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 June 30, 2001 Commission File Number 001-08106 MASTEC, INC. (Exact name of registrant as specified in its charter) Florida 65-0829355 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 3155 N.W. 77th Avenue, Miami, FL 33122-1205 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (305) 599-1800 Former name, former address and former fiscal year, if changed since last report: Not Applicable Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes_X_ No____. As of August 13, 2001 MasTec, Inc. had 47,784,003 shares of common stock, $0.10 par value, outstanding.
MASTEC, INC. FORM 10-Q TABLE OF CONTENTS Part I. Financial Information Item 1. Financial Statements Unaudited Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2001 and June 30, 2000....................................................... 3 Consolidated Balance Sheets as of June 30, 2001 (Unaudited) and December 31, 2000.......................... 4 Unaudited Consolidated Statement of Changes in Shareholders' Equity for the Six Months Ended June 30, 2001.............. 5 Unaudited Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2001 and June 30, 2000.......... 6 Notes to Consolidated Financial Statements (Unaudited)..... 8 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition.........................15 Item 3. Quantitative and Qualitative Disclosures About Market Risk................................................22 Part II. Other Information Item 1. Legal Proceedings..................................22 Item 4. Submission of Matters to a Vote of Securities Holders............................................23 Signatures.................................................24
MASTEC, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amounts) (Unaudited) <TABLE> <C> <C> <C> Three Months Ended Six Months Ended June 30, June 30, --------------------- --------------------- 2001 2000 2001 2000 --------------------- --------------------- Revenue North America $ 316,254 $ 286,418 $ 640,063 $ 548,790 International 13,966 11,279 27,369 21,601 --------- --------- --------- --------- 330,220 297,697 667,432 570,391 Costs of revenue 272,750 224,933 538,108 433,862 Depreciation 13,564 13,183 26,882 26,661 Amortization 2,771 2,675 5,648 6,176 General and administrative expenses 36,164 21,930 84,078 45,042 Interest expense 5,152 4,303 9,864 9,859 Interest income 2,770 1,054 5,203 2,267 Other (loss) income, net (6,047) 4,873 (5,606) 5,253 --------- --------- --------- --------- Income before provision for income taxes and minority interest (3,458) 36,600 2,449 56,311 Benefit (provision) for income taxes 1,290 (15,120) (1,184) (23,499) Minority interest 6 (138) (130) 7 --------- --------- --------- --------- Net (loss) income $ (2,162) $ 21,342 $ 1,135 $ 32,819 ========= ========= ========= ========= Basic weighted average common shares outstanding 47,763 46,823 47,739 45,314 Basic earnings per share $ (0.05) $ 0.46 $ 0.02 $ 0.72 Diluted weighted average common shares outstanding 47,763 49,055 48,980 47,445 Diluted earnings per share $ (0.05) $ 0.44 $ 0.02 $ 0.69 </TABLE> The accompanying notes are an integral part of these consolidated financial statements. MASTEC, INC. CONSOLIDATED BALANCE SHEETS (In thousands) <TABLE> <C> <C> <C> June 30, December 31, 2001 2000 ----------- ----------- (Unaudited) Assets Current assets: Cash and cash equivalents $ 14,970 $ 18,457 Accounts receivable, unbilled revenue and retainage, net 354,057 386,480 Inventories 21,446 19,643 Other current assets 18,885 29,184 ---------- --------- Total current assets 409,358 453,764 Property and equipment, net 156,868 159,673 Intangibles, net 261,143 262,398 Other assets 137,669 80,510 ---------- --------- Total assets $ 965,038 $ 956,345 ========== ========= Liabilities and Shareholders' Equity Current liabilities: Current maturities of debt $ 70,943 $ 5,685 Accounts payable 85,814 85,797 Other current liabilities 65,315 119,845 ---------- --------- Total current liabilities 222,072 211,327 ---------- --------- Other liabilities 42,896 38,530 ---------- --------- Long-term debt 199,337 206,160 ---------- --------- Commitments and contingencies (Note 4) Shareholders' equity: Common stock 4,777 4,770 Capital surplus 347,118 346,099 Retained earnings 167,485 166,350 Foreign currency translation adjustments (18,647) (16,891) ---------- --------- Total shareholders' equity 500,733 500,328 ---------- --------- Total liabilities and shareholders' equity $ 965,038 $ 956,345 ========== ========= </TABLE> The accompanying notes are an integral part of these consolidated financial statements.
MASTEC, INC. CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (In thousands) (Unaudited) <TABLE> <C> <C> <C> <C> <C> <C> Foreign Common Stock Currency ---------------- Capital Retained Translation Shares Amount Surplus Earnings Adjustments Total ---------------------------------------------------------------- Balance December 31, 2000 47,702 $ 4,770 $ 346,099 $ 166,350 $ (16,891) $ 500,328 Net income 1,135 1,135 Foreign currency translation adjustments (1,756) (1,756) Stock issued 70 7 1,019 1,026 ------ ------- --------- --------- ---------- --------- Balance June 30, 2001 47,772 $ 4,777 $ 347,118 $ 167,485 $ (18,647) $ 500,733 ====== ======= ========= ========= ========== ========= </TABLE> The accompanying notes are an integral part of these consolidated financial statements.
MASTEC, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited) <TABLE> <C> <C> <C> Six Months Ended June 30, 2001 2000 ------------------------- Cash flows from operating activities: Net income $ 1,135 $ 32,819 Adjustments to reconcile net income to net cash used in operating activities: Depreciation and amortization 32,530 32,837 Minority interest 130 (7) Gain on sale of assets (484) (7,349) Changes in assets and liabilities net of effect of acquisitions: Accounts receivables, unbilled revenue and retainage, net (12,126) (25,920) Inventories (1,564) (4,701) Other assets, current and non-current portion (5,019) (13,415) Accounts payable 465 (14,534) Other current liabilities (22,238) (9,000) Other liabilities (2,568) (1,329) --------- ---------- Net cash used in operating activities (9,739) (10,599) --------- ---------- Cash flows from investing activities: Capital expenditures (23,529) (28,252) Cash paid for acquisitions (net of cash acquired) and contingent consideration (26,300) (17,374) Repayment of notes receivable, net - 946 Investment in unconsolidated companies and distribution to joint venture partner (1,451) (4,900) Proceeds from sale of assets 1,285 15,232 --------- ---------- Net cash used in investing activities (49,995) (34,348) --------- ---------- Cash flows from financing activities: Borrowings (repayments) on revolving credit facilities, net 56,814 (75,446) Net proceeds from common stock issued 229 132,595 --------- ---------- Net cash provided by financing activities 57,043 57,149 --------- ---------- Net (decrease) increase in cash and cash equivalents (2,691) 12,202 Effect of translation on cash (796) 316 Cash and cash equivalents - beginning of period 18,457 27,635 --------- ---------- Cash and cash equivalents - end of period $ 14,970 $ 40,153 ========= ========== </TABLE> The accompanying notes are an integral part of these consolidated financial statements.
MASTEC, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) (Unaudited) Supplemental disclosure of non-cash investing and financing activities: During the six months ended June 30, 2001, we completed certain acquisitions which have been accounted for as purchases. The fair value of the net assets excluding goodwill acquired totaled $2.4 million and was comprised primarily of $3.0 million of accounts receivable, $1.7 million of property and equipment, $0.5 million of other assets and $0.2 million in cash, offset by $3.0 million of assumed liabilities. The excess of the purchase price over the fair value of net assets acquired was $2.7 million and was allocated to goodwill. The total purchase price of $5.1 million is comprised of $4.2 million in cash and the balance in seller financing. During the six months ended June 30, 2001, we paid approximately $22.3 million related to contingent consideration from earlier acquisitions of which $0.6 million was reflected as additional goodwill and $21.7 million reflected as a reduction in other current liabilities. During the six months ended June 30, 2000, we completed certain acquisitions which have been accounted for as purchases. The fair value of the net assets excluding goodwill acquired totaled $1.0 million and was comprised primarily of $3.3 million of accounts receivable, $1.8 million of property and equipment, $0.5 million of other assets and $1.4 million in cash, offset by $6.0 million of assumed liabilities. The excess of the purchase price over the fair value of net assets acquired was $16.4 million and was allocated to goodwill. The total purchase price of $17.4 million was comprised of $12.1 million in cash, $4.7 million in stock and $0.6 million in seller financing. We also issued 183,759 shares of common stock with a value of $14.9 million related to the payment of contingent consideration from earlier acquisitions. Of the $14.9 million, $0.2 million was recorded as a reduction of other current liabilities and $14.7 million as additional goodwill. During the six months ended June 30, 2000, we paid approximately $6.7 million related to contingent consideration for earlier acquisitions of which $5.2 was reflected as additional goodwill and $1.5 reflected as a reduction in other current liabilities. The accompanying notes are an integral part of these consolidated financial statements.
MASTEC, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1 - Basis for Presentation of Consolidated Financial Statements The accompanying unaudited consolidated financial statements of MasTec, Inc. have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions for Form 10-Q and Rule 10-01 of Regulation S-X. They do not include all information and notes required by generally accepted accounting principles for complete financial statements and should be read together with the audited financial statements and notes thereto included in our annual report on Form 10-K for the year ended December 31, 2000. The balance sheet data as of December 31, 2000 was derived from audited financial statements but does not include all disclosures required by generally accepted accounting principles. Certain reclassifications have been made to conform to the 2001 presentation. The financial information furnished reflects all adjustments, consisting only of normal recurring accruals, which are, in the opinion of management, necessary for a fair presentation of the financial position, results of operations and cash flows for the quarterly periods presented. The results of operations for the periods presented are not necessarily indicative of our future results of operations for the entire year. Our comprehensive income (loss) for the six months ended June 30, 2001 and 2000 was ($0.6) million and $32.6 million, respectively. The components of comprehensive income (loss) are net income (loss) and foreign currency translation adjustments. In July 2001, the Financial Accounting Standards Board (the FASB) issued SFAS No. 141, Business Combinations. SFAS No. 141 requires that all business combinations initiated after June 30, 2001, be accounted for using the purchase method. The FASB also issued SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 142 requires that goodwill be assessed at least annually for impairment by applying a fair-value based test. Goodwill will no longer be subject to amortization over its estimated useful life. In addition, acquired intangible assets are required to be recognized and amortized over their useful lives if the benefit of the asset is based on contractual or legal rights. While most provisions of SFAS No. 142 are effective for the Company beginning January 1, 2002, goodwill and intangible assets acquired after June 30, 2001, will be subject immediately to the non-amortization and amortization provisions of the statement, respectively. The Company is currently analyzing the provisions of SFAS No. 142 and has not yet made a determination of the impact the adoption will have on the consolidated financial statements.
MASTEC, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 2 - Debt Debt is comprised of the following (in thousands): <TABLE> <C> <C> <C> June 30, December 31, 2001 2000 --------- --------- Revolving credit facility at LIBOR plus 1.0% (4.75% at June 30, 2001 and 7.64% at December 31, 2000) $ 65,221 $ 7,000 Other bank facilities at LIBOR plus 1.50% (5.36% at June 30, 2001 and 8.06% at December 31, 2000) 2,077 517 Notes payable for equipment, at interest rates from 7.5% to 8.5% due in installments through the year 2004 4,368 6,161 Notes payable for acquisitions, at interest rates from 7.0% to 8.0% due in installments through February 2002 2,796 2,362 7.75% senior subordinated notes due February 2008 195,818 195,805 --------- --------- Total debt 270,280 211,845 Less current maturities (70,943) (5,685) --------- --------- Long-term debt $ 199,337 $ 206,160 ========= ========= </TABLE> We have a credit facility that provides for borrowings up to an aggregate of $100.0 million. Amounts outstanding under the revolving credit facility mature on June 9, 2002. We are currently negotiating with our existing bank group to amend the existing facility to extend the maturity date and modify other terms and conditions including certain financial ratio coverages. We are currently required to pay an unused facility fee ranging from .25% to .50% per annum on the facility, depending upon certain financial covenants. The credit facility is secured by a pledge of shares of certain of our subsidiaries. Interest under the credit facility accrues at rates based, at our option, on the agent bank's base rate plus a margin of up to .50% depending on certain financial covenants or 1.0% above the overnight federal funds effective rate, whichever is higher, or its LIBOR Rate (as defined in the credit facility) plus a margin of 1.00% to 2.25%, depending on certain financial covenants. The credit facility and the senior subordinated notes contain customary events of default and covenants which prohibit, among other things, making investments in excess of a specified amount, incurring additional indebtedness in excess of a specified amount, paying dividends in excess of a specified amount, making capital expenditures in excess of a specified amount, creating liens, prepaying other indebtedness, including the senior notes, and engaging in certain mergers or combinations without the prior written consent of the lenders. The credit facility also provides that we must maintain certain financial ratio coverages, requiring, among other things minimum ratios at the end of each fiscal quarter of debt to earnings and earnings to interest expense. Note 3 - Operations by Segments and Geographic Areas The following table sets forth, for the three months and six months ended June 30, 2001 and 2000, certain information about segment results of operations and segment assets (in thousands): <TABLE> <C> <C> <C> <C> <C> <C> Datacom Energy Inter- Network Network national Other Consol- Three Months 2001 Services Services (1) (2) idated - ------------------------------------------------------------------------------- Revenue $276,528 $ 39,726 $ 13,966 $ - $330,220 Depreciation 11,360 1,883 - 321 13,564 Amortization 2,326 222 223 - 2,771 Income (loss) before provision for income taxes and minority interest 6,219(3) 4,171 (274) (13,574) (3,458) Datacom Energy Inter- Network Network national Other Consol- Three Months 2000 Services Services (1) (2) idated - ------------------------------------------------------------------------------- Revenue $249,527 $ 36,891 $ 11,279 $ - $297,697 Depreciation 10,431 2,408 - 344 13,183 Amortization 1,496 202 977 - 2,675 Income (loss) before provision for income taxes and minority interest 35,640 3,486 4,214(4) 6,740 36,600 Datacom Energy Inter- Network Network national Other Consol- Six Months 2001 Services Services (1) (2) idated - ------------------------------------------------------------------------------- Revenue $564,320 $ 75,743 27,369 $ - $667,432 Depreciation 22,640 3,594 - 648 26,882 Amortization 4,496 424 445 283 5,648 Income (loss) before provision for income taxes and minority interest 17,085(3) 7,085 (162) (21,559) 2,449 Capital expenditures 19,139 1,450 52 2,888 23,529 Total assets 724,909 87,434 63,235 89,460 965,038 Datacom Energy Inter- Network Network national Other Consol- Six Months 2000 Services Services (1) (2) idated - ------------------------------------------------------------------------------- Revenue $474,536 $ 74,254 $ 21,601 $ - $570,391 Depreciation 20,519 5,349 - 793 26,661 Amortization 2,766 404 3,006 - 6,176 Income (loss) before provision for income taxes and minority interest 62,697 5,593 3,204(4)(15,183) 56,311 Capital expenditures 25,883 1,835 534 - 28,252 Total assets 540,115 81,769 89,414 109,318 820,616 </TABLE> (1) For the six months ended June 30, 2001 and 2000, consists of our Brazilian operations. As of June 30, 2001 and 2000, total assets for Brazil consisted of $47.1 million and $50.4 million, respectively and the remainder relates to our interest in international assets not related to our core business. (2) Consists of non-core construction and corporate operations, which includes interest expense, net of interest income. For the three months ended June 30, 2001 and 2000, interest expense, net of interest income, was $2.5 million and $3.5 million, respectively, and $4.8 million and $8.2 million for the six months ended June 30, 2001 and 2000, respectively. The three and six months results for the period ended June 30, 2001 include an impairment charge of $6.5 million related to our equity investment in a client. (3) Includes a $16.0 million and $38.0 million reserve charge for the three months and six months ended June 30, 2001, respectively. Additionally, in 2001, margins were impacted by excess personnel and equipment resulting from less than anticipated demand for certain services provided by our datacom services network, cost associated with inefficient workforce, losses on projects not properly bid and inefficiencies due to exiting contracts related to clients experiencing financial difficulties. (4) Includes a $4.5 million net gain on sale of a non-core international asset. There are no significant transfers between geographic areas and segments. Total assets are those assets used in our operations in each segment. Corporate assets include domestic cash and cash equivalents, non-core assets held for sale and notes receivable. Note 4 - Commitments and Contingencies We have lawsuits pending in Florida federal court against Sintel International Corp., a subsidiary of Artcom Technologies, Inc., to recover more than $5.0 million due under a promissory note and for breach of contract. We are also pursuing other claims against Artcom affiliates totaling approximately $4.0 million. Artcom has responded by suing us in federal court in Florida to recover approximately $6.0 million (subject to trebling) it alleges we received as a result of certain allegedly unauthorized transactions by two former employees of Artcom that occurred after we sold the company. In a related matter, the labor union representing the workers of Sistemas e Instalaciones de Telecomunicacion S.A. ("Sintel"), a sister company of Sintel International, has instigated an investigative action with a Spanish federal court alleging that five former members of the board of directors of Sintel, including Jorge Mas, the Chairman of the Board of MasTec, and his brother Juan Carlos Mas, a MasTec executive, approved a series of allegedly unlawful transactions that led to the bankruptcy of Sintel. We are also named as a potentially liable party. The union alleges Sintel and its creditors were damaged in the approximate amount of 13 billion pesetas ($66.0 million at June 30, 2001 exchange rates). Neither we nor our executives have yet been served in the action. In January 2001, we filed suit in Florida state court against Broward County, Florida, to recover approximately $5.0 million for work performed to construct a detention facility for the Broward Sheriff's Office ("BSO"). The BSO filed a separate lawsuit in response to our lawsuit, claiming $13.0 million in damages for alleged delays in constructing the facility. The court in which these actions are pending has dismissed the BSO's complaint without prejudice to refile. In November 1997, we filed a suit against Miami-Dade County in Florida state court alleging breach of contract and seeking damages exceeding $3.0 million in connection with the county's refusal to pay amounts due to us under a multi-year agreement to perform road restoration work for the Miami-Dade Water and Sewer Department ("MWSD"), a department of the county. The county has counterclaimed against us seeking unspecified damages. We are vigorously litigating the actions described above. We are also a party to other pending legal proceedings arising in the normal course of business, none of which we believe is material to our financial position or results of operations. In August, we agreed to pay our former president and chief executive officer $10 million in severance, payable in five equal installments on September 3, 2001 and January 2, April 1, July 1 and October 1, 2002. The agreement provides for a two-year consulting and non-compete period. In July, we agreed to purchase an additional 37% minority interest of our Brazilian joint venture from our joint venture partner for $10.0 million. The purchase price is payable $5.0 million at closing scheduled for no later than August 31, 2001, and $5.0 million in October 2001. Following the closing, we will own 88% of the joint venture. Our operations in Brazil are subject to the risks of political, economic or social instability, including the possibility of expropriation, confiscatory taxation, hyper-inflation or other adverse regulatory or legislative developments, or limitations on the repatriation of investment income, capital and other assets. We cannot predict whether any of such factors will occur in the future or the extent to which such factors would have a material adverse effect on our Brazilian operations. Note 5 - Client Credit Risk Recently, certain of our clients, including competitive local exchange carriers, have filed for bankruptcy or have been experiencing financial difficulties. We review all our clients on a regular basis, and as a result increased our reserves by $16.0 million and $38.0 million during the three and six months ended June 30, 2001, to reflect the fact that clients may be unable to meet their obligations to us in the future. Included in other non-current assets are amounts due from two clients totaling $86.2 million who have defaulted, subsequent to June 30, 2001, under the terms of their financing agreements with us and other lenders. We have stopped substantially all work for these clients. Additionally, we no longer accrue interest income related to these arrangements. Subsequent to June 30, 2001, one of these clients representing $42.5 million of the total and in whom we have a $6.5 million equity investment, announced a layoff of one-fourth of its workforce and is in negotiations with senior lenders regarding a restructuring of its debt. We have taken an impairment charge of $6.5 million related to our equity investment in this client. Should additional clients file for bankruptcy or experience difficulties, or should anticipated recoveries in existing bankruptcy and other workout situations fail to materialize, we could experience reduced cash flows and losses in excess of current reserves. ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Except for historical information, the matters discussed below contain forward-looking statements, such as statements regarding MasTec's future results and anticipated trends in the industries and economies in which MasTec operates. These forward-looking statements are based on MasTec's current expectations and are subject to a number of risks, uncertainties, and assumptions, including that our revenue may differ from that projected, that we may be further impacted by slowdowns in our clients' businesses, deterioration in our clients' financial condition or in the economy in general, our reserves may be inadequate or our equity investments may be impaired and we may experience increased costs associated with realigning our business or may be unsuccessful in those efforts any of which may impact our compliance with our covenants under our outstanding debt. Should one or more of these risks or uncertainties materialize, or should the underlying assumptions prove incorrect, actual results may differ significantly from results expressed or implied in any forward-looking statements made by MasTec. These and other risks are detailed in documents filed by MasTec with the Securities and Exchange Commission, including our registration statement on Form S-3 (No. 333-90027). MasTec does not undertake any obligation to revise these forward-looking statements to reflect future events or circumstances General We are a leading end-to-end voice, video, data and energy network infrastructure solution for a broad range of communications, broadband, energy and other corporate clients. We have a diverse client base representing all the major segments of the industries we serve. We design, build, install, maintain and monitor internal and external networks and transmission facilities for communication, computing and energy systems. We are a national services provider, operating from more than 200 service locations throughout the United States, Canada and Brazil. Results of Operations The following tables state for the periods indicated our consolidated operations in dollar and percentage of revenue terms for 2000 and 2001 (dollars in thousands) : <TABLE> <C> <C> <C> Three Months Ended June 30, Six Months Ended June 30, ---------------------------------- ---------------------------------- 2001 2000 2001 2000 ---------------- --------------- ---------------- ---------------- Revenue $330,220 100.0% $297,697 100.0% $667,432 100.0% $570,391 100.0% Costs of revenue 272,750 82.6 224,933 75.5 538,108 80.6 433,862 76.0 Depreciation 13,564 4.1 13,183 4.4 26,882 4.0 26,661 4.7 Amortization 2,771 0.8 2,675 0.9 5,648 0.9 6,176 1.1 General and adminis- trative expenses 36,164 11.0 21,930 7.4 84,078 12.6 45,042 7.9 Interest expense, net of interest income 2,382 0.7 3,249 1.1 4,661 0.7 7,592 1.3 Other (loss) income, net (6,047) (1.8) 4,873 1.6 (5,606) (0.8) 5,253 0.9 (Loss) income before (benefit) provision for income taxes and minority interest (3,458) (1.0) 36,600 12.3 2,449 0.4 56,311 9.9 Benefit (provision) for income taxes 1,290 0.4 (15,120) (5.1) (1,184) (0.2) (23,499) (4.1) Minority interest 6 - (138) - (130) - 7 - Net (loss) income $ (2,162) (0.6)% $ 21,342 7.2% $ 1,135 0.2% $ 32,819 5.8% </TABLE> Three Months Ended June 30, 2001 Compared to Three Months Ended June 30, 2000 The following table sets forth the revenue and change in revenue by operating segments, in dollar and percentage terms (in thousands): <TABLE> <C> <C> Three Months Ended June 30, Change ------------------- --------------- 2001 2000 $ % -------- -------- -------- ----- Datacom network services $276,528 $249,527 $ 27,001 10.8% Energy network services 39,726 36,891 2,835 7.7 International 13,966 11,279 2,687 23.8 -------- -------- -------- ---- $330,220 $297,697 $ 32,523 10.9% </TABLE> Our revenue was $330.2 million for the three months ended June 30, 2001, compared to $297.7 million for the same period in 2000, representing an increase of $32.5 million or 10.9% primarily due to datacom services. While we experienced growth in the second quarter of 2001, the growth rate was lower than originally anticipated and revenue for the remainder of 2001 is not expected to increase due to a reduction in capital expenditures by incumbent telecom clients and our decision to reduce services to emerging telecommunications carriers. Our costs of revenue were $272.8 million or 82.6% of revenue for the three months ended June 30, 2001, compared to $224.9 million or 75.5% of revenue for the same period in 2000. In 2001, margins were impacted by excess personnel and equipment resulting from less than anticipated demand for certain services provided by our datacom services network, cost associated with inefficient workforce, losses on projects not properly bid and inefficiencies due to exiting contracts related to clients experiencing financial difficulties. Depreciation was $13.6 million or 4.1% of revenue for the three months ended June 30, 2001, compared to $13.2 million or 4.4% of revenue for the same period in 2000. The decline in depreciation as a percentage of revenue in 2001 was due to an increase in our revenue base. Amortization was $2.8 million or 0.8% of revenue for the three months ended June 30, 2001, compared to $2.7 million or 0.9% of revenue for the same period in 2000. Amortization of goodwill net of tax was $2.1 million in 2001 and $1.9 million in 2000. General and administrative expenses were $36.2 million or 11.0% of revenue for the three months ended June 30, 2001, compared to $21.9 million or 7.4% of revenue for the same period in 2000. Included in general and administrative expense in 2001 is a provision of $16.0 million related to reserves for receivables due from clients who have recently filed for bankruptcy or who have experienced difficulties. Excluding the reserve, general and administrative expenses were 6.1% of revenue. The decline in general and administrative expenses as a percentage of revenue in 2001, excluding the provision for bad debts, was due primarily to our ability to continue to support higher revenue with a comparatively lower administrative base. Interest expense, net of interest income, was $2.4 million or 0.7% of revenue for the three months ended June 30, 2001, compared to $3.2 million or 1.1% of revenue for the same period in 2000. The decrease in net interest expense of $0.8 million was due primarily to interest accrued under our financing arrangements with our clients. We have ceased accruing interest income related to these arrangements. Other (expense) income, was $(6.0) million or (1.8)% of revenue for the three months ended June 30, 2001, compared to $4.9 million or 1.6% of revenue for the same period in 2000. In 2001, the loss was primarily due to an impairment charge of $6.5 million related to our equity investment in a client. In 2000, we recognized a net gain of $4.5 million related to non-core international assets. For the three months ended June 30, 2001, our effective tax rate was approximately 40.3% for North American operations and 33.0% for Brazilian operations, compared to 42.0% and 33.0% in 2000 for North American and Brazilian operations, respectively. Six Months Ended June 30, 2001 Compared to Six Months Ended June 30, 2000 The following table sets forth the revenue and change in revenue by operating segments, in dollar and percentage terms (in thousands): <TABLE> <C> <C> <C> Six Months Ended June 30, Change ------------------ --------------- 2001 2000 $ % -------- -------- -------- ----- Datacom network services $564,320 $474,536 $ 89,784 18.9% Energy network services 75,743 74,254 1,489 2.0 International 27,369 21,601 5,768 26.7 $667,432 $570,391 $ 97,041 17.0% </TABLE> Our revenue was $667.4 million for the six months ended June 30, 2001, compared to $570.4 million for the same period in 2000, representing an increase of $97.0 million or 17.0% primarily due to datacom services. While we experienced growth during the six months of 2001, the growth rate was lower than originally anticipated and revenue for the remainder of 2001 is not expected to increase due to a reduction in capital expenditures by incumbent telecom clients and our decision to reduce services to emerging telecommunications carriers. Our costs of revenue were $538.1 million or 80.6% of revenue for the six months ended June 30, 2001, compared to $433.9 million or 76.0% of revenue for the same period in 2000. In 2001, margins were impacted by excess personnel and equipment resulting from less than anticipated demand for certain services provided by our datacom services network, cost associated with inefficient workforce, losses on projects not properly bid and inefficiencies due to exiting contracts related to clients experiencing financial difficulties. Depreciation was $26.9 million or 4.0% of revenue for the six months ended June 30, 2001, compared to $26.7 million or 4.7% of revenue for the same period in 2000. The decline in depreciation as a percentage of revenue in 2001 was due to an increase in our revenue base. Amortization was $5.6 million or 0.9% of revenue for the six months ended June 30, 2001, compared to $6.2 million or 1.1% of revenue for the same period in 2000. Amortization of goodwill net of tax was $4.2 million in 2001 and $4.4 million in 2000. General and administrative expenses were $84.1 million or 12.6% of revenue for the six months ended June 30, 2001, compared to $45.0 million or 7.9% of revenue for the same period in 2000. Included in general and administrative expense in 2001 are provisions totaling $38.0 million related to reserves for receivables due from clients who have recently filed for bankruptcy or who have experienced financial difficulties. Excluding the reserves, general and administrative expenses were 6.9% of revenue. The decline in general and administrative expenses as a percentage of revenue in 2001, excluding the provision for bad debt, was due primarily to our ability to continue to support higher revenue with a comparatively lower administrative base. Interest expense, net of interest income, was $4.7 million or 0.7% of revenue for the six months ended June 30, 2001, compared to $7.6 million or 1.3% of revenue for the same period in 2000. The decrease in net interest expense of $2.9 million was due primarily to interest accrued under our financing arrangements with clients. We have ceased accruing interest income related to these arrangements. Other (expense) income, was $(5.6) million or (0.8)% of revenue for the six months ended June 30, 2001, compared to $5.3 million or 0.9% of revenue for the same period in 2000. In 2001, the loss was primarily due to an impairment charge of $6.5 million related to our equity investment in a client. In 2000, we recognized a net gain of $4.5 million related to non-core international assets. For the six months ended June 30, 2001, our effective tax rate was approximately 40.3% for North American operations and 33.0% for Brazilian operations, compared to 42.0% and 33.0% in 2000 for North American and Brazilian operations, respectively. Financial Condition, Liquidity and Capital Resources Our primary liquidity needs are for working capital, capital expenditures, acquisitions and investments, and debt service. Our primary sources of liquidity are cash flows from operations and borrowings under revolving lines of credit. Net cash used in operating activities was $9.7 million for the six months ended June 30, 2001, compared to $10.6 million for the same period in 2000. Net cash used in operating activities in 2001 and 2000 was due principally to increased working capital needs. We have a credit facility that provides for borrowings up to an aggregate of $100.0 million, under which $32.7 million was available at June 30, 2001. Amounts outstanding under the credit facility mature on June 9, 2002. We are currently negotiating with our existing bank group to amend the existing facility to extend the maturity date and modify other terms and conditions including certain financial ratio coverages. We are currently required to pay an unused facility fee ranging from .25% to .50% annually on the facility, depending upon certain financial covenants. The credit facility contains customary events of default and covenants which prohibit, among other things, making investments in excess of a specified amount, incurring additional indebtedness in excess of a specified amount, paying dividends in excess of a specified amount, making capital expenditures in excess of a specified amount, creating liens, prepaying other indebtedness, including our 7.75% senior subordinated notes, and engaging in certain mergers or combinations without the prior written consent of the lenders. The credit facility also provides that we must maintain financial ratio coverages at the end of each fiscal quarter such as debt to earnings and earnings to interest expense. We also have $200 million, 7.75% senior subordinated notes due in February 2008, with interest due semi-annually. During the six months of 2001, we invested $23.5 million primarily in our fleet to support revenue growth and $27.8 million in acquisitions and investments. We have reflected in other current liabilities additional consideration related to earnouts for acquisitions completed in prior years of approximately $13.9 million that we expect will be paid during 2001 in cash or common stock. In August, we agreed to pay our former president and chief executive officer $10 million in severance, payable in five equal installments on September 3, 2001 and January 2, April 1, July 1 and October 1, 2002. The agreement provides for a two-year consulting and non-compete period. In July, we agreed to purchase an additional 37% interest in our Brazilian joint venture from our joint venture partner for $10.0 million. The purchase price is payable $5.0 million at closing scheduled for no later than August 31, 2001, and $5.0 million in October 2001. Following the closing, we will own 88% of the joint venture Impact of Inflation The primary inflationary factor affecting our operations is increased labor costs. We have not experienced significant increases in labor costs to date. Our Brazilian operations may, at times in the future, be exposed to high inflation or currency devaluations. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK See Note 2 to Consolidated Financial Statements for disclosure about market risk. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS We have lawsuits pending in Florida federal court against Sintel International Corp., a subsidiary of Artcom Technologies, Inc., to recover more than $5.0 million due under a promissory note and for breach of contract. We are also pursuing other claims against Artcom affiliates totaling approximately $4.0 million. Artcom has responded by suing us in federal court in Florida to recover approximately $6.0 million (subject to trebling) it alleges we received as a result of certain allegedly unauthorized transactions by two former employees of Artcom that occurred after we sold the company. In a related matter, the labor union representing the workers of Sistemas e Instalaciones de Telecomunicacion S.A. ("Sintel"), a sister company of Sintel International has instigated an investigative action with a Spanish federal court alleging that five former members of the board of directors of Sintel, including Jorge Mas, the Chairman of the Board of MasTec, and his brother Juan Carlos Mas, a MasTec executive, approved a series of allegedly unlawful transactions that led to the bankruptcy of Sintel. We are also named as a potentially liable party. The union alleges Sintel and its creditors were damaged in the approximate amount of 13 billion pesetas ($66.0 million at June 30, 2001 exchange rates). Neither we nor our executives have yet been served. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS The Annual Meeting of shareholders of MasTec was held on May 8, 2001. The holders of MasTec's common stock, $0.10 par value, were entitled to elect three Class III directors to serve until 2004 and until their successors are elected and qualified. Proxies for 44,202,636 of the 47,719,144 shares entitled to vote were received. The following table sets forth the names of the three persons elected at the Annual Meeting to serve as directors until 2004 and the number of votes cast for or against respect to each person. <TABLE> <C> <C> <C> For Withheld ---------- --------- Joseph P. Kennedy II 42,425,109 1,777,527 Arthur B. Laffer 43,815,655 386,981 Jose S. Sorzano 43,679,344 523,292 </TABLE>
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MASTEC, INC. Date: August 14, 2001 /s/ CARMEN M. SABATER Carmen M. Sabater Executive Vice President - Chief Financial Officer (Principal Financial Officer) Date: August 14, 2001 /s/ ARLENE VARGAS Arlene Vargas Vice President and Controller (Principal Accounting Officer)