of approximately $11.2 million for approximately $7.6 million recognizing
a loss on sale of approximately $3.6 million. We also reserved $1.0 million for
a 1994 lawsuit from a predecessor company. Offsetting these amounts was a fee of
$4.8 million collected from a telecommunications customer related to a vendor
financing arrangement.
Our effective tax rate for North American and Brazil operations
approximates 42.0% and 33.0% respectively, for the nine months ended September
30, 1999.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Our primary liquidity needs are for working capital, capital
expenditures, acquisitions and investments, and debt service. Our primary
sources of liquidity are cash flows from operations, borrowings under revolving
lines of credit and the proceeds from the sale of assets held for sale.
Net cash provided by operating activities was $75.7 million for the
nine months ended September 30, 1999, compared to $14.9 million for the same
period in 1998.
Our working capital at September 30, 1999, excluding assets held for
sale of $72.2 million, was $170.8 million compared to $192.8 million at December
31, 1998. Our North American working capital as of September 30, 1999 was
19
<PAGE>
$133.7 million, comprised primarily of $244.9million in accounts receivable,
$33.5 million in inventories and other current assets and $11.0 million in cash,
net of $155.7 million in current liabilities.
We have a revolving line of credit with a group of banks (as amended,
the "Credit Facility") that provides for borrowings up to an aggregate amount of
$165.0 million. Amounts outstanding under the Credit Facility mature on June 9,
2001. We are required to pay an unused facility fee ranging from .25% to .50%
per annum on the facility, depending upon certain financial covenants. The
Credit Facility contains customary events of default and covenants which
prohibit, among other things, making certain investments in excess of a
specified amount, incurring additional indebtedness in excess of a specified
amount, paying dividends in excess of a specified amount, making capital
expenditures in excess of a specified amount, creating liens, prepaying other
indebtedness, including the Senior Notes, and engaging in certain mergers or
combinations without the prior written consent of the lenders. The Credit
Facility also provides that we must maintain certain financial ratio coverages
at the end of each fiscal quarter such as debt to earnings and earnings to
interest expense.
During 1999, we acquired three external telecommunications network
services providers for $11.1 million in cash and $2.4 million in seller
financing and invested $57.7 million primarily in our fleet to support revenue
growth which we financed from cash provided by operations and from financing
activities. We have also sold certain assets and investments for which we have
received approximately $28.4 million in cash, $15.9 million of which was
attributable to the sale of our Spanish operations. We anticipate that available
cash, cash flows from operations and proceeds from the sale of assets and
investments and borrowing availability under the Credit Facility will be
sufficient to satisfy our working capital requirements for the foreseeable
future. However, to the extent that we should desire to increase our financial
flexibility and capital resources or choose or be required to fund future
capital commitments from sources other than operating cash or from borrowings
under its existing Credit Facility, we may consider raising additional capital
by increasing the Credit Facility or through the offering of equity and/or debt
securities in the public or private markets. There can be no assurance, however,
that additional capital will be available to us on acceptable terms, if at all.
We have a $28.4 million investment in a PCS wireless system in Paraguay
which is held for sale and are committed to spend an additional $5.0 million to
complete the system. In September 1999, the Paraguayan telecommunications
regulatory agency rescinded its previous revocation of our license to develop
the system, reaffirmed the grant of the license to us and extended the deadline
for us to complete the system. The terms of our license now require us to
complete the system by January 31, 2000. Our Paraguayan subsidiary is under a
preliminary investigation for alleged improper conduct by certain of its
employees in connection with the license. Although we believe that the
allegations are baseless, we are fully cooperating with the investigations.
Included in assets held for sale at September 30, 1999 is approximately
$34.0 million of investments in Argentina and Ecuador, which have defaulted on
their third party debt obligations. We do not guarantee any of their
indebtedness. We are monitoring our investments in Argentina, Ecuador and
Paraguay and have determined that the carrying values of these assets as of
September 30, 1999 have not been impaired. There can be no assurance that future
transactions or events will not result in a permanent impairment of these
assets.
We sold 87% of our Spanish operations effective December 31, 1998 for
$27.2 million in cash, payable in four installments and $25.0 million of assumed
debt. As of September 30, 1999, $12.5 million of the cash purchase price plus
accrued interest has not been paid when due, however we received $1.8 million
subsequently (a portion of which is in escrow), which has reduced the
outstanding balance to $10.7 million. We have posted a $3.0 million letter of
credit for the benefit of the Spanish operations to be used for working capital.
20
<PAGE>
YEAR 2000
The Year 2000 computer issue is primarily the result of computer
programs using two digits rather than four to define the applicable year. Any of
our computer programs that have time-sensitive software may recognize a date
using "00" as the year 1900 rather than the year 2000. This could result in a
system failure, disruption of operations and/or a temporary inability to conduct
normal business activities.
We undertook a Year 2000 project, which included an assessment of our
telecommunications equipment, computer equipment, software, database, data
services, network infrastructure, and telephone equipment. Our Year 2000 plan
addressed the Year 2000 issue in five phases: (1) inventory and assessment; (2)
impact analysis and implementation planning; (3) implementation and testing; (4)
on-going and monitoring; and (5) contingency planning to assess reasonably
likely worst case scenarios. At this time, we have completed phase (1), (2) and
the majority of phase (3) of the project and believe that the Year 2000 issue
will not pose significant operational problems. Based on our assessment efforts,
we do not believe that Year 2000 issues will have a material adverse effect on
our financial condition or results of operations. If, however, additional
upgrades, replacements or conversions are necessary and not made or completed on
a timely basis, the Year 2000 issue may have a material adverse effect on our
business, financial condition and results of operations. Our Year 2000 issues
and any potential business interruptions, costs, damages or losses related
thereto, are dependent, to a certain degree, upon the Year 2000 readiness of
third parties such as vendors and suppliers. As part of our Year 2000 efforts,
formal communications with all significant vendors, suppliers, banks and clients
are being pursued to determine the extent to which related interfaces with our
systems are vulnerable if these third parties fail to remediate their Year 2000
issues. There cannot be any assurance that any such third parties will address
any Year 2000 issues that they have or that such third parties' systems will not
materially adversely affect our systems and operations.
Through September 30, 1999, related costs incurred in our Year 2000
project were not material, and we do not expect that the total cost of our Year
2000 project will be material to our financial position or results of
operations.
Risk Relating to the Company's Failure to Become Year 2000 Compliant.
We continue to enhance our contingency plans, including the identification of
our most likely worst case scenarios. Currently, the most likely sources of risk
to us include: (i) interruptions to our customers' operations which could
prevent them from utilizing our services and paying for the services when
rendered; and ( ii) failure of our suppliers' operations which could result in
our inability to obtain equipment, materials and supplies to meet the demands of
our customers.
The risks described above could materially and adversely affect our
business, results of operations and financial condition. Due to the general
uncertainty inherent in the Year 2000 problem, resulting in part from the
uncertainty of the Year 2000 readiness of third-party suppliers and customers,
we are unable to determine at this time what our most reasonable and likely
worst case scenario would be or whether the consequences of Year 2000 failures
will have a material adverse impact on our results of operations, liquidity, or
financial condition.
Contingency Plans. Our Year 2000 efforts are ongoing and our overall
plan for the critical mission systems, as well as the consideration of
contingency plans, will continue to evolve as new information becomes available.
Contingency plans for Year 2000-related interruptions have been developed and
include emergency backup and recovery procedures for lost data, billing and
collection procedures, identification of alternate suppliers and increasing
inventory levels of critical supplies and equipment. These activities are
intended to provide a means of managing risk, but cannot eliminate the potential
for disruption due to third-party failure.
SEASONALITY
Our North America operations have historically been seasonally weaker
in the first and fourth quarters of the year and have produced stronger results
in the second and third quarters. This seasonality is primarily the result of
customer budgetary constraints and preferences and the effect of winter weather
on external network activities. Certain U.S. customers tend to complete budgeted
capital expenditures before the end of the year and defer additional
expenditures until the following budget year. Revenue, from our Brazilian
operation, in reals, is not expected to fluctuate seasonally.
21
<PAGE>
IMPACT OF INFLATION AND CURRENCY FLUCTUATIONS
The primary inflationary factor affecting our operations is increased
labor costs. We have not experienced significant increases in labor costs to
date. Competition for qualified personnel could increase labor costs for us in
the future. Our international operations which represents approximately 6% of
our total revenue may, at times in the future, be exposed to high inflation in
certain foreign countries. We anticipate that revenue from international
operations will be less significant to operations in the foreseeable future due
to our current intentions to dispose of them, however, the likelihood and extent
of further devaluation and deteriorating economic conditions in Brazil and other
Latin American countries and the resulting impact on our results of operations,
financial position and cash flows cannot now be determined.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See Notes 3 and 5 of Notes to Consolidated Financial Statements for
disclosure about market risk.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
EXHIBIT NO. DESCRIPTION
------------ -----------
27 Financial Data Schedule
22
<PAGE>
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.
Date: October 29, 1999 /S/ CARMEN M. SABATER
-----------------------------------------------
Carmen M. Sabater
Senior Vice President - Chief Financial Officer
(Principal Financial Officer)
Date: October 29, 1999 /S/ ARLENE VARGAS
-----------------------------------------------
Arlene Vargas
Vice President and Controller
(Principal Accounting Officer)
23
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 28,656
<SECURITIES> 0
<RECEIVABLES> 265,191
<ALLOWANCES> 5,373
<INVENTORY> 72,179
<CURRENT-ASSETS> 411,159
<PP&E> 243,863
<DEPRECIATION> 90,277
<TOTAL-ASSETS> 741,539
<CURRENT-LIABILITIES> 168,164
<BONDS> 0
0
0
<COMMON> 2,817
<OTHER-SE> 236,845
<TOTAL-LIABILITY-AND-EQUITY> 741,539
<SALES> 746,576
<TOTAL-REVENUES> 746,576
<CGS> 568,126
<TOTAL-COSTS> 673,170
<OTHER-EXPENSES> 57
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 73,406
<INCOME-PRETAX> 59,029
<INCOME-TAX> 25,354
<INCOME-CONTINUING> 33,675
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 33,675
<EPS-BASIC> 1.22
<EPS-DILUTED> 1.19
</TABLE>
