MasTec, Inc.
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 March 31, 2006
Commission File Number 001-08106
MASTEC, INC.
(Exact name of registrant as specified in its charter)
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Florida
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65-0829355 |
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer
Identification No.) |
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800 S. Douglas Road, 12th Floor, Coral Gables, FL
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33134 |
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(Address of principal executive offices)
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(Zip Code) |
Registrants telephone number, including area code: (305) 599-1800
Indicate by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, or a
non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule
12b-2 of the Exchange Act. (Check one):
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o Large accelerated filer
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x Accelerated filer
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o Non-accelerated filer |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No x
As of May 1, 2006 MasTec, Inc. had 64,583,635 shares of common stock, $0.10 par value,
outstanding.
MASTEC, INC.
FORM 10-Q
QUARTER ENDED MARCH 31, 2006
TABLE OF CONTENTS
2
PART I. FINANCIAL INFORMATION
Item 1.
Financial Statements
MASTEC, INC.
CONDENSED UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
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For the Three Months Ended |
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March 31, |
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2006 |
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2005 |
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Revenue |
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$ |
218,752 |
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$ |
193,976 |
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Costs of revenue, excluding depreciation |
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191,957 |
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177,077 |
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Depreciation |
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3,562 |
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4,474 |
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General and administrative expenses, including
non-cash stock compensation expense of
$1,181 in 2006 and $24 in 2005 |
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16,594 |
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14,844 |
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Interest expense, net of interest income |
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3,485 |
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4,832 |
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Other income, net |
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322 |
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1,874 |
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Income (loss) from continuing operations
before minority interest |
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3,476 |
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(5,377 |
) |
Minority interest |
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129 |
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(66 |
) |
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Income (loss) from continuing operations |
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3,605 |
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(5,443 |
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Loss from discontinued operations, net of tax
benefit of $0 in 2006 and 2005 |
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(7,829 |
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(6,571 |
) |
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Net loss |
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$ |
(4,224 |
) |
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$ |
(12,014 |
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Basic net income (loss) per share: |
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Continuing operations |
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$ |
.06 |
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$ |
(.11 |
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Discontinued operations |
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(.13 |
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(.14 |
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Total basic net income (loss) per share |
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$ |
(.07 |
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$ |
(.25 |
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Basic weighted average common shares outstanding |
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59,291 |
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48,696 |
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Diluted net income (loss) per share: |
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Continuing operations |
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$ |
.06 |
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$ |
(.11 |
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Discontinued operations |
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(.13 |
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(.14 |
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Total diluted net income (loss) per share |
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$ |
(.07 |
) |
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$ |
(.25 |
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Diluted weighted average common shares outstanding |
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61,028 |
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48,696 |
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The accompanying notes are an integral part of these condensed unaudited consolidated financial statements.
3
MASTEC, INC.
CONDENSED UNAUDITED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
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March 31, |
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December 31, |
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2006 |
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2005 |
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(Unaudited) |
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(Audited) |
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Assets |
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Current assets: |
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Cash and cash equivalents |
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$ |
72,025 |
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$ |
2,024 |
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Accounts receivable, unbilled revenue and retainage, net |
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154,875 |
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171,832 |
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Inventories |
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24,028 |
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17,832 |
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Income tax refund receivable |
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1,161 |
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1,489 |
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Prepaid expenses and other current assets |
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29,015 |
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42,442 |
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Current assets held for sale |
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69,365 |
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69,688 |
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Total current assets |
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350,469 |
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305,307 |
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Property and equipment, net |
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46,173 |
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48,027 |
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Goodwill |
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150,630 |
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127,143 |
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Deferred taxes, net |
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54,478 |
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51,468 |
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Other assets |
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47,480 |
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46,070 |
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Long-term assets held for sale |
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5,793 |
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6,149 |
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Total assets |
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$ |
655,023 |
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$ |
584,164 |
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Liabilities and Shareholders Equity |
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Current liabilities: |
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Current maturities of debt |
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$ |
113 |
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$ |
4,266 |
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Accounts payable and accrued expenses |
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83,805 |
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90,324 |
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Other current liabilities |
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42,918 |
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45,549 |
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Current liabilities related to assets held for sale |
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27,955 |
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30,099 |
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Total current liabilities |
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154,791 |
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170,238 |
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Other liabilities |
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36,515 |
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37,359 |
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Long-term debt |
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121,082 |
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196,104 |
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Long-term liabilities related to assets held for sale |
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790 |
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860 |
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Total liabilities |
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313,178 |
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404,561 |
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Commitments and contingencies |
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Shareholders equity: |
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Preferred stock, $1.00 par value; authorized shares 5,000,000;
issued and outstanding shares none |
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Common stock $0.10 par value authorized shares 100,000,000
issued and outstanding shares 64,561,294 and 49,222,013
shares in 2006 and 2005, respectively |
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6,456 |
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4,922 |
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Capital surplus |
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521,066 |
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356,131 |
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Accumulated deficit |
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(186,124 |
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(181,900 |
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Accumulated other comprehensive income |
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447 |
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450 |
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Total shareholders equity |
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341,845 |
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179,603 |
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Total liabilities and shareholders equity |
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$ |
655,023 |
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$ |
584,164 |
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The accompanying notes are an integral part of these condensed unaudited consolidated financial statements.
4
MASTEC, INC.
CONDENSED UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
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For the Three Months Ended |
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March 31, |
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2006 |
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2005 |
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Cash flows from operating activities: |
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Net loss |
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$ |
(4,224 |
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$ |
(12,014 |
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Adjustments to reconcile loss to net cash provided by operating activities: |
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Depreciation and amortization |
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3,943 |
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5,011 |
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Non-cash stock and restricted stock compensation expense |
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1,423 |
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24 |
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(Gain) loss on sale of fixed assets |
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21 |
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(1,820 |
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Write down of fixed assets |
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144 |
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327 |
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Provision for doubtful accounts |
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1,206 |
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1,028 |
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Income tax refunds |
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264 |
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Income from equity investment |
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(356 |
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(214 |
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Accrued losses on construction projects |
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1,062 |
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716 |
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Minority interest |
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(129 |
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66 |
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Changes in assets and liabilities net of assets acquired: |
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Accounts receivable, unbilled revenue and retainage, net |
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16,666 |
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9,222 |
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Inventories |
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9,765 |
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17,902 |
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Income tax refund receivable |
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(280 |
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(79 |
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Other assets, current and non-current portion |
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8,970 |
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1,571 |
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Accounts payable and accrued expenses |
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(19,669 |
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(13,168 |
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Other liabilities, current and non-current portion |
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(4,814 |
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(6,010 |
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Net cash provided by operating activities |
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13,992 |
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2,562 |
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Cash flows (used in) provided by investing activities: |
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Cash paid for acquisitions |
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(19,284 |
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Capital expenditures |
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(2,922 |
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(1,893 |
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Payments received from sub-leases |
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190 |
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Investments in unconsolidated companies |
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(1,905 |
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(1,139 |
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Investments in life insurance policies |
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(326 |
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Net proceeds from sale of assets |
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1,584 |
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3,875 |
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Net cash (used in) provided by investing activities |
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(22,853 |
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1,033 |
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Cash flows provided by financing activities: |
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Proceeds from issuance of common stock, net |
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156,465 |
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Payments of other borrowings, net |
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(4,175 |
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(20 |
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Payments of capital lease obligations |
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(91 |
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(91 |
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Payments of senior subordinated notes |
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(75,000 |
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Proceeds from issuance of common stock pursuant to stock option exercises |
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1,693 |
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611 |
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Payments of financing costs |
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(28 |
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Net cash provided by financing activities |
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78,864 |
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500 |
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Net increase in cash and cash equivalents |
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70,003 |
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4,095 |
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Net effect of currency translation on cash |
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(2 |
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5 |
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Cash and cash equivalents beginning of period |
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2,024 |
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19,548 |
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Cash and cash equivalents end of period |
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$ |
72,025 |
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$ |
23,648 |
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Cash paid during the period for: |
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Interest |
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$ |
8,517 |
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$ |
8,158 |
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Income taxes |
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$ |
9 |
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$ |
248 |
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Supplemental disclosure of non-cash information: |
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Auction receivable Auction receivable |
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$ |
262 |
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$ |
354 |
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Investment in unconsolidated companies payable in April |
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$ |
925 |
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$ |
1,850 |
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Accruals for inventory at quarter-end |
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$ |
17,795 |
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$ |
26,627 |
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The accompanying notes are an integral part of these condensed unaudited consolidated financial statements.
5
MasTec, Inc.
Notes to the Condensed Unaudited Consolidated Financial Statements
Note 1 Nature of the Business
MasTec, Inc. (collectively, with its subsidiaries, MasTec or the Company) is a leading
specialty contractor operating mainly throughout the United States and Canada across a range of
industries. The Companys core activities are the building, installation, maintenance and upgrade
of communications and utility infrastructure and transportation systems. The Companys primary
customers are in the following industries: communications (including satellite television and
cable television), utilities and government. The Company provides similar infrastructure services
across the industries it serves. Customers rely on MasTec to build and maintain infrastructure and
networks that are critical to their delivery of voice, video and data communications, electricity
and transportation systems. MasTec is organized as a Florida corporation and its fiscal year ends
December 31. MasTec or its predecessors have been in business for over 70 years.
Note 2 Basis for Presentation
The accompanying condensed unaudited consolidated financial statements for MasTec have been
prepared in accordance with accounting principles generally accepted in the United States for
interim financial information and with the instructions for Form 10-Q and Rule 10-01 of Regulation
S-X. Accordingly, these financial statements do not include all information and notes required by
accounting principles generally accepted in the United States for complete financial statements and
should be read in conjunction with the audited consolidated financial statements and notes thereto
included in the Companys Form 10-K for the year ended December 31, 2005. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation of the financial position, results of operations and cash flows for the quarterly
periods presented have been included. The results of operations for the periods presented are not
necessarily indicative of results that may be expected for any other interim period or for the full
fiscal year.
Note 3 Significant Accounting Policies
(a) Principles of Consolidation
The accompanying financial statements include MasTec, Inc. and its subsidiaries. The Company
consolidates GlobeTec Construction, LLC as it has a 51% ownership interest in this entity. Other
parties interests in this entity are reported as a minority interest in the condensed unaudited
consolidated financial statements. All intercompany accounts and transactions have been eliminated
in consolidation.
(b) Statements of cash flows
The Company revised the presentation of its cash flow statement and elected not to disclose
cash flows from discontinued operations separately for all periods presented. Accordingly, the
prior period has been revised to reflect the current year presentation.
(c) Comprehensive Loss
Comprehensive loss is a measure of net loss and all other changes in equity that result from
transactions other than with shareholders. Comprehensive loss consists of net loss and foreign
currency translation adjustments.
6
MasTec, Inc.
Notes to the Condensed Unaudited Consolidated Financial Statements
Comprehensive loss consisted of the following (in thousands):
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For the Three Months Ended |
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March 31, |
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2006 |
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2005 |
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Net loss |
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$ |
(4,224 |
) |
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$ |
(12,014 |
) |
Less: foreign currency translation |
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(3 |
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5 |
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Comprehensive loss |
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$ |
(4,227 |
) |
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$ |
(12,009 |
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(d) Revenue Recognition
Revenue and related costs for master and other service agreements billed on a time and
materials basis are recognized as the services are rendered. There are also some service agreements
that are billed on a fixed fee basis. Under the Companys fixed fee master service and similar type
service agreements, the Company furnishes various specified units of service for a separate fixed
price per unit of service. The Company recognizes revenue as the related unit of service is
performed. For service agreements on a fixed fee basis, profitability will be reduced if the actual
costs to complete each unit exceed original estimates. The Company also immediately recognizes the
full amount of any estimated loss on these fixed fee projects if estimated costs to complete the
remaining units exceed the revenue to be received from such units.
The Company recognizes revenue on unit based installation/construction projects using the
units-of-delivery method. The Companys unit based contracts relate primarily to contracts that
require the installation or construction of specified units within an infrastructure system. Under
the units-of-delivery method, revenue is recognized at the contractually agreed price per unit as
the units are completed and delivered. Profitability will be reduced if the actual costs to
complete each unit exceed original estimates. The Company is also required to immediately recognize
the full amount of any estimated loss on these projects if estimated costs to complete the
remaining units for the project exceed the revenue to be earned on such units. For certain
customers with unit based installation/construction projects, the Company recognizes revenue after
the service is performed and work orders are approved to ensure that collectibility is probable
from these customers. Revenue from completed work orders not collected in accordance with the
payment terms established with these customers is not recognized until collection is assured.
The Companys non-unit based, fixed price installation/construction contracts relate primarily
to contracts that require the construction and installation of an entire infrastructure system. The
Company recognizes revenue and related costs as work progresses on non-unit based, fixed price
contracts using the percentage-of-completion method, which relies on contract revenue and estimates
of total expected costs. The Company estimates total project costs and profit to be earned on each
long-term, fixed-price contract prior to commencement of work on the contract. The Company follows
this method since reasonably dependable estimates of the revenue and costs applicable to various
stages of a contract can be made. Under the percentage-of-completion method, the Company records
revenue and recognizes profit or loss as work on the contract progresses. The cumulative amount of
revenue recorded on a contract at a specified point in time is that percentage of total estimated
revenue that incurred costs to date bear to estimated total contract costs. If, as work progresses,
the actual contract costs exceed estimates, the profit recognized on revenue from that contract
decreases. The Company recognizes the full amount of any estimated loss on a contract at the time
the estimates indicate such a loss.
(e) Basic and Diluted Net Income (Loss) Per Share
The computation of basic net income (loss) per share is based on the weighted average number
of common shares outstanding during the period. The computation of diluted net income (loss) per
common share is based on the weighted average of common shares outstanding during the period plus,
when their effect is dilutive, incremental shares consisting of shares subject to stock options and
unvested restricted stock (common stock equivalents). For the three months ended March 31, 2006,
diluted net income (loss) per common share includes the effect of common stock equivalents in the
amount of 1,737,426 shares. For the three months ended March 31, 2005, common stock equivalents
were not considered since their effect would be antidilutive. Common stock equivalents amounted to
796,625 shares for the three months ended March 31, 2005. Accordingly, diluted net loss per share
is the same as basic net loss per share for the three months ended March 31, 2005.
7
MasTec, Inc.
Notes to the Condensed Unaudited Consolidated Financial Statements
(f) Valuation of Long-Lived Assets
The Company reviews long-lived assets, consisting primarily of property and equipment and
intangible assets with finite lives, for impairment in accordance with Statement of Financial
Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets
(SFAS No. 144). In analyzing potential impairment, the Company used projections of future
discounted cash flows from the assets. These projections are based on its view of growth rates for
the related business, anticipated future economic conditions and the appropriate discount rates
relative to risk and estimates of residual values. The Company believes that its estimates are
consistent with assumptions that marketplace participants would use in their estimates of fair
value. In addition, due to the Companys intent to sell substantially all of its state Department
of Transportation projects and assets, it evaluated long-lived assets for these operations under
SFAS No. 144 based on projections of future discounted cash flows from these assets in 2006 and an
estimated selling price for the assets held for sale by using a weighted probability cash flow
analysis based on managements estimates. These estimates are subject to change in the future and
if the Company is not able to sell these projects and assets at the estimated selling price or the
cash flow changes because of changes in economic conditions, growth rates or terminal values, the
Company may incur impairment charges in the future related to these projects and assets.
(g) Valuation of Goodwill and Intangible Assets
In the three months ended March 31, 2006, the Company recorded $23.5 million of goodwill in
connection with the DSSI acquisition as described in Note 5.
Goodwill acquired in a purchase business combination and determined to have an infinite useful
life is not amortized, but instead tested for impairment at least annually. In accordance with SFAS
No. 142, Goodwill and Other Intangible Assets (SFAS 142), the Company conducts, on at least
an annual basis, a review of its reporting entities to determine whether the carrying values of
goodwill exceed the fair market value using a discounted cash flow methodology for each entity.
Should this be the case, the value of its goodwill may be impaired and written down.
The Company could record impairment losses if, in the future, profitability and cash flows of
the reporting entities decline to the point where the carrying value of those units exceed their
market value.
(h) Accrued Insurance
The Company maintains insurance policies subject to per claim deductibles of $2 million for
its workers compensation policy, $2 million for its general liability policy and $3 million for
its automobile liability policy. The Company has excess umbrella coverage for losses in excess of
the primary coverages of up to $100 million per claim and in the aggregate. The Company also
maintains an insurance policy with respect to employee group health claims subject to per claim
deductibles of $300,000. The Company actuarially determines any liabilities for unpaid claims and
associated expenses, including incurred but not reported losses and reflects those liabilities in
the condensed unaudited consolidated balance sheet as other current and non-current liabilities.
The determination of such claims and expenses and the appropriateness of the related liability is
reviewed and updated quarterly. In the three months ended March 31, 2006, the Company recorded a
change in its estimate related to the discount factor used in estimating actuarial insurance reserves
for its workers compensation, general and automobile liability policies. The discount factor was
changed from 3.5% to 4.5% to reflect current market conditions and to use a discount factor that is
more in line with the market interest rate the Company receives on its investments. The change in
discount rate resulted in a decrease of insurance reserves of
$1.1 million. The Companys
insurance reserves, however, increased due to several large claims related to prior years which offset the decrease resulting from the change in discount factor.
The Company is periodically required to post letters of credit and provide cash collateral to
its insurance carriers and surety company. As of March 31, 2006 and December 31, 2005, such letters
of credit amounted to $59.4 million and $53.1 million, respectively, and cash collateral posted
amounted to $23.7 million and $24.8 million, respectively. Cash collateral is included in other
assets. The 2006 increase in the letters of credit is related to additional collateral provided to
the insurance carrier for the 2006 plan year in the amount of
$6.5 million, in comparison to the $18 million of cash
collateral provided to the Companys insurance carrier for the 2005 plan year. The cash collateral was
reduced in 2006 due to a $1.1 million reduction for prior year insurance programs.
8
MasTec, Inc.
Notes to the Condensed Unaudited Consolidated Financial Statements
(i) Stock Based Compensation
In the first quarter of 2006, the Company adopted Statement of Financial Accounting Standards
No. 123 (revised 2004), Share-Based Payment, (FAS 123R). This Statement requires companies to
expense the estimated fair value of stock options and similar equity instruments issued to
employees over the vesting period in their statement of operations. FAS 123R eliminates the
alternative to use the intrinsic method of accounting provided for in Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees (APB 25), which generally resulted in no
compensation expense recorded in the financial statements related to the grant of stock options to
employees if certain conditions were met.
The Company adopted FAS 123R using the modified prospective method effective January 1, 2006,
which requires the Company to record compensation expense over the vesting period for all awards
granted after the date of adoption, and for the unvested portion of previously granted awards that
remain outstanding at the date of adoption. Accordingly, amounts for periods prior to January 1,
2006 presented herein have not been restated to reflect the adoption of FAS 123R. The pro forma
effect of the 2005 prior period is as follows and has been disclosed to be consistent with prior
accounting rules (in thousands, except per share data):
|
|
|
|
|
|
|
For the Three Months Ended |
|
|
|
March 31, 2005 |
|
Net loss, as reported |
|
$ |
(12,014 |
) |
Deduct: Total stock-based employee
compensation expense determined under
fair value based methods for all
awards |
|
|
(1,252 |
) |
|
|
|
|
Pro forma net loss |
|
$ |
(13,266 |
) |
|
|
|
|
Basic and diluted net loss: |
|
|
|
|
As reported |
|
$ |
(.25 |
) |
|
|
|
|
Pro forma |
|
$ |
(.27 |
) |
|
|
|
|
The
fair value concepts were not changed significantly in FAS 123R;
however, in adopting FAS 123R, companies must choose among alternative valuation models and amortization assumptions.
After assessing alternative valuation models and amortization assumptions, the Company will
continue using the Black-Scholes valuation model and has elected to use the ratable method to
amortize compensation expense over the vesting period of the grant.
The fair value of each option granted was estimated using the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended |
|
|
|
March 31, |
|
|
|
2006 |
|
|
2005 |
|
Expected life employees |
|
3.26 years |
|
7 years |
Expected life executives |
|
4.74 years |
|
7 years |
Volatility percentage |
|
|
65.0 |
% |
|
|
79.2 |
% |
Interest rate |
|
|
4.85 |
% |
|
|
4.0 |
% |
Dividends |
|
None |
|
None |
Forfeiture rate |
|
|
7.11 |
% |
|
|
6.97 |
% |
Total non-cash stock compensation expense for the three months ended March 31, 2006 related to
unvested stock options amounted to $1,254,465 of which $241,876 is included in loss from
discontinued operations and $1,012,589 is included in general and administrative expenses in the
condensed unaudited consolidated statements of operations. Included in the expense is $321,818 of
compensation expense related to accelerations of stock options that occurred in the three months
ended March 31, 2006. Accelerations were a result of certain benefits given to employees who were
terminated during the quarter. During the three months ended March 31, 2006 and 2005, the Company
granted 0 and 125,000 options, respectively, to employees and executives at their fair value on the
date of grant. The options granted during the three months ended March 31, 2005 had a weighted
average exercise price of $5.77 per share.
9
MasTec, Inc.
Notes to the Condensed Unaudited Consolidated Financial Statements
Subsequent to March 31, 2006, the Company granted 709,500 options to employees and executives
at their fair value on the date of grant. The total value of these options amounted to $5.2 million
and will be expensed over the three year vesting period.
The Company also grants restricted stock, which is valued based on the market price of the
common stock on the date of grant. Compensation expense arising from restricted stock grants is
recognized using the straight-line method over the vesting period. Unearned compensation for
restricted stock is a reduction of shareholders equity in the condensed unaudited consolidated
balance sheets. Through March 31, 2006, the Company has issued 145,923 shares of restricted stock
valued at approximately $1.2 million which is being expensed over various vesting periods (21
months to 3 years). Total unearned compensation related to restricted stock grants as of March 31,
2006 is approximately $568,000. Restricted stock expense for the three months ended March 31, 2006
and 2005 is $168,200 and $24,254, respectively, and is included in non-cash stock compensation in
the condensed unaudited consolidated statements of operations.
Subsequent to March 31, 2006, the Company issued 83,600 additional shares of restricted stock
to certain employees valued at approximately $1.2 million which will be expensed on a straight line
basis over various vesting periods (one to two years).
(j) Reclassifications
Certain reclassifications were made to the prior period financial statements in order to
conform to the current period presentation. In addition, as discussed in Note 8, the Company in
2005 announced its intention to sell substantially all of its state Department of Transportation
related projects and assets. Accordingly, the net loss for these projects and assets for the three
months ended March 31, 2005 has been reclassified from the prior period presentation as a loss from
discontinued operations in the Companys condensed unaudited consolidated statements of operations.
(k) Equity investments
The Company has one investment which the Company accounts for by the equity method because the
Company owns 49% of the entity and has the ability to exercise significant influence over the
operational policies of the limited liability company. The Companys share of its earnings or
losses in this investment is included as other income, net in the condensed unaudited consolidated
statements of operations. As of March 31, 2006, the Companys investment exceeded the net equity of
such investment and accordingly the excess is considered to be equity goodwill. The Company
periodically evaluates the equity goodwill for impairment under Accounting Principle Board No. 18,
The Equity Method of Accounting for Investments in Common Stock, as amended. See Note 11.
(l) Fair value of financial instruments
The Company estimates the fair market value of financial instruments through the use of public
market prices, quotes from financial institutions and other available information. Judgment is
required in interpreting data to develop estimates of market value and, accordingly, amounts are
not necessarily indicative of the amounts that we could realize in a current market exchange.
Short-term financial instruments, including cash and cash equivalents, accounts and notes
receivable, accounts payable and other liabilities, consist primarily of instruments without
extended maturities, the fair value of which, based on managements estimates, equaled their
carrying values. At March 31, 2006 and December 31, 2005, the fair value of the Companys
outstanding senior subordinated notes was $120.6 million and $195.0 million, respectively, based on
quoted market values. The Company uses letters of credit to back certain insurance policies. The
letters of credit reflect fair value as a condition of their underlying purpose and are subject to
fees under the credit agreement.
Note 4 Sale of the Companys Common Stock
On January 24, 2006, the Company completed a public offering of 14,375,000 shares of common
stock at $11.50 per share. The net proceeds from the sale were $156.5 million after deducting
underwriting discounts and offering
10
MasTec, Inc.
Notes to the Condensed Unaudited Consolidated Financial Statements
expenses. The Company used $18.5 million of the net proceeds for the cash portion of the
purchase price for the DSSI acquisition, as described in Note 5. On March 2, 2006, the Company used
$75.5 million of the net proceeds to redeem a portion of its 7.75% senior subordinated notes due
February 2008 plus interest (see Note 7). The Company expects to use the remaining net proceeds for
working capital, other possible acquisitions of assets and businesses, organic growth and other
general corporate purposes.
Note 5 Acquisition of Digital Satellite Services, Inc.
Effective January 31, 2006, the Company acquired substantially all of the assets and assumed
certain operating liabilities and contracts of Digital Satellite Services, Inc., which it refers to
as the DSSI acquisition. The purchase price was composed of $18.5 million in cash, $6.9 million of
MasTec common stock (637,214 shares based on the closing price of the Companys common stock of
$11.77 per share on January 27, 2006 discounted by 8.75% due to the shares being restricted for 120
days), $784,000 of transaction costs and an earn-out based on future performance. Pursuant to the
terms of the purchase agreement, the Company agreed to use its best efforts to register for resale
the MasTec common stock issued as part of the purchase price within 120 days after the closing of
the acquisition. The Company registered these shares for resale on April 28, 2006.
DSSI, which had revenues exceeding $50 million in 2005 (unaudited), was involved in the
installation of residential and commercial satellite and security services in several markets
including Atlanta, Georgia, the Greenville-Spartanburg area of South Carolina and Asheville, North
Carolina, and portions of Tennessee, Kentucky and Virginia. These markets are contiguous to areas
in which the Company is active with similar installation services. Following the DSSI acquisition,
the Company provides installation services from the mid-Atlantic states to South Florida.
The preliminary purchase price allocation for the DSSI acquisition is based on fair-value of
each of the following components on January 31, 2006 (unaudited) (in thousands):
|
|
|
|
|
Net assets |
|
$ |
2,026 |
|
Non-compete agreements |
|
|
658 |
|
Goodwill |
|
|
23,487 |
|
|
|
|
|
|
|
$ |
26,171 |
|
|
|
|
|
The non-compete agreements are with an executive and with the shareholders of DSSI and will be
amortized over a five and a seven year period.
DSSIs results of operations prior to the date of acquisition are not significant to the
Companys results of operations or financial condition and
accordingly, no pro forma information is required to be disclosed.
Note 6 Other Assets and Liabilities
Prepaid expenses and other current assets as of March 31, 2006 and December 31, 2005 consisted
of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
Deferred tax assets |
|
$ |
2,329 |
|
|
$ |
5,308 |
|
Notes receivable |
|
|
1,837 |
|
|
|
2,231 |
|
Non-trade receivables |
|
|
9,602 |
|
|
|
21,452 |
|
Other investments |
|
|
4,929 |
|
|
|
4,815 |
|
Prepaid expenses and deposits |
|
|
7,515 |
|
|
|
6,563 |
|
Other |
|
|
2,803 |
|
|
|
2,073 |
|
|
|
|
|
|
|
|
Total prepaid expenses and other current assets |
|
$ |
29,015 |
|
|
$ |
42,442 |
|
|
|
|
|
|
|
|
11
MasTec, Inc.
Notes to the Condensed Unaudited Consolidated Financial Statements
Other non-current assets consist of the following as of March 31, 2006 and December 31, 2005
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
Investment in real estate |
|
$ |
1,683 |
|
|
$ |
1,683 |
|
Equity investment |
|
|
7,529 |
|
|
|
5,268 |
|
Long-term portion of deferred financing costs, net |
|
|
3,716 |
|
|
|
4,124 |
|
Cash surrender value of insurance policies |
|
|
6,695 |
|
|
|
6,369 |
|
Non-compete agreements, net |
|
|
1,512 |
|
|
|
900 |
|
Insurance escrow |
|
|
23,702 |
|
|
|
24,792 |
|
Other |
|
|
2,643 |
|
|
|
2,934 |
|
|
|
|
|
|
|
|
Total other assets |
|
$ |
47,480 |
|
|
$ |
46,070 |
|
|
|
|
|
|
|
|
Other current and non-current liabilities consist of the following as of March 31, 2006 and
December 31, 2005 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Accrued compensation |
|
$ |
10,940 |
|
|
$ |
11,084 |
|
Accrued insurance |
|
|
17,477 |
|
|
|
17,144 |
|
Billings in excess of costs |
|
|
3,453 |
|
|
|
2,505 |
|
Accrued professional fees |
|
|
2,430 |
|
|
|
3,484 |
|
Accrued interest |
|
|
1,563 |
|
|
|
6,329 |
|
Accrued losses on contracts |
|
|
338 |
|
|
|
509 |
|
Accrued payments related to equity investment |
|
|
925 |
|
|
|
925 |
|
Other |
|
|
5,792 |
|
|
|
3,569 |
|
|
|
|
|
|
|
|
Total other current liabilities |
|
$ |
42,918 |
|
|
$ |
45,549 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
Non-current liabilities: |
|
|
|
|
|
|
|
|
Accrued insurance |
|
$ |
34,687 |
|
|
$ |
34,926 |
|
Minority interest |
|
|
1,573 |
|
|
|
1,837 |
|
Other |
|
|
255 |
|
|
|
596 |
|
|
|
|
|
|
|
|
Total other liabilities. |
|
$ |
36,515 |
|
|
$ |
37,359 |
|
|
|
|
|
|
|
|
Note 7 Debt
Debt is comprised of the following at March 31, 2006 and December 31, 2005 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
Revolving credit facility at LIBOR plus 1.75% as
of March 31, 2006 and 2.25% as of December 31,
2005 (6.75% as of March 31, 2006 and 5.25% as of
December 31, 2005) or, at the option of the
Company, the banks prime rate plus 0.25% as of
March 31, 2006 and 0.75% as of December 31, 2005
(8.0% as of March 31, 2006 and December 31,
2005) |
|
$ |
|
|
|
$ |
4,154 |
|
7.75% senior subordinated notes due February 2008 |
|
|
120,949 |
|
|
|
195,943 |
|
Notes payable for equipment, at interest rates
from 7.5% to 8.5% due in installments through
the year 2008 |
|
|
246 |
|
|
|
273 |
|
|
|
|
|
|
|
|
Total debt |
|
|
121,195 |
|
|
|
200,370 |
|
Less current maturities |
|
|
(113 |
) |
|
|
(4,266 |
) |
|
|
|
|
|
|
|
Long-term debt |
|
$ |
121,082 |
|
|
$ |
196,104 |
|
|
|
|
|
|
|
|
12
MasTec, Inc.
Notes to the Condensed Unaudited Consolidated Financial Statements
Revolving Credit Facility
The Company has a secured revolving credit facility for its operations which was amended and
restated on May 10, 2005 increasing the maximum amount of availability from $125 million to $150
million, subject to reserves of $5.0 million, and other adjustments and restrictions (the Credit
Facility). The Credit Facility expires on May 10, 2010. The deferred financing costs related to
the Credit Facility are included in prepaid expenses and other current assets and other assets in
the condensed unaudited consolidated balance sheets.
The amount that the Company can borrow at any given time is based upon a formula that takes
into account, among other things, eligible billed and unbilled accounts receivable and equipment
which can result in borrowing availability of less than the full amount of the Credit Facility. As
of March 31, 2006 and December 31, 2005, net availability under the Credit Facility totaled $43.2
million and $55.4 million, respectively, net of outstanding standby letters of credit aggregating
$63.9 million and $57.6 million in each period, respectively. At March 31, 2006, $59.4 million of
the outstanding letters of credit were issued to support the Companys casualty and medical
insurance requirements or surety requirements. These letters of credit mature at various dates and
most have automatic renewal provisions subject to prior notice of cancellation. The Credit Facility
is collateralized by a first priority security interest in substantially all of the Companys
assets and a pledge of the stock of certain of its operating subsidiaries. All wholly-owned
subsidiaries collateralize the Credit Facility. At March 31, 2006 and December 31, 2005, the
Company had outstanding draws under the Credit Facility of $0 and $4.2 million, respectively.
Interest under the Credit Facility accrues at rates based, at the Companys option, on the agent
banks base rate plus a margin of between 0.25% and 1.25% or the LIBOR rate (as defined in the
Credit Facility) plus a margin of between 1.75% and 2.75%, depending on certain financial
thresholds. The Credit Facility includes an unused facility fee of 0.375%, which may be adjusted to
as low as 0.250%.
If the net availability under the Credit Facility is under $20.0 million at any given day, the
Company is required to be in compliance with a minimum fixed charge coverage ratio of 1.2 to 1.0
measured on a monthly basis and certain events are triggered. The fixed charge coverage ratio is
generally defined to mean the ratio of the Companys net income before interest expense, income tax
expense, depreciation expense, and amortization expense minus net capital expenditures and cash
taxes paid to the sum of all interest expense plus current maturities of debt for the period. The
financial covenant was not applicable as of March 31, 2006 because the net availability under the
Credit Facility was $43.2 million as of March 31, 2006 and net availability did not reduce below
$20.0 million at any given day during the period.
Based
on the Companys improved financial position, on May 8,
2006, the Company was able to amend its Credit Facility (2006
Amendment) to reduce the interest rate margins
charged on borrowings and letters of credit. This amendment also
increases the maximum permitted purchase price for an acquisition, increases permitted receivable concentration of certain customers, increases the permitted capital expenditures and debt baskets,
and reduces the required minimum fixed charge coverage ratio if net availability falls below $20.0
million.
Based upon the 2006 Amendment and the Companys current availability,
liquidity and projections for 2006, the Company believes it will be in compliance with the Credit
Facilitys terms and conditions and the minimum availability requirements for the remainder of 2006. The Company is
dependent upon borrowings and letters of credit under this Credit Facility to fund operations.
Should the Company be unable to comply with the terms and conditions of the Credit Facility, it
would be required to obtain modifications to the Credit Facility or another source of financing to
continue to operate. The Company may not be able to achieve its 2006 projections and this may adversely affect its ability to remain in compliance with the Credit Facilitys minimum net availability requirements and minimum fixed
charge ratio in the future.
The Companys variable rate Credit Facility exposes it to interest rate risk. However, the
Company had no borrowings outstanding under the Credit Facility at March 31, 2006.
Senior Subordinated Notes
As of March 31, 2006, the Company had outstanding $120.9 million in principal amount of its
7.75% senior subordinated notes due in February 2008. Interest is due semi-annually. The notes are
redeemable, at the Companys option at 100% of the principal amount plus accrued but unpaid
interest. On March 2, 2006, the Company redeemed
13
MasTec, Inc.
Notes to the Condensed Unaudited Consolidated Financial Statements
$75.0 million of the senior subordinated notes and paid $500,521 in interest. The notes also
contain default (including cross-default) provisions and covenants restricting many of the same
transactions restricted under the Credit Facility.
The Company had no holdings of derivative financial or commodity instruments at March 31,
2006.
Note 8 Discontinued Operations
In March 2004, the Company ceased performing contractual services for customers in Brazil,
abandoned all assets of its Brazil subsidiary and made a determination to exit the Brazil market.
The abandoned Brazil subsidiary has been classified as a discontinued operation. In November 2005,
the subsidiary applied for relief and was adjudicated bankrupt by a Brazilian bankruptcy court. The
subsidiary is currently being liquidated under court supervision. For the three months ended March
31, 2006 and 2005, the expenses incurred by the Brazilian subsidiary were principally related to
legal fees incurred in connection with the bankruptcy proceedings. For the three months ended March
31, 2006 and 2005, the net loss from these operations was $53,000 and $0, respectively.
The following table summarizes the assets and liabilities for the Brazil operations as of
March 31, 2006 and December 31, 2005 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
Current assets |
|
$ |
290 |
|
|
$ |
290 |
|
Non-current assets |
|
|
|
|
|
|
|
|
Current liabilities |
|
|
19,507 |
|
|
|
19,455 |
|
Non-current liabilities |
|
|
2,170 |
|
|
|
2,170 |
|
Accumulated foreign currency translation. |
|
|
(21,387 |
) |
|
|
(21,335 |
) |
During the fourth quarter of 2004, the Company ceased performing new services in the network
services operations and sold these operations in 2005. On May 24, 2005, the Company sold certain of
its network services operations assets to a third party for $208,501 consisting of $100,000 in cash
and a promissory note in the principal amount of $108,501 due in May 2006. The promissory note is
included in other current assets in the accompanying condensed unaudited consolidated balance
sheet. These operations have been classified as a discontinued operation in all periods presented.
The net loss for the network services operations was $97,000 and $445,000 for the three months
ended March 31, 2006 and 2005, respectively.
The following table summarizes the assets and liabilities of the network services operations
as of March 31, 2006 and December 31, 2005 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
Current assets |
|
$ |
316 |
|
|
$ |
883 |
|
Non current assets |
|
|
34 |
|
|
|
34 |
|
Current liabilities |
|
|
597 |
|
|
|
816 |
|
Non current liabilities |
|
|
|
|
|
|
|
|
Shareholders (deficit) equity |
|
|
(247 |
) |
|
|
101 |
|
14
MasTec, Inc.
Notes to the Condensed Unaudited Consolidated Financial Statements
The following table summarizes the results of operations of network services (in thousands):
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended |
|
|
|
March 31, |
|
|
|
2006 |
|
|
2005 |
|
Revenue |
|
$ |
59 |
|
|
$ |
2,636 |
|
Cost of revenue |
|
|
(59 |
) |
|
|
(2,533 |
) |
Operating and other expenses |
|
|
(97 |
) |
|
|
(548 |
) |
|
|
|
|
|
|
|
Loss from operations before benefit for income taxes |
|
$ |
(97 |
) |
|
$ |
(445 |
) |
Benefit for income taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(97 |
) |
|
$ |
(445 |
) |
|
|
|
|
|
|
|
On December 31, 2005, the executive committee of the Companys board of directors voted to
sell substantially all of its state Department of Transportation related projects and assets. The
projects and assets that are for sale have been accounted for as discontinued operations for all
periods presented, including the reclassification of results of operations from these projects to
discontinued operations for the three months ended March 31, 2005. As of March 31, 2006, the
carrying value of the subject net assets for sale was approximately $46.5 million. This amount is
comprised of total assets of $75.2 million less total liabilities of $28.7 million. A review of the
carrying value of property and equipment related to the state Department of Transportation projects
and assets was conducted in connection with the decision to sell these projects and assets.
Management assumed a nine month projected cash flow and estimated a selling price using a weighted
probability cash flow approach based on managements estimates. These estimates are subject to
change in the future and if the Company is not able to sell these projects and assets at the
estimated selling price or the cash flow changes because of changes in economic conditions, growth
rates and terminal values, the Company may incur impairment charges in the future.
The following table summarizes the assets held for sale and liabilities related to the assets
held for sale for the state Department of Transportation operations as of March 31, 2006 and
December 31, 2005 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
Accounts receivable, net |
|
$ |
43,991 |
|
|
$ |
44,906 |
|
Inventory |
|
|
20,927 |
|
|
|
23,724 |
|
Other current assets |
|
|
4,447 |
|
|
|
1,058 |
|
|
|
|
|
|
|
|
Current assets held for sale |
|
$ |
69,365 |
|
|
$ |
69,688 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net |
|
$ |
3,624 |
|
|
$ |
3,822 |
|
Long-term assets |
|
|
2,169 |
|
|
|
2,327 |
|
|
|
|
|
|
|
|
Long-term assets held for sale |
|
$ |
5,793 |
|
|
$ |
6,149 |
|
|
|
|
|
|
|
|
Current liabilities related to assets held for sale |
|
$ |
27,955 |
|
|
$ |
30,099 |
|
|
|
|
|
|
|
|
Long-term liabilities related to assets held for sale |
|
$ |
790 |
|
|
$ |
860 |
|
|
|
|
|
|
|
|
The following table summarizes the results of operations for the state Department of
Transportation related projects and assets that are considered to be discontinued (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2006 |
|
|
2005 |
|
Revenue |
|
$ |
24,664 |
|
|
$ |
23,794 |
|
Cost of revenue |
|
|
(29,270 |
) |
|
|
(27,893 |
) |
Operating expenses |
|
|
(3,073 |
) |
|
|
(2,027 |
) |
|
|
|
|
|
|
|
Loss from operations before benefit for income taxes |
|
$ |
(7,679 |
) |
|
|
(6,126 |
) |
Benefit for income taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(7,679 |
) |
|
$ |
(6,126 |
) |
|
|
|
|
|
|
|
15
MasTec, Inc.
Notes to the Condensed Unaudited Consolidated Financial Statements
Note 9 Commitments and Contingencies
The Company brought an action against NextiraOne Federal in the Federal Court in Eastern
District of Virginia, to recover payment for services rendered in connection with a state
Department of Transportation project, which is included in discontinued operations, on a network
wiring contract. NextiraOne counterclaimed for offsets and remediation. On May 5, 2006, the Judge ruled
that the Company failed to establish an entitlement to recover damages for
contract work done, and that NextiraOne Federal failed to establish an entitlement to recover costs
of alleged offsets and costs of remediation. Neither party obtained the relief sought. The Company believes
the ruling is an error, and will seek rehearing and, if necessary, remedy on appeal. The Company
may be unable to obtain relief without additional expenses.
In April 2006 the Company settled, without payment to the plaintiffs by the Company, several
complaints for purported securities class actions that were filed against the Company and certain
officers in the second quarter of 2004. While the Company believes it would have ultimately been
successful in defense of these actions, given the amount of the settlement, the inherent risk of
uncertainty of the legal proceedings, and the substantial time and expense of defending these
proceedings, the Company concluded that entering into the settlement was the appropriate course of
action. As part of the settlement, the Companys excess insurance carrier has retained its rights
to seek reimbursement of up to $2.0 million from the Company based on its claim that notice was not
properly given under the policy. The Company believes these claims are without merit and plans to
continue vigorously defending this action. The Company also believes that they have claims against
the insurance broker for any losses arising from the notice.
In October 2005, eleven former employees filed a Fair Labor Standards Act (FLSA) collective
action against MasTec, alleging failure to pay overtime wages as required under the FLSA. The
matter is currently stayed and under investigation. The Company does not believe it is liable
under the FLSA as alleged in the complaint. The Company plans to vigorously defend this lawsuit,
but may be unable to successfully resolve this dispute without incurring significant expenses. Due
to the early stage of this proceeding, potential loss, if any, can not be determined.
During construction of a natural gas pipeline project in Oregon in 2003, the Company and its
customer, Coos County, Oregon, were cited for violations of the Clean Water Act by the U.S. Corp of
Engineers. Despite protracted negotiations, the parties were unable to settle these complaints.
On March 30, 2006, the Corp of Engineers filed suit against the Company and Coos County in Federal
District Court in Oregon. The Company intends to defend this action vigorously, but may be unable
to do so without incurring significant expenses. Due to the early stage of this proceeding,
potential loss, if any, cannot be determined.
In connection with the same project, a complaint alleging failure to comply with prevailing
wage requirements was filed against us by the Oregon Bureau of Labor and Industry. This matter was
filed with the state court in Coos County. The Company intends to defend this action vigorously,
but may be unable to do so without incurring significant expenses. Due to the early stage of this
litigation, any potential loss cannot presently be determined.
The potential loss for all unresolved Coos Bay matters and unpaid settlements reached
described above is estimated to be $125,000 at March 31, 2006, which has been recorded in the
unaudited condensed consolidated balance sheets as accrued expenses.
In June 2005, the Company posted a $2.3 million bond in order to pursue the appeal of a $1.7
million final judgment entered March 31, 2005 against the Company for damages plus attorneys fees
resulting from a break in a Citgo pipeline. The Company seeks a new trial and reduction in the
damages award. The Company will continue to contest this matter in the appellate court, and on
subsequent retrial. The amount of the loss, if any, relating to this matter not covered by
insurance is estimated to be $100,000 to $2.4 million, of which $100,000 is recorded in the
unaudited condensed consolidated balance sheet as of March 31, 2006, as accrued expenses.
The Company is also a party to other pending legal proceedings arising in the normal course of
business. While complete assurance cannot be given as to the outcome of any legal claims,
management believes that any financial impact would not be material to its results of operations,
financial position or cash flows.
The Company is required to provide payment and performance bonds for some of
its contractual commitments related to projects in process. At March 31, 2006, the cost to complete
projects for which the $296.0 million in performance and payment bonds are outstanding was $74.1
million.
On January 3, 2005, MasTec entered into an employment agreement with Gregory S. Floerke
relating to his employment as Chief Operations Officer. He was solely focused and responsible for
managing intelligent traffic services related projects for MasTec. The agreement was to expire on
January 2, 2007 unless earlier terminated, and provided that Mr. Floerke would be paid an annual
salary of $300,000 during the first year of employment and $350,000 during the second year of
employment. The agreement also provided for the grant to Mr. Floerke of stock options pursuant to
16
MasTec, Inc.
Notes to the Condensed Unaudited Consolidated Financial Statements
MasTecs stock option plans and contained confidentiality, non-competition and
non-solicitation provisions. Mr. Floerke resigned effective March 31, 2006. In connection
therewith, the Company entered into a separation agreement with Mr. Floerke in which the Company
paid him $95,000. This separation agreement terminated the employment agreement with Mr. Floerke.
The Company also recorded approximately $242,000 in stock compensation for the three months ended
March 31, 2006 related to the extension of the exercise period on Mr. Floerkes stock options and
the acceleration of the vesting of his unvested options. This amount is included in non-cash stock
compensation expense as discussed in Note 3(i) and is included in loss from discontinued
operations.
Note 10 Concentrations of Risk
The Company provides services to its customers in the following industries: communications,
utilities and government.
Revenue for customers in these industries is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended |
|
|
|
March 31, |
|
|
|
2006 |
|
|
2005 |
|
Communications |
|
$ |
156,821 |
|
|
$ |
140,513 |
|
Utilities |
|
|
53,744 |
|
|
|
44,460 |
|
Government |
|
|
8,187 |
|
|
|
9,003 |
|
|
|
|
|
|
|
|
|
|
$ |
218,752 |
|
|
$ |
193,976 |
|
|
|
|
|
|
|
|
The Company grants credit, generally without collateral, to its customers. Consequently, the
Company is subject to potential credit risk related to changes in business and economic factors.
However, the Company generally has certain lien rights on that work and concentrations of credit
risk are limited due to the diversity of the customer base. The Company believes its billing and
collection policies are adequate to minimize potential credit risk. During the three months ended
March 31, 2006, 51.2% of the Companys total revenue was attributed to two customers. Revenue from
these two customers accounted for 37.9% and 13.3% of total revenue for the three months ended March
31, 2006. During the three months ended March 31, 2005, two customers accounted for 46.0% of the
Companys total revenue after adjustment for discontinued operations (see Note 8). Revenue from
these two customers accounted for 32.0% and 14.0% of the total revenue for the three months ended
March 31, 2005.
The Company maintains allowances for doubtful accounts for estimated losses resulting from the
inability of customers to make required payments. Management analyzes historical bad debt
experience, customer concentrations, customer credit-worthiness, the availability of mechanics and
other liens, the existence of payment bonds and other sources of payment, and current economic
trends when evaluating the adequacy of the allowance for doubtful accounts. If judgments regarding
the collectibility of accounts receivables were incorrect, adjustments to the allowance may be
required, which would reduce profitability. In addition, the Companys reserve mainly covers the
accounts receivable related to the unprecedented number of customers that filed for bankruptcy
protection during the year 2001 and general economic climate of 2002. As of March 31, 2006, the
Company had remaining receivables from customers undergoing bankruptcy reorganization totaling
$13.8 million net of $7.4 million in specific reserves. As of December 31, 2005, the Company had
remaining receivables from customers undergoing bankruptcy reorganization totaling $14.5 million
net of $8.0 million in specific reserves. Based on the analytical process described above,
management believes that the Company will recover the net amounts recorded. The Company maintains
an allowance for doubtful accounts of $13.8 million and $15.9 million as of March 31, 2006 and
December 31, 2005, respectively, for both specific customers and as a reserve against other past
due balances. The decrease in reserves is due to certain specific reserves being written off
against the receivable in the three months ended March 31, 2006. Should additional customers file
for bankruptcy or experience difficulties, or should anticipated recoveries in existing
bankruptcies and other workout situations fail to materialize, the Company could experience reduced
cash flows and losses in excess of the current allowance.
17
MasTec, Inc.
Notes to the Condensed Unaudited Consolidated Financial Statements
Note 11 Equity Investment
The Company has a 49% interest in a limited liability company that it purchased from a third
party. The purchase price for this investment was an initial amount of $3.7 million which was paid
in four quarterly installments of $925,000 through December 31, 2005. Beginning in the first
quarter of 2006, eight additional contingent quarterly payments are expected to be made to the
third party from which the interest was purchased. The contingent payments will be up to a maximum
of $1.3 million per quarter based on the level of unit sales and profitability of the limited
liability company in specified preceding quarters. The first quarterly contingent payment was paid
on January 10, 2006 in the amount of $925,000 and the second quarterly contingent payment was paid
on April 10, 2006 in the amount of $925,000. The April amount is included in accrued expenses and
other assets at March 31, 2006. The Company also may be required under the agreement to make
capital contributions from time to time equal to 49% of the additional capital required by the
venture. In March 2006, the venture requested a total capital contribution in the amount of $2.0
million of which $980,000, or 49%, was paid by MasTec. Accordingly, this amount increased the
investment balance and is included in other assets at March 31, 2006.
As of March 31, 2006, the Companys investment exceeded the net equity of such investment and
accordingly the excess is considered to be equity goodwill.
The Company has accounted for this investment using the equity method as the Company has the
ability to exercise significant influence over the financial and operational policies of this
limited liability company. The Company recognized $356,000 and $214,000 in investment income in the
three months ended March 31, 2006 and 2005, respectively. As of March 31, 2006, the Company had an
investment balance of approximately $7.5 million in relation to this investment included in other
assets in the condensed unaudited consolidated financial statements.
Note 12 Related Party Transactions
MasTec purchases, rents and leases equipment used in its business from a number of different
vendors, on a non-exclusive basis, including Neff Corp., in which Jorge Mas, the Companys Chairman
and Jose Mas, the Companys Vice-Chairman and Executive Vice President, were directors and owners
of a controlling interest through June 4, 2005. Juan Carlos Mas, the brother of Jorge and Jose Mas,
is Chairman, Chief Executive Officer, a director and a shareholder of Neff Corp. During the three
months ended March 31, 2005, MasTec paid Neff $172,618. MasTec believes the amount paid to Neff was
equivalent to the payments that would have been made between unrelated parties for similar
transactions acting at arms length.
MasTec has entered into split dollar agreements with key executives and the Chairman of the
Board. During the three months ended March 31, 2006 and 2005, MasTec paid $325,000 and $0,
respectively, in premiums in connection with these split dollar agreements.
18
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
This report contains forward-looking statements within the meaning of the Securities Act of
1933 and the Securities Exchange Act of 1934, as amended by the Private Securities Litigation
Reform Act of 1995. These forward-looking statements are not historical facts but are the intent,
belief, or current expectations, of our business and industry, and the assumptions upon which these
statements are based. Words such as anticipates, expects, intends, will, could, would,
should, may, plans, believes, seeks, estimates and variations of these words and the
negatives thereof and similar expressions are intended to identify forward-looking statements.
These statements are not guarantees of future performance and are subject to risks, uncertainties,
and other factors, some of which are beyond our control, are difficult to predict, and could cause
actual results to differ materially from those expressed or forecasted in the forward-looking
statements. These risks and uncertainties include those described in Managements Discussion and
Analysis of Financial Condition and Results of Operations, Risk Factors and elsewhere in this
report and in the Companys Annual Report on Form 10-K for the year ended December 31, 2005,
including those described under Risk Factors in the Form 10-K. Forward-looking statements that
were true at the time made may ultimately prove to be incorrect or false. Readers are cautioned to
not place undue reliance on forward-looking statements, which reflect our managements view only as
of the date of this report. We undertake no obligation to update or revise forward-looking
statements to reflect changed assumptions, the occurrence of unanticipated events or changes to
future operating results.
Overview
We are a leading specialty contractor operating mainly throughout the United States and Canada
and across a range of industries. Our core activities are the building, installation, maintenance
and upgrade of communications and utility infrastructure and transportation systems. Our primary
customers are in the following industries: communications (including satellite television and cable
television), utilities and governments. We provide similar infrastructure services across the
industries we serve. Our customers rely on us to build and maintain infrastructure and networks
that are critical to their delivery of voice, video and data communications, electricity and
transportation systems.
Effective January 31, 2006, we acquired substantially all of the assets and assumed certain
operating liabilities and contracts of Digital Satellite Services, Inc., which we refer to as the
DSSI acquisition. The purchase price was composed of $18.5 million in cash, $6.9 million of MasTec
common stock (637,214 shares based on the closing price of $11.77 on January 27, 2006 discounted
due to shares being restricted for up to 120 days), $784,000 of transaction costs and an earn-out based
on future performance. Pursuant to the terms of the purchase agreement, we agreed to use our best
efforts to register for resale the MasTec common stock issued as part of the purchase price within
120 days after the closing of the acquisition. We registered these shares for resale on April 28, 2006.
DSSI, which had revenues exceeding $50 million in 2005 (unaudited), was involved in the
installation of residential and commercial satellite and security services in several markets
including Atlanta, Georgia, the Greenville-Spartanburg area of South Carolina and Asheville, North
Carolina, and portions of Tennessee, Kentucky and Virginia. These markets are contiguous to areas
in which we are active with similar installation services. Following the DSSI acquisition, we
provide installation services from the mid-Atlantic states to South Florida.
The preliminary purchase price allocation for the DSSI acquisition is based on fair-value of
each of the following components as of January 31, 2006 (in thousands):
|
|
|
|
|
Net assets |
|
$ |
2,026 |
|
Non-compete agreements |
|
|
658 |
|
Goodwill |
|
|
23,487 |
|
|
|
|
|
|
|
$ |
26,171 |
|
|
|
|
|
19
Revenue
We provide services to our customers which are companies in the communications, as well as
utilities and government industries.
Revenue for customers in these industries is as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
|
Ended March 31, |
|
|
|
2006 |
|
|
2005 |
|
|
|
(In thousands) |
|
Communications |
|
$ |
156,821 |
|
|
$ |
140,513 |
|
Utilities |
|
|
53,744 |
|
|
|
44,460 |
|
Government |
|
|
8,187 |
|
|
|
9,003 |
|
|
|
|
|
|
|
|
|
|
$ |
218,752 |
|
|
$ |
193,976 |
|
|
|
|
|
|
|
|
A majority of our revenue is derived from projects performed under service agreements. Some of
these agreements are billed on a time and materials basis and revenue is recognized as the services
are rendered. We also provide services under master service agreements which are generally
multi-year agreements. Certain of our master service agreements are exclusive up to a specified
dollar amount per work order for each defined geographic area. Work performed under master service
and other agreements is typically generated by work orders, each of which is performed for a fixed
fee. The majority of these services typically are of a maintenance nature and to a lesser extent
upgrade services. These master service agreements and other service agreements are frequently
awarded on a competitive bid basis, although customers are sometimes willing to negotiate contract
extensions beyond their original terms without re-bidding. Our master service agreements and other
service agreements have various terms, depending upon the nature of the services provided and are
typically subject to termination on short notice. Under our master service and similar type service
agreements, we furnish various specified units of service each for a separate fixed price per unit
of service. We recognize revenue as the related unit of service is performed. For service
agreements on a fixed fee basis, profitability will be reduced if the actual costs to complete each
unit exceed original estimates. We also immediately recognize the full amount of any estimated loss
on these fixed fee projects if estimated costs to complete the remaining units for the project
exceed the revenue to be received from such units.
The remainder of our work is generated pursuant to contracts for specific
installation/construction projects or jobs. For installation/construction projects, we recognize
revenue on the units-of-delivery or percentage-of-completion methods. Revenue on unit based
projects is recognized using the units-of-delivery method. Under the units-of-delivery method,
revenue is recognized as the units are completed at the contractually agreed price per unit. For
certain customers with unit based installation/construction projects, we recognize revenue after
the service is performed and the work orders are approved to ensure that collectibility is probable
from these customers. Revenue from completed work orders not collected in accordance with the
payment terms established with these customers is not recognized until collection is assured.
Revenue on non-unit based contracts is recognized using the percentage-of-completion method. Under
the percentage-of-completion method, we record revenue as work on the contract progresses. The
cumulative amount of revenue recorded on a contract at a specified point in time is that percentage
of total estimated revenue that incurred costs to date bear to estimated total contract costs.
Customers are billed with varying frequency: weekly, monthly or upon attaining specific milestones.
Such contracts generally include retainage provisions under which 2% to 15% of the contract price
is withheld from us until the work has been completed and accepted by the customer. If, as work
progresses, the actual projects costs exceed estimates, the profit recognized on revenue from that
project decreases. We recognize the full amount of any estimated loss on a contract at the time the
estimates indicate such a loss.
Revenue by type of contract is as follows:
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended |
|
|
|
March 31, |
|
|
|
2006 |
|
|
2005 |
|
|
|
(In thousands) |
|
Master service and other service agreements |
|
$ |
164,532 |
|
|
$ |
140,713 |
|
Installation/construction projects agreements |
|
|
54,220 |
|
|
|
53,263 |
|
|
|
|
|
|
|
|
|
|
$ |
218,752 |
|
|
$ |
193,976 |
|
|
|
|
|
|
|
|
20
Costs of Revenue
Our costs of revenue include the costs of providing services or completing the projects under
our contracts including operations payroll and benefits, fuel, subcontractor costs, equipment
rental, materials not provided by our customers, and insurance. Profitability will be reduced if
the actual costs to complete each unit exceed original estimates on fixed price service agreements.
We also immediately recognize the full amount of any estimated loss on fixed fee projects if
estimated costs to complete the remaining units for the project exceed the revenue to be received
from such units.
Our customers generally supply materials such as cable, conduit and telephone equipment.
Customer furnished materials are not included in revenue and cost of sales due to all materials
being purchased by the customer. The customer determines the specifications of the materials that
are to be utilized to perform installation/construction services. We are only responsible for the
performance of the installation/construction services and not the materials for any contract that
includes customer furnished materials nor do we not have any risk associated with customer
furnished materials. Our customers retain the financial and performance risk of all customer
furnished materials.
General and Administrative Expenses
General and administrative expenses include all costs of our management and administrative
personnel, provisions for bad debts, rent, utilities, travel, business development efforts and back
office administration such as financial services, insurance, administration, professional costs and
clerical and administrative overhead.
Discontinued Operations
In 2004, we declared each of our Brazil subsidiary and network services operations a
discontinued operation. In 2005, we declared substantially all of our state Department of
Transportation related projects and assets a discontinued operation due to our intention to sell
these projects and assets. Accordingly, results of operations for the three months ended March 31,
2005 of substantially all of our state Department of Transportation related projects and assets
have been reclassified to discontinued operations and all financial information for all periods
presented reflects these operations as discontinued operations.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations is based upon
our consolidated financial statements, which have been prepared in accordance with accounting
principles generally accepted in the United States. The preparation of these financial statements
requires us to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. On
an on-going basis, we evaluate our estimates, including those related to revenue recognition,
allowance for doubtful accounts, intangible assets, reserves and accruals, impairment of assets,
income taxes, insurance reserves and litigation and contingencies. We base our estimates on
historical experience and on various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis of making judgments about the carrying values of
assets and liabilities, that are not readily apparent from other sources. Actual results may differ
from these estimates if conditions change or if certain key assumptions used in making these
estimates ultimately prove to be materially incorrect.
We believe the following critical accounting policies involve our more significant judgments
and estimates used in the preparation of our consolidated financial statements.
Revenue Recognition
Revenue and related costs for master and other service agreements billed on a time and
materials basis are recognized as the services are rendered. There are also some master service
agreements that are billed on a fixed fee basis. Under our fixed fee master service and similar
type service agreements we furnish various specified units of service for a separate fixed price
per unit of service. We recognize revenue as the related unit of service is performed. For service
agreements on a fixed fee basis, profitability will be reduced if the actual costs to complete each
unit exceed original estimates. We also immediately recognize the full amount of any estimated loss
on these fixed fee projects if estimated costs to complete the remaining units exceed the revenue
to be received from such units.
21
We recognize revenue on unit based installation/construction projects using the
units-of-delivery method. Our unit based contracts relate primarily to contracts that require the
installation or construction of specified units within an infrastructure system. Under the
units-of-delivery method, revenue is recognized at the contractually agreed upon price as the units
are completed and delivered. Our profitability will be reduced if the actual costs to complete each
unit exceed our original estimates. We are also required to immediately recognize the full amount
of any estimated loss on these projects if estimated costs to complete the remaining units for the
project exceed the revenue to be earned on such units. For certain customers with unit based
installation/construction projects, we recognize revenue after service has been performed and work
orders are approved to ensure that collectibility is probable from these customers. Revenue from
completed work orders not collected in accordance with the payment terms established with these
customers is not recognized until collection is assured.
Our non-unit based, fixed price installation/construction contracts relate primarily to
contracts that require the construction and installation of an entire infrastructure system. We
recognize revenue and related costs as work progresses on non-unit based, fixed price contracts
using the percentage-of-completion method, which relies on contract revenue and estimates of total
expected costs. We estimate total project costs and profit to be earned on each long-term,
fixed-price contract prior to commencement of work on the contract. We follow this method since
reasonably dependable estimates of the revenue and costs applicable to various stages of a contract
can be made. Under the percentage-of-completion method, we record revenue and recognize profit or
loss as work on the contract progresses. The cumulative amount of revenue recorded on a contract at
a specified point in time is that percentage of total estimated revenue that incurred costs to date
bear to estimated total contract costs. If, as work progresses, the actual contract costs exceed
our estimates, the profit we recognize from that contract decreases. We recognize the full amount
of any estimated loss on a contract at the time our estimates indicate such a loss.
Allowance for Doubtful Accounts
We maintain allowances for doubtful accounts for estimated losses resulting from the inability
or unwillingness of our clients to make required payments. Management analyzes past due balances
based on invoice date, historical bad debt experience, customer concentrations, customer
credit-worthiness, customer financial condition and credit reports, the availability of mechanics
and other liens, the existence of payment bonds and other sources of payment, and current economic
trends when evaluating the adequacy of the allowance for doubtful accounts. We review the adequacy
of reserves for doubtful accounts on a quarterly basis. If our estimates of the collectibility of
accounts receivable are incorrect, adjustments to the allowance for doubtful accounts may be
required, which could reduce our profitability.
Our estimates for our allowance for doubtful accounts are subject to significant change during
times of economic weakness or uncertainty in either the overall U.S. economy or the industries we
serve, and our loss experience has increased during such times.
We recorded provisions against earnings for doubtful accounts of $1.2 million and $1.0 million
for the three months ended March 31, 2006 and 2005, respectively, which is included in part in
general and administrative expenses and in part in loss from discontinued operations in our
condensed unaudited consolidated financial statements. These provisions are based on the results of
managements quarterly reviews and analyses of our write-off history.
Inventories
Inventories consist of materials and supplies for construction projects, and are typically
purchased on a project-by-project basis. Inventories are valued at the lower of cost (using the
specific identification method) or market. Construction projects are completed pursuant to customer
specifications. The loss of the customer or the cancellation of the project could result in an
impairment of the value of materials purchased for that customer or project. Technological or
market changes can also render certain materials obsolete. Allowances for inventory obsolescence
are determined based upon the specific facts and circumstances for each project and market
conditions. The provisions were mainly due to inventories that were purchased for specific jobs no
longer in process.
Valuation of Long-Lived Assets
We review long-lived assets, consisting primarily of property and equipment and intangible
assets with finite lives, for impairment in accordance with Statement of Financial Accounting
Standards No. 144, Accounting for the
22
Impairment or Disposal of Long-Lived Assets (SFAS No. 144). In analyzing potential
impairment, we use projections of future undiscounted cash flows from the assets. These projections
are based on our views of growth rates for the related business, anticipated future economic
conditions and the appropriate discount rates relative to risk and estimates of residual values. We
believe that our estimates are consistent with assumptions that marketplace participants would use
in their estimates of fair value. In addition, due to our intent to sell substantially all of our
state Department of Transportation projects and assets for these operations under SFAS No. 144
based on projections of future discounted cash flows from these assets in 2006 and an estimated
selling price for the assets held for sale by using a weighted probability cash flow analysis based
on managements estimates. These estimates are subject to change in the future and if we are not
able to sell these projects and assets at the estimated selling price or our cash flow changes
because of changes in economic conditions, growth rates or terminal values, we may incur additional
impairment charges in the future related to these operations.
Valuation of Goodwill and Intangible Assets
In the three months ended March 31, 2006, we recorded $23.5 million of goodwill in connection
with the DSSI acquisition.
Goodwill acquired in a purchase business combination and determined to have an infinite useful
life is not amortized, but instead tested for impairment at least annually. In accordance with SFAS
No. 142, Goodwill and Other Intangible Assets, we conduct, on at least an annual basis, a review
of our reporting entities to determine whether the carrying values of goodwill exceed the fair
market value using a discounted cash flow methodology for each entity. Should this be the case, the
value of our goodwill may be impaired and written down.
We could record additional impairment losses if, in the future, profitability and cash flows
of our reporting units decline to the point where the carrying value of those units exceed their
market value.
Insurance Reserves
We presently maintain insurance policies subject to per claim deductibles of $2 million for
our workers compensation policy, $2 million for our general liability policy and $3 million for
our automobile liability policy. We have excess umbrella coverages of up to $100 million per claim
and in the aggregate. We also maintain an insurance policy with respect to employee group health
claims subject to per claim deductibles of $300,000. We actuarially determine any liabilities for
unpaid claims and associated expenses, including incurred but not reported losses, and reflect
those liabilities in our balance sheet as other current and non-current liabilities. The
determination of such claims and expenses and the appropriateness of the related liability is
reviewed and updated quarterly. In the three months ended March 31, 2006, we recorded a change in our
estimate related to the discount factor used in estimating our actuarial insurance reserves for the
workers compensation, general and automobile liability policies. The discount factor was changed
from 3.5% to 4.5% to better reflect current market conditions and to use a discount factor more
in line with the market interest rate we are receiving on our investments. The change in discount factor
resulted in a decrease in insurance reserves of $1.1 million. Our insurance reserve, however, increased due to several large claims related to prior years which offset the decrease resulting from the change in discount rate.
We are required to periodically post letters of credit and provide cash collateral to our
insurance carriers and surety company. Such letters of credit amounted to $59.4 million at March
31, 2006 and $53.1 million as of December 31, 2005, and cash collateral posted amounted to $23.7
million at March 31, 2006 and $24.8 million as of December 31, 2005. The 2006 increase in
collateral for our insurance programs is related to additional collateral provided to the insurance
carrier for the 2006 plan year in the amount of $6.5 million of letters of credit slightly offset
by a $1.1 million reduction in cash collateral for prior year insurance programs. We may be
required to post additional collateral in the future which may reduce our liquidity, or pay
increased insurance premiums, which could decrease our profitability.
Stock Compensation
In the first quarter of 2006, we adopted Statement of Financial Accounting Standards No. 123
(revised 2004), Share-Based Payment, (FAS 123R). This Statement requires companies to expense the
estimated fair value of stock options and similar equity instruments issued to employees over the
vesting period in their statement of operations. FAS 123R eliminates the alternative to use the
intrinsic method of accounting provided for in Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees (APB 25), which generally resulted in no compensation
23
expense recorded in the financial statements related to the grant of stock options to
employees if certain conditions were met.
We adopted FAS 123R using the modified prospective method effective January 1, 2006, which
requires us to record compensation expense over the vesting period for all awards granted after
the date of adoption, and for the unvested portion of previously granted awards that remain
outstanding at the date of adoption. Accordingly, amounts presented for periods prior to January 1,
2006 have not been restated to reflect the adoption of FAS 123R. However, the pro forma effect for
the three months ended March 31, 2005 is disclosed in Note 3(i) in Part 1. Item 1 Financial
Statements, consistent with prior accounting rules.
The fair value concepts were not changed significantly in FAS 123R; however, in adopting this
Standard, companies must choose among alternative valuation models and amortization assumptions.
After assessing alternative valuation models and amortization assumptions, we will continue using
the Black-Scholes valuation model and have elected to use the ratable method to amortize
compensation expense over the vesting period of the grant.
Total non-cash stock compensation expense related to unvested stock options for the three
months ended March 31, 2006 amounted to $1.4 million of which $242,000 was included in loss from
discontinued operations and $1.2 million is included in general and administrative expenses.
Valuation of Equity Investments
We have one investment which we account for by the equity method because we own 49% of the
entity and we have the ability to exercise significant influence over the operational policies of
the limited liability company. Our share of the earnings or losses in this investment is included
in other income, net, in the condensed unaudited consolidated statements of operations. As of March
31, 2006, our investment exceeded the net equity of such investment and accordingly the excess is
considered to be equity goodwill. We periodically evaluate the equity goodwill for impairment under
Accounting Principles Board No. 18, The Equity Method of Accounting for Investments in Common
Stock, as amended. We recognized approximately $356,000 and $214,000 of investment income in the
three months ended March 31, 2006 and 2005, respectively.
Income Taxes
We record income taxes using the liability method of accounting for deferred income taxes.
Under this method, deferred tax assets and liabilities are recognized for the expected future tax
consequence of temporary differences between the financial statement and income tax bases of our
assets and liabilities. We estimate our income taxes in each of the jurisdictions in which we
operate. This process involves estimating our tax exposure together with assessing temporary
differences resulting from differing treatment of items, such as deferred revenue, for tax and
accounting purposes. These differences result in deferred tax assets and liabilities, which are
included within our consolidated balance sheet. The recording of a net deferred tax asset assumes
the realization of such asset in the future. Otherwise a valuation allowance must be recorded to
reduce this asset to its net realizable value. We consider future pretax income and ongoing prudent
and feasible tax planning strategies in assessing the need for such a valuation allowance. In the
event that we determine that we may not be able to realize all or part of the net deferred tax
asset in the future, a valuation allowance for the deferred tax asset is charged against income in
the period such determination is made.
As a result of our operating losses, we have recorded valuation allowances aggregating $36.5
million and $33.9 million as of March 31, 2006 and December 31, 2005, respectively, to reduce
certain of our net deferred Federal, foreign and state tax assets to their estimated net realizable
value. We anticipate that we will generate sufficient pretax income in the future to realize our
deferred tax assets. In the event that our future pretax operating income is insufficient for us to
use our deferred tax assets, we have based our determination that the deferred tax assets are still
realizable based on feasible tax planning strategies that are available to us involving the sale
of one or more of our operations.
Litigation and Contingencies
Litigation and contingencies are reflected in our condensed unaudited consolidated financial
statements based on our assessments, with legal counsel, of the expected outcome of such litigation
or expected resolution of such contingency. If the final outcome of such litigation and
contingencies differs significantly from our current expectations,
24
such outcome could result in a charge to earnings. See Note 9 to our condensed unaudited
consolidated financial statements in Part I Item 1 and Part II Item 1 to this Form 10-Q for
description of legal proceedings and commitments and contingencies.
Results of Operations
Comparison of Quarterly Results
The following table reflects our consolidated results of operations in dollar and percentage
of revenue terms for the periods indicated. This table includes the reclassification for the three
months ended March 31, 2005 of the net loss for the state Department of Transportation related
projects and assets to discontinued operations from the prior period presentation.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended |
|
|
|
March 31, |
|
|
|
2006 |
|
|
2005 |
|
Revenue |
|
$ |
218,752 |
|
|
|
100.0 |
% |
|
$ |
193,976 |
|
|
|
100.0 |
% |
Costs of revenue, excluding depreciation |
|
|
191,957 |
|
|
|
87.8 |
% |
|
|
177,077 |
|
|
|
91.3 |
% |
Depreciation |
|
|
3,562 |
|
|
|
1.6 |
% |
|
|
4,474 |
|
|
|
2.3 |
% |
General and administrative expenses |
|
|
16,594 |
|
|
|
7.5 |
% |
|
|
14,844 |
|
|
|
7.7 |
% |
Interest expense, net of interest income |
|
|
3,485 |
|
|
|
1.6 |
% |
|
|
4,832 |
|
|
|
2.5 |
% |
Other income, net |
|
|
322 |
|
|
|
0.1 |
% |
|
|
1,874 |
|
|
|
1.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations before minority interest |
|
|
3,476 |
|
|
|
1.6 |
% |
|
|
(5,377 |
) |
|
|
(2.8 |
)% |
Minority interest |
|
|
129 |
|
|
|
|
|
|
|
(66 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations |
|
|
3,605 |
|
|
|
1.6 |
% |
|
|
(5,443 |
) |
|
|
(2.8 |
)% |
Discontinued operations |
|
|
(7,829 |
) |
|
|
(3.5 |
)% |
|
|
(6,571 |
) |
|
|
(3.4 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(4,224 |
) |
|
|
(1.9 |
)% |
|
$ |
(12,014 |
) |
|
|
(6.2 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2006 Compared to Three Months Ended March 31, 2005
Revenue. Our revenue was $218.8 million for the three months ended March 31, 2006, compared
to $194.0 million for the same period in 2005, representing an increase of $24.8 million or 12.8%.
This increase was due primarily to the increased revenue of approximately $20.8 million received
from DIRECTV due to increased installations and increased market share from the DSSI acquisition
and an increase in revenue of $10.1 million from BellSouth mostly attributed to work we were
awarded for central office installations. We also experienced an increase in general business
activity from other customers in the first quarter of 2006 compared to the same period of 2005.
These increases in revenue were partially offset by a decrease in revenue of $10.8 million from
Verizon mostly attributed to the timing of generating work orders. In the three months ended March
31, 2005 the fiber-to-the-home installations had just commenced and the volume of work orders were
high whereas in the three months ended March 31, 2006 the installations have normalized. We expect
the Verizon revenue to increase in future quarters as additional work orders are approved.
Costs of Revenue. Our costs of revenue were $192.0 million or 87.8% of revenue for the three
months ended March 31, 2006, compared to $177.1 million or 91.3% of revenue for the same period in
2005 reflecting an improvement in margins. The improvement in margins was due to a decrease in
subcontractor expense as a percentage of revenue with operational payroll only slightly increasing
as a percentage of revenue. In the first quarter of 2006, we continued to reduce the use of
subcontractors without hiring a proportional number of additional employees. These decreases were
partially offset by increases in fuel costs. Fuel costs as a percentage of revenue in the three
months ended March 31, 2006 was 3.3% compared to 2.7% in the three months ended March 31, 2005.
These increases in fuel costs as a percentage of revenue is a direct result of the rising fuel
costs during the period.
Depreciation. Depreciation was $3.6 million for the three months ended March 31, 2006,
compared to $4.5 million for the same period in 2005, representing a decrease of $912,000 or 20.4%.
We reduced depreciation expense in the three months ended March 31, 2006 by continuing to reduce
capital expenditures by entering into operating leases for fleet requirements. We also continue to
dispose of excess equipment.
25
General and administrative expenses. General and administrative expenses were $16.6 million or
7.5% of revenue for the three months ended March 31, 2006, compared to $14.8 million or 7.7% of
revenue for the same period in 2005, representing an increase of $1.8 million or 12%. This increase
is attributable to non-cash stock compensation; additional personnel; travel and
entertainment expenses; computer maintenance costs; and legal expenditures. Non-cash stock
compensation expense was $1.2 million or 0.5% of revenue for the three months ended March 31, 2006,
compared to $24,000 of revenue for the same period in 2005 representing an increase of $1.2
million. Effective January 1, 2006, we account for our stock-based award plans in accordance with
FAS 123R (revised 2005) Share Based Payment which requires us to expense over the vesting period
the fair-value of stock options and other equity-based compensation issued to employees. In
accordance with FAS 123R, we expensed $1.0 million in the three months ended March 31, 2006
related to unvested stock options and restricted stock awards. In addition, we recorded
approximately $170,000 related to restricted stock expense during the three months ended March 31,
2006. For the three months ended March 31, 2005, we expensed $24,000 related to restricted stock
awards. Had we adopted FAS 123R in 2005, we would have been required to expense $1.3 million for
the three months ended March 31, 2005. See the pro forma compensation expense disclosure in Note 3
to our condensed unaudited consolidated financial statements. The increase in general and
administrative expenses was also due to hiring additional personnel to address increased business activity.
In addition, travel and entertainment expenses increased approximately $240,000 due to additional
travel by executives and our March 2006 leadership conference. The leadership conference in 2005
was during the second quarter. We increased the Oracle maintenance contract in 2006 which resulted
in an increase in computer maintenance costs during the three months ended March 31, 2006 compared to the three months ended March
31, 2005 of $127,000. The increase relates to an annual increase of 3% and an increase in required
license users. Furthermore, we incurred additional legal expenses of approximately $214,000
during the three months ended March 31, 2006 compared to the same period in 2005.
These increases were slightly offset by a decrease in provisions for bad debt of $322,000 due to a
lower amount of specific provisions being recorded as a result of increased collections efforts and
as a result, the general provision is being maintained at a consistent level with the prior period.
Interest expense, net. Interest expense, net of interest income was $3.5 million or 1.6% of
revenue for the three months ended March 31, 2006, compared to $4.8 million or 2.5% of revenue for
the same period in 2005 representing a decrease of approximately $1.3 million or 27.9%. The
decrease was due to lower rates charged during the period under our credit facility based on our improved performance, as well as a reduction in interest
expense due to our redemption of $75.0 million principal of our senior 7.75% subordinated
notes on March 2, 2006.
Other income, net. Other income, net was $322,000 for the three months ended March 31, 2006,
compared to $1.9 million in the three months ended March 31, 2005, representing a decrease of $1.6
million or 82.8%. The decrease mainly relates to greater gains on sale of fixed assets in the first
quarter of 2005 compared to the first quarter of 2006.
Minority interest. Minority interest for GlobeTec Construction, LLC resulted in income of $129,000 for
the three months ended March 31, 2006, compared to a charge of $66,000 for the same period in 2005
representing a decrease of $195,000. The joint venture experienced a slight decline in business in
the three months ended March 31, 2006 compared to the same period in 2005 due to certain jobs
incurring higher costs in order to complete them more rapidly.
Discontinued operations. The loss on discontinued operations was $7.8 million for the three
months ended March 31, 2006 compared to $6.6 million in the three months ended March 31, 2005. The
net loss for our Brazilian operations for the three months ended March 31, 2006 was $53,000 and was
attributable to legal fees related to the Brazilian operations bankruptcy proceedings. The net
loss for our network services operations decreased to $97,000 for the three months ended March 31,
2006 from a net loss of $445,000 in the three months ended March 31, 2005. The net loss from
operations of network services decreased from the net loss in the three months ending March 31,
2005 as a result of the winding down of the network services operations. The loss in the three
months ended March 31, 2006 is mostly attributable to overhead personnel and legal costs in winding
down the operations. The net loss of our state Department of Transportation related projects and
assets that are classified as discontinued was $7.7 million for the three months ended March 31,
2006 compared to a net loss of $6.1 million in the three months ended March 31, 2005. The net loss
increased due to operational performance on existing projects, cost overruns and inefficiencies.
The loss during the three months ended March 31, 2006 as compared to the three months ended March
31, 2005 included increased legal expenses of approximately $1.2 million and bad debt expense of
approximately $500,000. In addition, we had increased operating expenses related to stock
compensation expense of $242,000 related to a terminated executive, duplication of back-office
functions in order to ensure an easier transition and moving costs related to the consolidation of
office space.
26
Financial Condition, Liquidity and Capital Resources
On January 24, 2006, we completed a public offering of 14,375,000 shares of our common stock
at $11.50 per share. The net proceeds from the sale were approximately $156.4 million after
deducting underwriting discounts and offering expenses. We used $18.5 million of the net proceeds
for the cash portion of the purchase price for the DSSI acquisition, as described below. On March
2, 2006, we used $75.5 million of the net proceeds of the public offering to redeem a portion of
our 7.75% senior subordinated notes due February 2008, including the payment of related interest.
We expect to use the remaining net proceeds for working capital, other possible acquisitions of
assets and businesses, organic growth and other general corporate purposes.
In addition to the public offering we completed in the first quarter, our primary sources of
liquidity are cash flows from continuing operations, borrowings under our credit facility, and
proceeds from sales of assets and investments. Our primary liquidity needs are for working capital,
capital expenditures, insurance collateral in the form of cash and letters of credit, equity
investment obligations and debt service. In January 2006, we issued a $6.5 million letter of credit
to our insurance carrier related to our 2006 insurance plans. At the present time, we have no other
commitments to issue additional collateral in 2006 related to our insurance policies. Following the
March redemption of $75.0 million principal amount of subordinated debt, our semi-annual interest
payments on our senior subordinated notes will be reduced to approximately $5.4 million. In
addition to ordinary course working capital requirements, we estimate spending between $20.0
million and $40.0 million per year on capital expenditures in order to keep our equipment new and
in good condition. We will, however, because of our improved financial condition, continue to
evaluate lease versus buy decisions to meet our equipment needs and based on this evaluation our
capital expenditures may increase in 2006 from this estimate. We are also re-negotiating existing
leases and will be entering into new leases with more favorable terms. We expect to continue to
sell older vehicles and equipment as we upgrade with new equipment and we expect to obtain proceeds
from these sales in excess of $1.0 million per quarter depending upon market conditions. From time
to time, we engage in a review and analysis of our performance to our key strategic objectives. In
connection with this process, we consider activities including sale or divestitures of portions of
our assets, operations, real estate or other properties. Any actions taken may impact our
liquidity.
We have a 49% interest in a limited liability company. The purchase price for this investment
was an initial amount of $3.7 million which was paid in four quarterly installments of $925,000.
Eight additional contingent quarterly payments are expected to be made to the third party from
which the interest was purchased. The contingent payments will be up to a maximum of $1.3 million
per quarter based on the level of unit sales and profitability of the limited liability company in
specified preceding quarters. The first contingent quarterly payment was made on January 10, 2006
in the amount of $925,000 and we made a second quarterly contingent payment on April 10, 2006 in
the amount of $925,000. In March 2006, we also made an additional capital
contribution of $980,000.
We need working capital to support seasonal variations in our business, primarily due to the
impact of weather conditions on external construction and maintenance work, including storm
restoration work, and the corresponding spending by our customers on their annual capital
expenditure budgets. Our business is typically slower in the first and fourth quarters of each
calendar year and stronger in the second and third quarters. We generally experience seasonal
working capital needs from approximately April through September to support growth in unbilled
revenue and accounts receivable, and to a lesser extent, inventory. Our billing terms are generally
net 30 to 60 days, although some contracts allow our customers to retain a portion (from 2% to 15%)
of the contract amount until the contract is completed to their satisfaction. We maintain inventory
to meet the material requirements of some of our contracts. Some of our customers pay us in advance
for a portion of the materials we purchase for their projects, or allow us to pre-bill them for
materials purchases up to a specified amount.
Our vendors generally offer us terms ranging from 30 to 90 days. Our agreements with
subcontractors usually contain a pay-when-paid provision, whereby our payments to subcontractors
are made after we are paid by our customers.
We anticipate that funds generated from continuing operations, the net proceeds from our
public offering completed in the first quarter, borrowings under our credit facility, and proceeds
from sales of assets and investments will be sufficient to meet our working capital requirements,
anticipated capital expenditures, insurance collateral requirements, equity investment obligations,
letters of credit and debt service obligations for at least the next twelve months.
27
As of March 31, 2006, we had $195.7 million in working capital compared to $135.1 million as
of December 31, 2005. Cash and cash equivalents increased from $2.0 million at December 31, 2005 to
$72.0 million at March 31, 2006 due to the proceeds received from the offering offset by payments
made in connection with the redemption of $75.0 million principal on our senior subordinated notes and $18.5 million of cash in connection with the DSSI
acquisition.
Net cash provided by operating activities was $14.0 million for the three months ended March
31, 2006 compared to $2.6 million for the three months ended March 31, 2005. The net cash provided
by operating activities in the three years months ended March 31, 2006 and 2005 was primarily
related to the timing of cash payments to vendors and cash collections from customers. In addition,
the net loss incurred during the first quarter of 2006 was lower than the comparable period of
2005. The reduction in the net loss improved the net cash provided by operating activities.
Net cash used in investing activities was $22.9 million for the three months ended March 31,
2006 compared to net cash provided by investing activities of $1.0 million for the three months
ended March 31, 2005. Net cash used in investing activities in three months ended March 31, 2006
primarily related to cash payments made in connection with the DSSI acquisition of $19.3
million, capital expenditures in the amount of $2.9 million and payments related to our equity
investment in the amount of $1.9 million offset by $1.6 million in net proceeds from sales of
assets. Net cash provided by investing activities in the three months ended March 31, 2005
primarily related to $3.9 million in net proceeds from sales of assets partially offset by capital
expenditures in the amount of $1.9 million and payments related to our equity investment in the
amount of $1.1 million.
Net cash provided by financing activities was $78.9 million for three months ended March 31,
2006 compared to $0.5 million for the three months ended March 31, 2005. Net cash provided by
financing activities in the three months ended March 31, 2006 was primarily related to net proceeds
from the issuance of common stock of $156.5 million and proceeds from the issuance of common stock
pursuant to stock option exercises in the amount of $1.7 million
partially offset by the redemption of $75.0 million principal on our senior subordinated debt of $75.0 million. Net cash provided by financing
activities in the three months ended March 31, 2005 was mainly due to proceeds from the issuance of
common stock of $0.6 million.
Cash used in discontinued operations in the three months ended March 31, 2006 was $9.8
million. This consisted of (i) $9.7 million in cash used in operating activities, mostly attributed
to our net loss from these operations and (ii) $0.1 million in cash used in investing activities
mostly attributed to capital expenditures. We expect cash flow from discontinued operations to be
positive in the future based on cash flows expected in 2006 and our estimated selling price for our
state Department and Transportation projects and assets. However, this expectation may not be
realized if we are not able to sell these projects and assets at our estimated selling price or our
cash flow changes because of changes in economic conditions.
We have a secured revolving credit facility for our operations which was amended and restated
on May 10, 2005 increasing the maximum amount of availability from $125 million to $150 million
subject to reserves of $5.0 million, and other adjustments and restrictions. The costs related to
this amendment were $2.6 million which are being amortized over the life of the credit facility.
The credit facility expires on May 10, 2010. These deferred financing costs are included in prepaid
expenses and other current assets and other assets in our consolidated balance sheet.
The amount that we can borrow at any given time is based upon a formula that takes into
account, among other things, eligible billed and unbilled accounts receivable and equipment which
can result in borrowing availability of less than the full amount of the credit facility. As of
March 31, 2006 and December 31, 2005, net availability under the credit facility totaled $43.2
million and $55.4 million, respectively, which included outstanding standby letters of credit
aggregating $63.9 million and $57.6 million in each period, respectively. At March 31, 2006, $59.4
million of the outstanding letters of credit were issued to support our casualty and medical
insurance requirements and surety requirements. These letters of credit mature at various dates
through August 2006 and most have automatic renewal provisions subject to prior notice of
cancellation. The credit facility is collateralized by a first priority security interest in
substantially all of our assets and a pledge of the stock of certain of the operating subsidiaries.
All wholly-owned subsidiaries collateralize the facility. At March 31, 2006 and December 31, 2005,
we had outstanding cash draws under the credit facility in the amount of $0 and $4.2 million,
respectively. Interest under the credit facility accrues at rates based, at our option, on the
agent banks base rate plus a margin of between 0.25% and 1.25% or the LIBOR rate (as defined in
the credit facility) plus a margin of between 1.75% and 2.75%, depending on certain financial
thresholds. The credit facility includes an unused facility fee of 0.375%, which may be adjusted to
as low as 0.250%.
28
If the net availability under the credit facility is under $20.0 million on any given day, we
are required to be in compliance with a minimum fixed charge coverage ratio measured on a monthly
basis and certain events are triggered. Our operations are required to comply with this fixed
charge coverage ratio if these conditions of availability are not met. The credit facility further
provides that once net availability is greater than or equal to $20.0 million for 90 consecutive
days, the fixed charge coverage ratio will no longer apply. The fixed charge coverage ratio is generally
defined to mean the ratio of our net income before interest expense, income tax expense,
depreciation expense, and amortization expense minus net capital expenditures and cash taxes paid
to the sum of all interest expense plus current maturities of debt for the period. The financial
covenant was not applicable as of March 31, 2006, because at that time net availability under the
credit facility was $43.2 million and net availability did not reduce below $20.0 million on any
given day during the period.
Based
on our improved financial position, on May 8, 2006, we were able to amend our credit facility to reduce the interest rate margins
charged on our borrowings and letters of credit. This amendment also
increases the maximum permitted purchase price of an acquisition, increases permitted receivable concentration of certain customers, increases our permitted capital expenditures and
debt baskets, and reduces the required minimum fixed charge coverage ratio if our net availability
were below $20.0 million.
Based upon the amendment of the credit facility, our current availability, net proceeds from
sale of our common stock, liquidity and projections for 2006, we believe we will be in compliance
with the credit facilitys terms and conditions and the minimum availability requirements for the remainder of 2006.
We are dependent upon borrowings and letters of credit under this credit facility to fund
operations. Should we be unable to comply with the terms and conditions of the credit facility, we
would be required to obtain further modifications to the credit facility or another source of
financing to continue to operate. We may not be able to achieve our 2006 projections and this may adversely affect our ability to remain in compliance with the credit facilitys minimum net availability requirements and minimum
fixed charge coverage ratio in the future.
Our variable rate credit facility exposes us to interest rate risk. However, we had no cash
borrowings outstanding under the credit facility at March 31, 2006.
As of March 31, 2006, $120.9 million of our 7.75% senior subordinated notes due in February
2008, with interest due semi-annually were outstanding. The notes contain default (including
cross-default) provisions and covenants restricting many of the same transactions as under our
credit facility. The indenture which governs our senior subordinated notes allows us to incur the
following additional indebtedness among others: the credit facility (up to $150 million), renewals to existing
debt permitted under the indenture plus an additional $25 million of indebtedness. The indenture
prohibits incurring further indebtedness unless our fixed charge coverage ratio is at least 2:1 for
the four most recently ended fiscal quarters determined on a proforma basis as if that additional
debt has been incurred at the beginning of the period. The definition of our fixed charge coverage
ratio under the indenture is essentially equivalent to that under our credit facility.
Some of our contracts require us to provide performance and payment bonds, which we obtain
from a surety company. If we were unable to meet our contractual obligations to a customer and the
surety paid our customer the amount due under the bond, the surety would seek reimbursement of such
payment from us. At March 31, 2006, the cost to complete on our $296.0 million performance and
payment bonds was $74.1 million.
Seasonality
Our operations are historically seasonally slower in the first and fourth quarters of the
year. This seasonality is primarily the result of client budgetary constraints and preferences and
the effect of winter weather on network activities. Some of our clients, particularly the incumbent
local exchange carriers, tend to complete budgeted capital expenditures before the end of the year
and defer additional expenditures until the following budget year.
29
Impact of Inflation
The primary inflationary factor affecting our operations is increased labor costs. We are also
affected by changes in fuel costs which increased significantly in 2006 and 2005.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk related to changes in interest rates and fluctuations in foreign
currency exchange rates. Our variable rate credit facility exposes us to interest rate risk.
However, we had no borrowings under the credit facility at March 31, 2006.
Interest Rate Risk
Less than 1% of our outstanding debt at March 31, 2006 was subject to variable interest rates.
The remainder of our debt has fixed interest rates. Our fixed interest rate debt includes $121.0
million (face value) in senior subordinated notes. The carrying value and market value of our debt
at March 31, 2006 was $120.9 million and $120.6 million, respectively. Based upon debt balances
outstanding at March 31, 2006, a 100 basis point (i.e. 1%) addition to our weighted average
effective interest rate for variable rate debt would increase our interest expense by less than
$100,000 on an annual basis.
Foreign Currency Risk
We have an investment in a subsidiary in Canada and sell our services into this foreign
market.
Our foreign net asset/exposure (defined as assets denominated in foreign currency less
liabilities denominated in foreign currency) for Canada at March 31, 2006 of U.S. dollar
equivalents was $496,000 as of March 31, 2006 and $1.5 million at December 31, 2005.
Our Canada subsidiary sells services and pays for products and services in Canadian dollars. A
decrease in the Canadian foreign currency relative to the U.S. dollar could adversely impact our
margins. An assumed 10% depreciation of the foreign currency relative to the U.S. dollar over the
three months ended March 31, 2006 (i.e., in addition to actual exchange experience) would have
resulted in a translation reduction of our revenue by $104,000 in the three months ended March 31,
2006.
As the assets, liabilities and transactions of our Canada subsidiary are denominated in
Canadian dollars, the results and financial condition are subject to translation adjustments upon
their conversion into U.S. dollars for our financial reporting purposes. A 10% decline in this
foreign currency relative to the U.S. dollar over the course of the three months ended March 31,
2006 (i.e., in addition to actual exchange experience) would have resulted in a reduction in our
foreign subsidiaries translated operating loss of $147,000 in the three months ended March 31,
2006.
See Note 1 to our Consolidated Financial Statements in our Annual Report on Form 10-K for
further disclosures about market risk.
ITEM 4. CONTROLS AND PROCEDURES
As of the end of the period covered by this report, we carried out an evaluation, under the
supervision and with the participation of our management, including our Chief Executive Officer and
our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure
controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as
amended). Based upon that evaluation, we concluded that as of March 31, 2006, our disclosure
controls and procedures are effective to ensure that information required to be disclosed in
reports that we file or submit under the Exchange Act are recorded, processed, summarized and
reported within the time periods specified in the rules and forms of the Securities and Exchange
Commission and that such information is accumulated and communicated to our management, including
our Chief Executive Officer and Chief Financial Officer, to allow for timely decisions regarding
required disclosures.
30
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting identified in
connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15
that occurred during the period covered by this report that have materially affected, or are
reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Set forth below is information with respect to those legal proceedings which became a reportable event, or as to which there had
been material developments, in the quarter ended March 31, 2006.
We brought an action against NextiraOne Federal in the Federal Court in Eastern District
of Virginia, to recover payment for services rendered in connection with a state Department of
Transportation project, which is included in discontinued operations, on a network wiring contract.
NextiraOne counterclaimed for offsets and remediation. On May 5, 2006, the Judge ruled that we failed to establish an entitlement to recover damages for contract work done, and
that NextiraOne Federal failed to establish an entitlement to recover costs of alleged offsets and
costs of remediation. Neither party obtained the relief sought. We believe the ruling is an error, and will seek rehearing
and, if necessary, remedy on appeal. We may be unable to obtain relief without additional expenses.
In April 2006 we settled, without payment to the plaintiffs by us, several complaints for
purported securities class actions that were filed against us and certain officers in the second
quarter of 2004. While we believe that we would have ultimately been successful in defense of these
actions, given the amount of the settlement, the inherent risk of uncertainty of the legal
proceedings, and the substantial time and expense of defending these proceedings, we concluded that
entering into the settlement was the appropriate course of action. As part of the settlement, our
excess insurance carrier has retained its rights to seek reimbursement of up to $2.0 million from
us based on its claim that notice was not properly given under the policy. We believe these claims
are without merit and plan to continue vigorously defending this action. We also believe that they
have claims against the insurance broker for any losses arising from the notice.
In October 2005, eleven former employees filed a Fair Labor Standards Act (FLSA) collective
action against MasTec, alleging failure to pay overtime wages as required under that Act. The
matter is currently stayed and under investigation. We do not believe it is liable under the FLSA
as alleged in the complaint. We plan to vigorously defend this lawsuit, but may be unable to
successfully resolve this dispute without incurring significant expenses. Due to the early stage
of this proceeding, potential loss, if any, can not be determined.
During construction of a natural gas pipeline project in Oregon in 2003, MasTec and its
customer, Coos County, Oregon, were cited for violations of the Clean Water Act by the U.S. Corp of
Engineers. Despite protracted negotiations, the parties were unable to settle these complaints.
On March 30, 2006, the Corp of Engineers filed suit against us and Coos County in Federal District
Court in Oregon. We intend to defend this action vigorously, but may be unable to do so without
incurring significant expenses. Due to the early stage of this proceeding, potential loss, if any,
cannot be determined.
In connection with the same project, a complaint alleging failure to comply with prevailing
wage requirements was filed against us by the Oregon Bureau of Labor and Industry. This matter was
filed with the state court in Coos County. We intend to defend this action vigorously, but may be
unable to do so without incurring significant expenses. Due to the early stage of this litigation,
any potential loss cannot presently be determined.
The potential loss for all unresolved Coos Bay matters and unpaid settlements reached
described above is estimated to be $125,000 at March 31, 2006, which has been recorded in the
unaudited condensed consolidated balance sheets as accrued expenses.
In June 2005, we posted a $2.3 million bond in order to pursue the appeal of a $1.7 million
final judgment entered March 31, 2005 against us for damages plus attorneys fees resulting from a
break in a Citgo pipeline. We seek a new trial and reduction in the damages award. We will continue
to contest this matter in the appellate court, and on subsequent retrial. The amount of the loss,
if any, relating to this matter not covered by insurance is estimated to be $100,000 to $2.4
million, of which $100,000 is recorded in the unaudited condensed consolidated balance sheet as of
March 31, 2006, as accrued expenses.
We are also a party to other pending legal proceedings arising in the normal course of
business. While complete assurance cannot be given as to the outcome of any legal claims,
management believes that any financial impact would not be material to its results of operations,
financial position or cash flows.
31
ITEM 1A. RISK FACTORS
In the course of operations, we are subject to certain risk factors, including but not limited
to, risks related to rapid technological and structural changes in the industries we serve, the
volume of work received from clients, contract cancellations on short notice, operating strategies,
economic downturn, collectibility of receivables, significant fluctuations in quarterly results,
effect of continued efforts to streamline operations, management of growth, dependence on key
personnel, availability of qualified employees, competition, recoverability of goodwill, and
deferred taxes and potential exposures to environmental liabilities and political and economic
instability in foreign operations. See Risk Factors in our most recently filed Annual Report on
Form 10-K for a complete description of these risk factors.
Except as set forth below, there have been no material changes to any of the risk factors
disclosed in our most recently filed Annual Report on Form 10-K.
We may incur costs due to complaints that were filed against us and certain of our officers.
In the second quarter of 2004, several complaints for a purported securities class action were
filed against us and certain of our officers. We have settled these actions without payments to the
plaintiffs by us. As part of the settlement, our excess insurance carrier has retained its rights
to seek up to $2.0 million in reimbursement from us based on its claim that notice was not properly
given under the policy. The derivative actions based on the same factual predicate as the purported
securities class action and the related SEC
informal inquiry, remain unresolved. We may be unable to successfully resolve these disputes
without incurring significant expenses. See Part II. Item 1. Legal Proceedings.
We derive a significant portion of our revenue from a few customers, and the loss of one of these
customers or a reduction in their demand, the amount they pay or their ability to pay, for our
services could impair our financial performance.
In the three months ended March 31, 2006, we derived approximately 37.9% and 13.3% of our
revenue from DIRECTV® and BellSouth. Verizon Communications was only 7.5% of our
revenue in the three months ended March 31, 2006. Because our business is concentrated among
relatively few major customers, our revenue could significantly decline if we lose one or more of
these customers or if the amount of business from Verizon continues to reduce, which could result
in reduced profitability and liquidity.
The adoption of SFAS 123R has had a significant impact on our results of operations and
earnings per share.
Prior to January 2006, we accounted for our stock-based award plans to employees and directors
in accordance with APB No. 25, Accounting for Stock Issued to Employees under which compensation
expense is recorded to the extent that the current market price of the underlying stock exceeds the
exercise price. Under this method, we generally did not recognize any compensation related to
employee stock option grants we issue under our stock option plans at fair value. In December 2004,
the Financial Accounting Standards Board issued SFAS 123R Share-Based Payment or SFAS 123R. This
statement, which was effective for us beginning on January 1, 2006, required us to recognize the
expense attributable to stock options granted or vested subsequent to December 31, 2005 and had a
material negative impact on our profitability of $1.2 million in the three months ended March 31,
2006 or $.02 diluted earnings per share.
SFAS 123R required us to recognize share-based compensation as compensation expense in our
statement of operations based on the fair values of such equity on the date of the grant, with the
compensation expense recognized over the vesting period. This statement also required us to adopt a
fair value-based method for measuring the compensation expense related to share-based compensation.
Due to additional stock options granted and the value of our common stock increasing, we now expect
the annual stock compensation expense related to unvested stock options to be approximately $4.0
million in 2006. The annual share-based compensation expense still could be affected by, among
other things, additional stock options granted to employees and directors, the volatility of our
stock price and the exercise price of the options granted.
32
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On January 31, 2006,
we issued 637,214 shares of unregistered common stock in connection with
the purchase of substantially all of the assets of Digital Satellite Services, Inc. The amount of
shares issued in connection with the DSSI acquisition was determined by dividing $7.5 million by
the closing sales price for the MasTec common shares on the New York Stock Exchange two business
days preceding the Closing Date rounded up to the nearest whole number. MasTec issued these shares
of its common stock in reliance on the exemption from registration provided by Section 4(2) of the
Securities Act of 1994, as amended. MasTec registered these shares of common stock on April 28,
2006.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
Based on our improved financial position, we were able to amend our Credit Facility to reduce
interest rate margins charged on our borrowings and letters of credit. This amendment also
increases the maximum permitted purchase price for an acquisition, increases permitted
receivable concentration of certain customers, increases our permitted capital expenditures and
debt baskets, and reduces the required minimum fixed charge coverage ratio if our net availability
were below $20.0 million. A copy of the Credit Facility Amendment is included as Exhibit 10.52 to
this quarterly report on Form 10-Q and is hereby incorporated by reference in its entirety.
ITEM 6. EXHIBITS
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Exhibit No.
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Description |
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10.52*
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First Amendment to Amended and Restated Loan and Security Agreement dated May 10, 2005 by and
between MasTec, Inc., the subsidiaries of MasTec, Inc. identified therein, the financial
institutions party from time to time to the Loan Agreement and Bank of America, N.A., as
administrative agent. |
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31.1*
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Certification of Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002. |
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31.2*
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Certification of Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002. |
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32.1*
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Certification of Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as Adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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32.2*
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Certification of Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as Adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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|
* |
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Exhibits filed with this Form 10-Q. |
33
SIGNATURE
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.
Date: May 8, 2006
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/s/ Austin J. Shanfelter
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Austin J. Shanfelter |
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President and Chief Executive Officer
(Principal Executive Officer) |
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/s/ C. Robert Campbell
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C. Robert Campbell |
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Chief Financial Officer
(Principal Financial and Accounting Officer) |
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34
1st Amendment to Loan Security Agreement
EXHIBIT 10.52
FIRST AMENDMENT TO AMENDED AND RESTATED
LOAN AND SECURITY AGREEMENT
THIS FIRST AMENDMENT TO AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT (this Amendment) is
made and entered into this 8th day of May, 2006, by and between MasTec, Inc., a Florida
corporation (MasTec), the Subsidiaries of MasTec identified on the signature pages hereto
(together with MasTec, hereinafter collectively referred to as the Borrowers), the financial
institutions party from time to time to the Loan Agreement (as hereinafter defined) (the Lenders)
and BANK OF AMERICA, N.A., a national bank in its capacity as collateral and administrative agent
for the Lenders (together with its successors in such capacity, Agent).
Recitals:
Agent, Lenders and Borrowers are parties to a certain Amended and Restated Loan and Security
Agreement dated May 10, 2005 (as amended and in effect on the date hereof, the Loan Agreement),
pursuant to which Lenders have made certain revolving credit loans and letter of credit
accommodations to or for the benefit of Borrowers.
Based on Borrowers improved financial position following its 2005 performance, 2006 follow-on
equity offering and repayment of $75,000,000 of long-term debt, all as reported by Borrowers in its
public filings, Borrowers have requested that Agent and Lenders amend the Loan Agreement to, among
other things, provide improved pricing and business terms to Borrower. Agent and Lenders are
willing to do so, on the terms and subject to the conditions set forth in this Amendment.
NOW, THEREFORE, for TEN DOLLARS ($10.00) in hand paid and other good and valuable
consideration, the receipt and sufficiency of which are hereby severally acknowledged, the parties
hereto, intending to be legally bound hereby, agree as follows:
1. Definitions. All capitalized terms used in this Amendment, unless otherwise
defined herein, shall have the meaning ascribed to such terms in the Loan Agreement.
2. Amendment to Loan Agreement. The Loan Agreement is hereby amended as follows:
a. By deleting the definition of Rentals in its entirety from Section 1.1 of the Loan
Agreement, and by deleting the definitions of Adjusted EBITDA, Applicable Margin, DirecTV
Concentration Percentage, Eligible Unbilled Accounts, Fixed Asset Formula Amount, Permitted
Acquisition, Permitted Contingent Obligations, Permitted Purchase Money Debt and Verizon
Concentration Percentage in their entireties from Section 1.1 of the Loan Agreement and by
inserting the following in lieu thereof:
Adjusted EBITDA for any fiscal period of Borrowers and their
Subsidiaries, an amount equal to the sum for such period of (i) Adjusted Net
Earnings, plus (ii) provision for taxes based on income and for state or
provincial franchise taxes, to the extent deducted in the calculation of Adjusted
Net Earnings for such fiscal period, plus (iii) interest expense, to the
extent deducted in the calculation of Adjusted Net Earnings for such fiscal period,
plus (iv) depreciation and amortization, to the extent deducted in the
calculation of Adjusted Net Earnings for such fiscal period, plus (v)
purchase accounting adjustments that are as required by FASB 141 and 142 for such
fiscal period, plus (vi) non-cash charges (including inventory adjustments,
lost job accruals, stock option expenses and write down of assets) from
discontinued operations and other non-cash charges approved by Agent, to the extent
deducted in the calculation of Adjusted Net Earnings for such period, all
calculated on a Consolidated basis.
Applicable Margin commencing on the first day of the calendar month
immediately succeeding the third Business Day (each an Adjustment Date) after
Agents receipt of the applicable financial statements and corresponding Compliance
Certificate for each Fiscal Quarter ending on or after March 31, 2006, the
Applicable Margin shall be increased or (if no Default or Event of Default exists)
decreased, on a quarterly basis according to the performance of Borrowers as
measured by the Leverage Ratio for the immediately preceding Fiscal Quarter of
Borrowers, as follows:
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Applicable |
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Applicable Base |
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Leverage Ratio |
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LIBOR Margin |
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Rate Margin |
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>= 4.0 to 1.00 |
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2.25 |
% |
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0.75 |
% |
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>= 3.0 to l.00 but
<4.0 to 1.00 |
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2.00 |
% |
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0.50 |
% |
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>= 2.0 to l.00 but
<3.0 to 1.00 |
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1.75 |
% |
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0.25 |
% |
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>= 1.0 to l.00 but
<2.0 to 1.00 |
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1.50 |
% |
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0.00 |
% |
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<1.0 to 1.00 |
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1.25 |
% |
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0.00 |
% |
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provided that, if during any Fiscal Quarter for which the Leverage Ratio is
measured to determine the Applicable Margin as provided above, the Average
Liquidity Amount is greater than $40,000,000, the Applicable Margin with respect to
Revolver Loans that are Base Rate Loans and the Applicable Margin for Revolver
Loans that are LIBOR Loans shall be decreased by 0.25% from the respective
Applicable Margin that is otherwise applicable to that Type of Revolver Loans as
set forth in the table above (but in no event shall the Applicable Margin for Base
Rate Loans be less than 0.00%).
-2-
Prior to the next Adjustment Date, based the performance of Borrowers as measured
by the Leverage Ratio for the Fiscal Quarter ended December 31, 2005, and after
giving effect to an adjustment based on the Average Liquidity Amount in accordance
with the above provisions, the Applicable Margin shall be a percentage equal to
0.25% with respect to Revolver Loans that are Base Rate Loans and 1.75% with
respect to Revolver Loans that are LIBOR Loans.
Except as otherwise set forth herein, any such increase or reduction in the
Applicable Margin shall be subject to receipt by Agent of the applicable financial
statements and corresponding Compliance Certificate. If the financial statements
and the Compliance Certificate of Borrowers setting forth the Leverage Ratio are
not received by Agent by the date required pursuant to Section 10.1.3 of this
Agreement, the Applicable Margin shall be determined as if the Leverage Ratio
exceeds 4.0 to 1 until such time as such financial statements and Compliance
Certificate are received and any Event of Default resulting from a failure timely
to deliver such financial statements or Compliance Certificate is waived in writing
by Agent and Lenders; provided, however, that Agent and Lenders
shall be entitled to accrue and receive interest at the Default Rate to the extent
authorized by Section 3.1.5 of this Agreement and, on each date that the Default
Rate accrues on any Loan, the Applicable Margin on such date for such Loan shall be
the Applicable Margin that would apply if the Leverage Ratio exceeded 4.0 to 1
(without regard to the actual Leverage Ratio). For the final Fiscal Quarter of any
Fiscal Year of Borrowers, Borrowers may provide the unaudited financial statements
of Borrowers, subject only to year-end adjustments, for the purpose of determining
the Applicable Margin; provided, however, that if, upon delivery of
the annual audited financial statements required to be submitted by Borrowers to
Agent pursuant to Section 10.1.3(i) of this Agreement, Borrowers have not met the
criteria for reduction of the Applicable Margin pursuant to the terms hereinabove
for the final Fiscal Quarter of the Fiscal Year of Borrowers then ended, then (a)
such Applicable Margin reduction shall be terminated and, effective on the first
day of the month following receipt by Agent of such audited financial statements,
the Applicable Margin shall be the Applicable Margin that would have been in effect
if such reduction had been implemented based upon the audited financial statements
of Borrowers for the final Fiscal Quarter of the Fiscal Year of Borrowers then
ended, and (b) Borrowers shall pay to Agent, for the Pro Rata benefit of the
Lenders, on the first day of the month following receipt by Agent of such audited
financial statements, an amount equal to the difference between the amount of
interest that would have been paid using the Applicable Margin determined based
upon such audited financial statements and the amount of interest actually paid
during the period in which the reduction of the Applicable Margin was in effect
based upon the unaudited financial statements for the final Fiscal Quarter of the
Fiscal Year of Borrowers then ended.
DirecTV Concentration Percentage (a) at any time that (i) DirecTVs
corporate credit rating or senior debt rating (secured or unsecured) by Moodys is
Ba2 and by S&P is BB, and (ii) Average Days Sales Outstanding on Accounts for
-3-
which DirecTV is the Account Debtor is 50 or fewer days, 40%; (b) at any time
that DirecTVs corporate credit rating or senior debt rating (secured or unsecured)
by Moodys is Ba3 or by S&P is BB-, 25%; (c) at any time that DirecTVs corporate
credit rating or senior debt rating (secured or unsecured) by Moodys is B1 or by
S&P is B+, 15%; (d) at any time that Average Days Sales Outstanding on Accounts for
which DirecTV is the Account Debtor is more than 50 days, 15%; and (e) irrespective
of the Average Days Sales Outstanding on Accounts for which DirecTV is the Account
Debtor, or DirecTVs rating, such lesser percentage as Agent may in its reasonable
credit judgment determine from time to time.
Eligible Unbilled Accounts an amount which, when an invoice is
issued with respect thereto, will be an Eligible Account, and in respect of which
an invoice is issued within 30 days (or 45 days with respect to an Account Debtor
principally engaged in the power distribution and transmission business or
communications business) after such amount is first included as an eligible
unbilled account on any Borrowing Base Certificate.
Fixed Assets Formula Amount on any date of determination thereof, an
amount equal to the lesser of (A) $50,000,000, or (B) 80% multiplied by the Net
Orderly Liquidation Value of Eligible Fixed Assets; provided that the amount
calculated under this clause (B) shall be reduced in an amount, as determined by
Agent, equal to the aggregate amount of the fair market value or book value,
whichever is more, of all Equipment that has been disposed of by Obligors (other
than in accordance with Section 8.4.2(ii)) since the date that the Equipment
included in the most recent Net Orderly Liquidation Value Appraisal was appraised.
Permitted Acquisition an Acquisition by an Obligor or any Subsidiary
of an Obligor in which each of the following conditions is satisfied:
(a) no Default or Event of Default exists before or would exist
immediately after giving effect thereto;
(b) the Acquisition is of (i) Equity Interests of any other Person
organized under the laws of the United States of America or any state
thereof or of Canada or any province thereof sufficient to give such
Obligor or Subsidiary control of such other Person or (ii) all or
substantially all of the assets of a Business Unit located in the United
States or Canada, and such Person or Business Unit is engaged in a business
that is substantially similar, related or incidental to the business
conducted by Obligors;
(c) the Purchase Price of such Acquisition does not exceed
$100,000,000, and the cash portion of such Purchase Price does not exceed
$80,000,000;
(d) the Liquidity Amount after giving effect to such Acquisition would
be not less than $30,000,000;
-4-
(e) MasTec or the applicable Obligor has made available to Agent, not
later than 14 days prior to the proposed date of such Acquisition, the
results of any due diligence investigation of the target performed by or on
behalf of such Obligor or its Subsidiaries, environmental assessment
reports if any real property is to be acquired, copies of the Acquisition
documents, and historical financial statements of the target since
inception but no longer than the 3 previous years;
(f) Agent shall have received evidence satisfactory to it that no
Default of Event of Default has occurred and is continuing or would exist
after giving effect to such transaction and of the Obligors continued
compliance with the provisions of this Agreement and the other Loan
Documents, including the provisions of Sections 10.1.14, 10.2.22, and, on a
pro forma basis after giving effect to such Acquisition Borrowers shall
have a Fixed Charge Coverage Ratio of not less than 1.10 to 1.0 for the 12
calendar month period ending on the date of the Acquisition;
(g) to the extent financed with Debt other than Loans, such Debt is
Subordinated Debt payable to the seller,
(h) such Acquisition is not hostile or contested;
(i) Agent shall have received evidence reasonably satisfactory to it
demonstrating on a pro forma basis that Adjusted EBITDA (calculated by
MasTec and approved by Agent as described below in this definition) of the
target for the period of 12 consecutive calendar months ended nearest to
the date of determination, is at least equal to the sum of interest expense
and scheduled principal payments on any Debt incurred in connection with
payment of the Purchase Price (including Loans);
(j) if requested by Agent or the Required Lenders, any new Subsidiary
shall have executed and delivered a Subsidiary Guaranty and a Subsidiary
Security Agreement, or, at Agents election, a Joinder Agreement, and in
either case shall have delivered or caused to be delivered as to such
Subsidiary the items referred to in Sections 11.1.4, 11.1.5 and 11.1.7 and
an opinion of counsel for such Subsidiary as to such matters in connection
with the transactions contemplated by the Subsidiary Guaranty and
Subsidiary Security Agreement or Joinder Agreement as Agent may reasonably
request; and
(k) financial statements shall have been delivered to Agent and the
Lenders for the most recently completed Fiscal Quarter in compliance with
the provisions of Section 10.1.3.
A determination made for purposes of this definition on a pro forma basis
shall be based upon Borrowers actual results of operations and the actual
-5-
results of operations of the target for the same period of 12 months ended
prior to the date of determination, as if such Acquisition had occurred
(and any related Debt had been incurred) on the first day of such 12-month
period, as adjusted with the approval of Agent to reflect verifiable,
adequately documented severance payments and reductions in officer and
employee compensation, insurance expenses, interest expense and rental
expense that will be realized effective upon completion of such
Acquisition.
Notwithstanding any provision of this Agreement to the contrary, in
connection with any merger (or other distribution of the assets) of a
Subsidiary that is not an Obligor with and into (or to) an Obligor, or any
Acquisition by an Obligor, whether by purchase of stock, merger, or
purchase of assets, and whether in a single transaction or series of
related transactions, Agent shall have the right to determine in its
reasonable credit judgment (based on standards and methodologies similar to
those applied to Borrowers then existing Accounts and Equipment to the
extent that the Accounts and Equipment so acquired are similar to such then
existing Accounts and Equipment), whether any Accounts or Equipment so
acquired shall be included in the Borrowing Base (subject to the other
applicable provisions of this Agreement). In connection with such
determination, Agent may obtain, at Borrowers expense, such appraisals,
commercial finance exams and other assessments of such Accounts and related
Inventory, Equipment and Real Estate as Agent may deem desirable.
Permitted Contingent Obligations Contingent Obligations (a)
arising from endorsements of Payment Items for collection or deposit in the
Ordinary Course of Business; (b) arising from Hedging Agreements entered
into in the Ordinary Course of Business pursuant to this Agreement or with
Agents prior written consent; (c) of any Borrower and its Subsidiaries
existing as of the Closing Date, including extensions and renewals thereof
that do not increase the amount of such Contingent Obligations as of the
date of such extension or renewal; (d) incurred in the Ordinary Course of
Business with respect to surety bonds, appeal bonds, performance bonds and
other similar obligations; (e) arising under indemnity agreements to title
insurers to cause such title insurers to issue to Agent title insurance
policies; (f) with respect to customary indemnification obligations in
favor of purchasers in connection with dispositions of Equipment permitted
under Section 8.4.2 of this Agreement; (g) consisting of reimbursement
obligations from time to time owing by any Borrower to an Issuing Bank with
respect to Letters of Credit (but in no event to include reimbursement
obligations at any time owing by a Borrower to any other Person that may
issue letters of credit for the account of Borrowers); (h) of MasTec
arising from any guaranty, indemnity or other assurance of payment or
performance of any equipment lease for which any other Obligor is the
primary obligor; and (i) other than those Contingent Obligations described
in the foregoing clauses of this definition, not exceeding $1,000,000 in
the aggregate at any time.
-6-
Permitted Purchase Money Debt Purchase Money Debt of
Borrowers and their Subsidiaries that is secured by no Lien or only by a
Purchase Money Lien, provided that the aggregate amount of Purchase Money
Debt outstanding at any time does not exceed $30,000,000 and the incurrence
of such Purchase Money Debt does not violate any limitation in the Loan
Documents regarding Capital Expenditures. For the purposes of this
definition, the principal amount of any Purchase Money Debt consisting of
capitalized leases shall be computed as a Capitalized Lease Obligation.
Verizon Concentration Percentage (a) at any time that
Verizons corporate credit rating or senior debt rating (secured or
unsecured) by Moodys is Baa3 or higher and by S&P BBB- or higher, 40%; or
(b) at any time that Verizons corporate credit rating or senior debt
rating (secured or unsecured) by Moodys is lower than Baa3 or by S&P is
lower than BBB-, 15%; or (c) irrespective of Verizons rating, such lesser
percentage as Agent may in its reasonable credit judgment determine from
time to time.
b. By deleting Section 10.2.1 of the Loan Agreement in its entirety and by
substituting the following in lieu thereof:
10.2.1. Fundamental Changes. (i) Merge, reorganize,
consolidate or amalgamate with any Person, or liquidate, wind up its
affairs or dissolve itself, in each case whether in a single transaction or
in a series of related transactions, except that (a) any Obligor or any
Subsidiary of an Obligor may merge or amalgamate with an Obligor (provided
that an Obligor is the surviving or continuing entity of such merger or
amalgamation); (b) any Obligor or Subsidiary of an Obligor may liquidate,
wind up or dissolve itself (provided that all of its Property is
distributed to an Obligor upon the effectiveness of such liquidation,
winding up or dissolution and Agents Liens in all Property of the
liquidated, wound up or dissolved entity continue in uninterrupted effect
with the same priority as prior to such liquidation, winding up or
dissolution); and (c) the Property or Equity Interests of any Obligor or
any Subsidiary of an Obligor may be purchased or otherwise acquired by any
Obligor (provided that Agents Liens in all Property or Equity Interests so
purchased or acquired continue in uninterrupted effect with the same
priority as prior to such purchase or acquisition). Nothing herein shall
authorize any merger, consolidation or amalgamation or purchase of assets
or Equity Interests if, after giving effect thereto, any Property of an
Obligor would be subject to a Lien that is not a Permitted Lien; or
(ii) change an Obligors name or conduct business under any new fictitious
name; or change an Obligors FEIN, organizational identification number or
state of organization unless, in each such case, Borrowers shall have given
at least 30 days prior notice to Agent and shall have taken such action as
Agent may reasonably request to maintain the perfection and priority of any
Liens
-7-
of Agent that would otherwise be affected thereby.
c. By deleting Section 10.2.3 of the Loan Agreement in its entirety and by substituting the
following in lieu thereof:
10.2.3. Permitted Debt. Create, incur, assume, guarantee or
suffer to exist any Debt, except:
(i) the Obligations;
(ii) Subordinated Notes;
(iii) accounts payable by such Borrower or a Subsidiary to
trade creditors that are not aged more than 90 days from billing
date or more than 30 days from the due date, in each case incurred
in the Ordinary Course of Business and paid within such time period,
unless the same are being Properly Contested or are paid in
accordance with Borrowers customary payment practices and are not
in default;
(iv) Debt for rental payments under operating leases incurred
in the Ordinary Course of Business of such Borrower or Subsidiary
and not secured by a Lien (unless such Lien is a Permitted Lien);
(v) Permitted Purchase Money Debt;
(vi) Debt for accrued payroll, Taxes and other operating
expenses (other than for Money Borrowed) incurred in the Ordinary
Course of Business of such Borrower or such Subsidiary, including
Cash Management Obligations, in each case so long as payment thereof
is not past due and payable unless, in the case of Taxes only, such
Taxes are being Properly Contested;
(vii) Debt for Money Borrowed by such Obligor (other than the
Obligations, Permitted Purchase Money Debt and Subordinated Debt
permitted herein), but only to the extent that such Debt is
outstanding on the date of this Agreement, as described on Schedule
10.2.3 and is not to be satisfied on or about the Closing Date from
the proceeds of the initial Loans;
(viii) Permitted Contingent Obligations;
(ix) Debt of any Person that is in existence at the time that
it becomes or is consolidated into or merged with a Subsidiary of
such Borrower in a Permitted Acquisition or that is secured by any
fixed asset acquired by any Borrower or any Subsidiary at the time
of any Permitted Acquisition, provided that such Debt is not
incurred in
-8-
contemplation of such Person becoming a Subsidiary or such
acquisition of such asset by any Borrower or any of its
Subsidiaries, as the case may be;
(x) Debt that is not included in any of the preceding
paragraphs of this Section 10.2.3, is not secured by a Lien (unless
such Lien is a Permitted Lien) and provided that the sum of the
aggregate amount of such Debt plus the aggregate amount of
Permitted Purchase Money Debt plus the aggregate amount of
Debt described in clause (ix) of this Section does not exceed at
any time $30,000,000 as to all Obligors and all of their
Subsidiaries, and provided further that, in no event shall the
aggregate amount of all such Debt exceed the maximum aggregate
amount of Debt that any of the Obligors are permitted to incur
under the Indenture; and
(xi) Refinancing Debt so long as each of the Refinancing
Conditions is met.
None of the provisions of this Section 10.2.3 that authorize any Obligor to
incur any Debt shall be deemed to (A) override, modify or waive any of the
provisions of Section 10.3, which shall constitute an independent and
separate covenant and obligation of each Borrower, or (B) permit any
Obligor to incur any Debt in violation of any provision of the Indenture.
d. By deleting Section 10.2.9 of the Loan Agreement in its entirety and by substituting the
following in lieu thereof:
10.2.9. Capital Expenditures. Make Capital Expenditures (including
expenditures by way of capitalized leases) which in the aggregate,
as to all
Borrowers and their Subsidiaries, exceed $40,000,000 during 2006 Fiscal Year or
during any Fiscal Year thereafter.
e. By deleting Section 10.3 of the Loan Agreement in its entirety and by substituting the
following in lieu thereof:
10.3. Financial Covenant. For so long as there are any Commitments
outstanding and thereafter until Full Payment of the Obligations, Borrowers covenant
that, if Availability falls below $20,000,000 on any date, then Borrowers (a) shall
immediately demonstrate a Fixed Charge Coverage Ratio of at least 1.10 to 1.0,
calculated for the immediately preceding 12 calendar months for which financial
statements and the corresponding Compliance Certificate have been received by Agent
in accordance with Section 10.1.3 prior to such date, and (b) thereafter, until such
time as Availability is greater than or equal to $20,000,000 for 90 consecutive
days, maintain a Fixed Charge Coverage Ratio of at least 1.10 to 1.0, calculated as
of the last day of each month for the immediately preceding 12 calendar months for
which financial statements and the corresponding Compliance Certificate
-9-
have been received by Agent in accordance with Section 10.1.3 prior to each
date of determination thereof. Borrowers shall include in each Compliance
Certificate a calculation of the Fixed Charge Coverage Ratio, whether or not
Borrowers are required under this Section to maintain a minimum Fixed Charge
Coverage Ratio at the date of, or with respect to the period covered by, the
Compliance Certificate.
f. By deleting the Schedules to the Loan Agreement in their entireties and by
substituting in lieu thereof the revised Schedules attached hereto.
3. Ratification and Reaffirmation. Each Borrower hereby ratifies and reaffirms the
Obligations, each of the Loan Documents and all of such Borrowers covenants, duties, indebtedness
and liabilities under the Loan Documents.
4. Acknowledgments and Stipulations. Each Borrower acknowledges and stipulates that
the Loan Agreement and the other Loan Documents executed by such Borrower are legal, valid and
binding obligations of such Borrower that are enforceable against such Borrower in accordance with
the terms thereof; all of the Obligations are owing and payable without defense, offset or
counterclaim (and to the extent there exists any such defense, offset or counterclaim on the date
hereof, the same is hereby waived by such Borrower); the security interests and Liens granted by
such Borrower in favor of Agent are duly perfected, first priority security interests and Liens,
subject only to Permitted Liens; and, as of the close on business on May 3, 2006,the unpaid
principal amount of the Revolver Loans totaled $0, and the face amount of outstanding Letters of
Credit totaled $63,945,498.74.
5. Representations and Warranties. Each Borrower represents and warrants to Agent and
Lenders, to induce Agent and Lenders to enter into this Amendment, that no Default or Event of
Default exists on the date hereof; the execution, delivery and performance of this Amendment have
been duly authorized by all requisite entity action on the part of such Borrower and this Amendment
has been duly executed and delivered by such Borrower; and all of the representations and
warranties made by Borrowers in the Loan Agreement are true and correct in all material respects on
and as of the date hereof after giving effect to this Amendment and to the revised Schedules to the
Loan Agreement delivered herewith.
6. Reference to Loan Agreement. Upon the effectiveness of this Amendment, each
reference in the Loan Agreement to this Agreement, hereunder, or words of like import shall
mean and be a reference to the Loan Agreement, as amended by this Amendment.
7. Breach of Amendment. This Amendment shall be part of the Loan Agreement and a
breach of any representation, warranty or covenant herein shall constitute an Event of Default.
8. Conditions Precedent. The amendments contained in Section 2 of this Amendment
shall become effective as of the date hereof, in each case on the date, in each case on the date on
which Agent shall have received, on or before May 8, 2005: the following documents, each of which
shall be satisfactory in form and substance to Agent and in sufficient copies for each Lender:
-10-
a. this Amendment duly executed and delivered by the Borrowers, the Lenders and Agent and the
Consent and Reaffirmation of Guarantors, duly executed and delivered by the Guarantors; and
b. a certificate of the secretary or assistant secretary of each Obligor having attached
thereto the articles or certificate of incorporation and bylaws of such Obligor (or containing the
certification of such secretary or assistant secretary that no amendment or modification of such
articles or certificate of incorporation or bylaws has become effective since May 10, 2005), and
certifying all entity action, including shareholders or members approval, if necessary, has been
taken by such Obligor and/or its shareholders or members to authorize the execution, delivery and
performance of this Amendment and the incumbency of the officers of such Obligor executing this
Amendment and any other documents in connection herewith.
9. Expenses of Agent. Borrowers agree to pay, on demand, all costs and expenses
incurred by Agent in connection with the preparation, negotiation and execution of this Amendment
and any other Loan Documents executed pursuant hereto and any and all amendments, modifications,
and supplements thereto, including, without limitation, the costs and fees of Agents legal counsel
and any taxes or expenses associated with or incurred in connection with any instrument or
agreement referred to herein or contemplated hereby.
10. Effectiveness; Governing Law. This Amendment shall be effective upon acceptance
by Agent in Atlanta, Georgia (notice of which acceptance is hereby waived), whereupon the same
shall be governed by and construed in accordance with the internal laws of the State of Georgia.
11. Successors and Assigns. This Amendment shall be binding upon and inure to the
benefit of the parties hereto and their respective successors and assigns.
12. No Novation, etc.. Except as otherwise expressly provided in this Amendment,
nothing herein shall be deemed to amend or modify any provision of the Loan Agreement or any of the
other Loan Documents, each of which shall remain in full force and effect. This Amendment is not
intended to be, nor shall it be construed to create, a novation or accord and satisfaction, and the
Loan Agreement as herein modified shall continue in full force and effect.
13. Counterparts; Telecopied Signatures. This Amendment may be executed in any number
of counterparts and by different parties to this Amendment on separate counterparts, each of
which, when so executed, shall be deemed an original, but all such counterparts shall constitute
one and the same agreement. Any signature delivered by a party by facsimile transmission shall be
deemed to be an original signature hereto.
14. Further Assurances. Each Borrower agrees to take such further actions as Agent shall
reasonably request from time to time in connection herewith to evidence or give effect to the
amendments set forth herein or any of the transactions contemplated hereby.
-11-
15. Section Titles. Section titles and references used in this Amendment shall be
without substantive meaning or content of any kind whatsoever and are not a part of the agreements
among the parties hereto.
16. Waiver of Jury Trial. To the fullest extent permitted by Applicable Law, the
parties hereto each hereby waives the right to trial by jury in any action, suit, counterclaim or
proceeding arising out of or related to this Amendment.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed under
seal and delivered by their respective duly authorized officers on the date first written above.
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BORROWERS:
MASTEC, INC.
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By: |
/s/ Stephen M. Wagman
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ATTEST: |
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Name: |
Stephen M. Wagman |
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/s/
Alberto de
Cardenas
Alberto de Cardenas, Secretary
[CORPORATE SEAL] |
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Title: |
Executive Vice President |
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MASTEC NORTH AMERICA AC, LLC
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By: |
/s/ Stephen M. Wagman
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Name: |
Stephen M. Wagman |
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Title: |
Executive Vice President |
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MASTEC TC, INC.
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By: |
/s/ Stephen M. Wagman
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Name: |
Stephen M. Wagman |
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Title: |
Executive Vice President |
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MASTEC FC, INC.
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By: |
/s/ Stephen M. Wagman
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Name: |
Stephen M. Wagman |
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Title: |
Executive Vice President |
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[Signatures continue on following page]
-12-
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MASTEC CONTRACTING COMPANY, INC.
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By: |
/s/ Stephen M. Wagman
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Name: |
Stephen M. Wagman |
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Title: |
Executive Vice President |
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MASTEC MINNESOTA SW, LLC
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By: |
/s/ Stephen M. Wagman
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Name: |
Stephen M. Wagman |
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Title: |
Executive Vice President |
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MASTEC SERVICES COMPANY, INC.
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By: |
/s/ Stephen M. Wagman
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Name: |
Stephen M. Wagman |
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Title: |
Executive Vice President |
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MASTEC ASSET MANAGEMENT COMPANY, INC.
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By: |
/s/ Stephen M. Wagman
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Name: |
Stephen M. Wagman |
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Title: |
Executive Vice President |
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CHURCH & TOWER, INC.
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By: |
/s/ Stephen M. Wagman
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Name: |
Stephen M. Wagman |
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Title: |
Executive Vice President |
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MASTEC OF TEXAS, INC.
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By: |
/s/ Stephen M. Wagman
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Name: |
Stephen M. Wagman |
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Title: |
Executive Vice President |
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[Signatures continue on following page]
-13-
MASTEC NORTH AMERICA, INC.
(and
as successor by merger to each of Cruz-Cell, Inc., Dresser/Areia
Construction, Inc., Flaire Incorporated, MasTec Telcom &
Electrical Services,
Inc., Protel Ind., Inc., Upper Valley Utilities Corp., MasTec
Integration
Systems, Inc., MasTec Network Services, Inc., Renegade of Idaho,
Inc., MasTec
Real Estate Holdings, Inc., Northland Contracting, Inc., Wilde
Optical Service,
Inc., Church & Tower Environmental, Inc., Wilde Holding Co.,
Inc., and Wilde
Acquisition Co., Inc.)
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By: |
/s/ Stephen M. Wagman
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Name: |
Stephen M. Wagman |
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Title: |
Executive Vice President |
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S.S.S. CONSTRUCTION, INC.
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By: |
/s/ Bryan Westerman
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Name: |
Bryan Westerman |
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Title: |
Vice President/Secretary |
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[Signatures continue on following page]
-14-
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LENDERS:
BANK OF AMERICA, N.A., as Agent and a Lender
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By: |
/s/ Dennis S. Losin |
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Dennis S. Losin, Senior Vice President |
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LASALLE BUSINESS CREDIT, LLC, as a Lender
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By: |
/s/ Monirah J. Masud
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Name: |
Monirah J. Masud |
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Title: |
Vice President |
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PNC BANK, NATIONAL ASSOCIATION, as a Lender
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By: |
/s/ Alex M. Council
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Name: |
Alex M. Council |
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Title: |
Vice President |
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GENERAL ELECTRIC CAPITAL CORPORATION, as Syndication Agent and a Lender
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By: |
/s/ William R. Doolittle
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Name: |
William R. Doolittle |
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Title: |
Duly Authorized Signatory |
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-15-
CONSENT AND REAFFIRMATION
Each of the undersigned guarantors of the Obligations at any time owing to Agent or Lenders
hereby (i) acknowledges receipt of a copy of the foregoing First Amendment to Amended and Restated
Loan and Security Agreement; (ii) consents to Borrowers execution and delivery thereof and of the
other documents, instruments or agreements any Borrower agrees to execute and deliver pursuant
thereto; (iii) agrees to be bound thereby; and (iv) affirms that nothing contained therein shall
modify in any respect whatsoever its respective guaranty of the Obligations and reaffirms that such
guaranty is and shall remain in full force and effect.
IN WITNESS WHEREOF, the undersigned has executed this Consent and Reaffirmation in Miami, Florida, as of the date of such First Amendment to Amended and Restated Loan and Security
Agreement.
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GUARANTORS:
PHASECOM SYSTEMS, INC.
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By: |
/s/ Stephen M. Wagman
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Name: |
Stephen M. Wagman |
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Title: |
Executive Vice President |
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INTEGRAL POWER & TELECOMMUNICATIONS CORPORATION, LTD.
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By: |
/s/ Stephen M. Wagman
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Name: |
Stephen M. Wagman |
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Title: |
Executive Vice President |
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MASTEC NORTH AMERICA AC, LLC
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By: |
/s/ Stephen M. Wagman
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Name: |
Stephen M. Wagman |
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Title: |
Executive Vice President |
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-16-
exv31w1
Exhibit 31.1
CERTIFICATIONS REQUIRED BY SECTION 302(A)
OF SARBANES-OXLEY ACT OF 2002
I, Austin J. Shanfelter, certify that:
I have reviewed this quarterly report on Form 10-Q of MasTec, Inc.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit
to state a material fact necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period covered by this
quarterly report;
Based on my knowledge, the financial statements, and other financial information included in this
quarterly report, fairly present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the periods presented in this quarterly
report;
The registrants other certifying officer and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and
internal control over financial reporting (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) for the registrant and have:
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a) |
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Designed such disclosure controls and procedures, or caused such disclosure controls
and procedures to be designed under my supervision, to ensure that material information
relating to the registrant, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this quarterly report
is being prepared; |
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b) |
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Designed such internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally accepted
accounting principles; |
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c) |
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Evaluated the effectiveness of the registrants disclosure controls and procedures and
presented in this quarterly report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the period covered by this report
based on such evaluation; and |
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d) |
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Disclosed in this quarterly report any change in the registrants internal control over
financial reporting that occurred during the registrants most recent fiscal quarter that
has materially affected, or is reasonably likely to materially affect, the registrants
internal control over financial reporting. |
The registrants other certifying officer and I have disclosed, based on our most recent evaluation
of internal control over financial reporting, to the registrants auditors and the audit committee
of the registrants board of directors (or persons performing the equivalent functions):
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a) |
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All significant deficiencies and material weaknesses in the design or operation of
internal control over financial reporting which are reasonably likely to adversely affect
the registrants ability to record, process, summarize and report financial information;
and |
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b) |
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Any fraud, whether or not material, that involves management or other employees who
have a significant role in the registrants internal control over financial reporting. |
Date: May 8, 2006
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/s/ Austin J. Shanfelter
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Austin J. Shanfelter |
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President and Chief Executive
Officer
(Principal Executive Officer) |
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exv31w2
Exhibit 31.2
CERTIFICATIONS REQUIRED BY SECTION 302(A)
OF SARBANES-OXLEY ACT OF 2002
I, C. Robert Campbell, certify that:
I have reviewed this quarterly report on Form 10-Q of MasTec, Inc.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit
to state a material fact necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period covered by this
quarterly report;
Based on my knowledge, the financial statements, and other financial information included in this
quarterly report, fairly present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the periods presented in this quarterly
report;
The registrants other certifying officer and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and
internal control over financial reporting (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) for the registrant and have:
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a) |
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Designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under my supervision, to ensure that material
information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which
this quarterly report is being prepared; |
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b) |
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Designed such internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally
accepted accounting principles; |
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c) |
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Evaluated the effectiveness of the registrants disclosure controls and
procedures and presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation; and |
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d) |
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Disclosed in this quarterly report any change in the registrants internal
control over financial reporting that occurred during the registrants most recent
fiscal quarter (the registrants fourth fiscal quarter in the case of an quarterly
report) that has materially affected, or is reasonably likely to materially affect, the
registrants internal control over financial reporting. |
The registrants other certifying officer and I have disclosed, based on our most recent evaluation
of internal control over financial reporting, to the registrants auditors and the audit committee
of the registrants board of directors (or persons performing the equivalent functions):
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a) |
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All significant deficiencies and material weaknesses in the design or operation
of internal control over financial reporting which are reasonably likely to adversely
affect the registrants ability to record, process, summarize and report financial
information; and |
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b) |
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Any fraud, whether or not material, that involves management or other employees
who have a significant role in the registrants internal control over financial
reporting. |
Date: May 8, 2006
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/s/ C. Robert Campbell
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C. Robert Campbell |
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Chief Financial Officer
(Principal Financial and Accounting
Officer) |
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exv32w1
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of MasTec, Inc. (the Company) on Form 10-Q for the period
ended March 31, 2006 as filed with the Securities and Exchange Commission on the date hereof (the
Report), I, Austin J. Shanfelter, President and Chief Executive Officer of MasTec, Inc., certify,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, that, to the best of my knowledge:
|
(1) |
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The Report fully complies with the requirements of section 13(a) or 15(d) of the
Securities Exchange Act of 1934; and |
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(2) |
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The information contained in the Report fairly presents, in all material respects, the
financial condition and results of operations of the Company. |
Date: May 8, 2006
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/s/ Austin J. Shanfelter
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Austin J. Shanfelter |
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President and Chief Executive
Officer
(Principal Executive Officer) |
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The certification set forth above is being furnished as an exhibit solely pursuant to Section 906
of the Sarbanes-Oxley Act of 2002 and is not being filed as part of the Quarterly Report on Form
10-Q for the period ended March 31, 2006, or as a separate disclosure documents of we or the
certifying officers.
exv32w2
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of MasTec, Inc. (the Company) on Form 10-Q for the period
ended March 31, 2006 as filed with the Securities and Exchange Commission on the date hereof (the
Report), I, C. Robert Campbell, Chief Financial Officer of MasTec, Inc., certify, pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to
the best of my knowledge:
|
(1) |
|
The Report fully complies with the requirements of section 13(a) or 15(d) of the
Securities Exchange Act of 1934; and |
|
|
(2) |
|
The information contained in the Report fairly presents, in all material respects, the
financial condition and results of operations of the Company. |
Date: May 8, 2006
|
|
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|
|
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/s/ C. Robert Campbell
|
|
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C. Robert Campbell |
|
|
Chief Financial Officer
(Principal Financial and Accounting
Officer) |
|
|
The certification set forth above is being furnished as an exhibit solely pursuant to Section 906
of the Sarbanes-Oxley Act of 2002 and is not being filed as part of the Quarterly Report on Form
10-Q for the period ended March 31, 2006, or as a separate disclosure documents of we or the
certifying officers.