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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2012
Commission File Number 001-08106
(Exact name of registrant as specified in its charter)
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 þ No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer, and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ
As of July 30, 2012, MasTec, Inc. had 75,866,261 shares of common stock, $0.10 par value, outstanding.
QUARTER ENDED JUNE 30, 2012
CONDENSED UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
The accompanying notes are an integral part of these condensed unaudited consolidated financial statements.
CONDENSED UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
The accompanying notes are an integral part of these condensed unaudited consolidated financial statements.
CONDENSED UNAUDITED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
The accompanying notes are an integral part of these condensed unaudited consolidated financial statements.
CONDENSED UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
Notes to the Condensed Unaudited Consolidated Financial Statements
Note 1 Business, Basis of Presentation and Significant Accounting Policies
Nature of the Business
MasTec, Inc. (collectively with its subsidiaries, MasTec or the Company) is a leading infrastructure construction company operating mainly throughout North America across a range of industries. The Companys activities include the engineering, building, installation, maintenance and upgrade of energy, utility and communications infrastructure, such as: electrical utility transmission and distribution; power generation; natural gas and petroleum pipeline infrastructure; wireless, wireline and satellite communications; wind farms, solar farms and other renewable energy; industrial infrastructure; and water and sewer systems. MasTecs customers are primarily in the utility, communications and government industries.
Basis of Presentation
The accompanying condensed unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP) for interim financial information and with the instructions for Form 10-Q and Rule 10-01 of Regulation S-X. Pursuant to these rules and regulations, certain information and footnote disclosures normally included in the annual consolidated financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. The accompanying condensed consolidated balance sheet as of December 31, 2011 is derived from the Companys audited financial statements as of that date. Because certain information and footnote disclosures have been condensed or omitted, these condensed unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto as of and for the year ended December 31, 2011 contained in the Companys most recent Annual Report on Form 10-K, as amended. In managements opinion, all normal and recurring adjustments considered necessary for a fair presentation of the financial position, results of operations and cash flows for the periods presented have been included. Interim period operating results do not necessarily indicate the results that may be expected for any other interim period or for the full fiscal year. The Company believes that the disclosures made in these condensed unaudited consolidated financial statements are adequate to make the information not misleading.
Principles of Consolidation
The accompanying condensed unaudited consolidated financial statements include MasTec, Inc. and its subsidiaries and include the accounts of all majority-owned subsidiaries over which the Company exercises control and, when applicable, entities in which the Company has a controlling financial interest. Other parties interests in companies for which MasTec exercises control and has a controlling financial interest are reported as non-controlling interests within shareholders equity. Net income or loss attributable to non-controlling interests is reported as a separate line item below net income. The Companys investments in entities in which the Company does not have a controlling interest, but has the ability to exert significant influence, are accounted for using the equity method of accounting. Equity method investments are recorded as long-term assets in the condensed unaudited consolidated balance sheets. Income or loss from these investments is recorded in other income or expense, net, in the condensed unaudited consolidated statements of operations. The cost method is used for investments in entities in which the Company does not have the ability to exert significant influence. All significant intercompany balances and transactions have been eliminated in consolidation.
In determining whether a group of assets to be disposed of should be presented as a discontinued operation, the Company makes a determination as to whether such assets compromise a component of the entity, which includes an assessment as to whether it has historic operations and cash flows that can be clearly distinguished. The Company also determines whether the cash flows associated with the group of assets will be significantly eliminated from the ongoing operations of the Company as a result of the disposal transaction and whether the Company will have no significant continuing involvement in the operations of the disposed assets after the disposal transaction. If management believes these conditions exist, then the results of operations of the disposed assets, as well as any gain or loss on the disposal transaction, are aggregated for separate presentation apart from the continuing operating results of the Company.
In May 2012, Red Ventures LLC (Red Ventures) exercised its purchase option to acquire MasTecs wholly owned subsidiary, DirectStar TV, LLC (DirectStar), including its subsidiaries (together, the DirectStar Business). The transaction was consummated in June 2012. Accordingly, the DirectStar Business is presented as a discontinued operation in the condensed unaudited consolidated financial statements for all periods presented. See Note 4 Discontinued Operations.
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Key estimates include: the recognition of revenue, in particular, on long-term construction contracts, including estimates to complete and provisions for contract losses; allowances for doubtful accounts; accrued self-insured claims; estimated fair values of goodwill and intangible assets, acquisition-related contingent consideration, investments in equity method investees, securities available for sale and certain convertible debt obligations; asset lives used in computing depreciation and amortization, including amortization of intangible assets; accounting for income taxes; and the estimated impact of contingencies and ongoing litigation. While management believes that such estimates are fair when considered in conjunction with the consolidated financial position and results of operations taken as a whole, actual results could differ from those estimates and such differences may be material to the condensed unaudited consolidated financial statements.
Certain prior year amounts have been reclassified to conform with the current period presentation.
Significant Accounting Policies
Except for adoption of the accounting pronouncements discussed below, there have been no material changes to the significant accounting policies described in the Companys Annual Report on Form 10-K for the year ended December 31, 2011, as amended.
Recently Issued Accounting Standards, Not Adopted as of June 30, 2012
In July 2012, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2012-02 Intangibles Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment (ASU 2012-02). ASU 2012-02 permits an entity to first assess qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired before performing quantitative impairment testing. The more-likely-than-not threshold is defined as having a likelihood of greater than 50%. ASU 2012-02 is effective for fiscal years beginning after September 15, 2012, with early adoption permitted. The Company is currently evaluating the potential impact of ASU 2012-02 on its indefinite-lived intangible asset impairment assessment methodology.
Recently Adopted Accounting Pronouncements
In May 2011, the FASB issued ASU 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (ASU 2011-04). The objective of ASU 2011-04 is to converge guidance of the FASB and the International Accounting Standards Board on fair value measurement and disclosure. This update changes the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and disclosing information about fair value measurements; clarifies the FASBs intent about the application of existing fair value measurement requirements; and changes particular principles or requirements for measuring fair value or for disclosing information about fair value measurements. ASU 2011-04, which the Company adopted as of January 1, 2012, is effective prospectively for interim and annual periods beginning after December 15, 2011. See fair value disclosures in Note 6 Fair Value of Financial Instruments.
In June 2011, the FASB issued ASU 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income (ASU 2011-05). The objective of ASU 2011-05 is to improve the comparability, consistency and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income. ASU 2011-05 provides the option to present the total of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of changes in shareholders equity. In December 2011, the FASB issued ASU 2011-12, Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in ASU 2011-05 (ASU 2011-12), which defers the provisions in ASU 2011-05 relating to the presentation of reclassification adjustments. ASU 2011-12 reinstates the requirements for the presentation of reclassifications out of accumulated other comprehensive income that were in place before ASU 2011-05. The remaining provisions of ASU 2011-05 are effective retrospectively for annual periods, and interim periods within those years, beginning after December 15, 2011. ASU 2011-12, which the Company adopted as of January 1, 2012, is effective for reporting periods beginning after December 15, 2011. See the condensed unaudited consolidated statements of comprehensive income for related disclosures.
Note 2 Earnings Per Share
Basic earnings per share is computed by dividing earnings available to MasTecs common shareholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share is computed on the basis of fully diluted shares and earnings, which includes the effect of potentially dilutive issuances of common shares. Potentially dilutive common shares include outstanding stock options and unvested restricted share awards, as calculated under the treasury stock method, as well as shares associated with the Companys outstanding convertible securities.
The following table provides details of the Companys earnings per share calculations for the periods indicated (in thousands, except per share amounts). Note that earnings per share calculations may contain slight summation differences due to rounding.
A total of 136,158 and 1,066 weighted average anti-dilutive common stock equivalents were not included in the Companys diluted earnings per share calculations for the three and six months ended June 30, 2012, respectively. There were no weighted average anti-dilutive common stock equivalents for the three or six months ended June 30, 2011.
Treasury Stock and Share Activity
During the fourth quarter of 2011, the Companys Board of Directors authorized a $150 million share repurchase plan, under which the Company repurchased 4.6 million shares of common stock for $75.0 million during the year ended December 31, 2011. During the second quarter of 2012, the Company repurchased an additional 2.9 million shares under this plan for an aggregate purchase price of $43.8 million. The repurchased shares are held in the Companys treasury. As of June 30, 2012, approximately $31.2 million remained available for share repurchases under this plan.
A summary of share activity for the six months ended June 30, 2012 is as follows (in thousands):
In July 2012, the Company repurchased an additional 2.0 million shares for an aggregate purchase price of $31.2 million, which completed the share repurchase plan.
Senior Convertible Notes Diluted Share Impact
The Company had convertible notes outstanding during each of the three and six months ended June 30, 2012 and 2011. During the first quarter of 2011, the Company exchanged $105.3 million of its original 4.0% senior convertible notes (the Original 4.0% Notes) and $97.0 million of its original 4.25% senior convertible notes (the Original 4.25% Notes and, together with the Original 4.0% Notes, the Original Notes) for identical principal amounts of new 4.0% and 4.25% senior convertible notes (the New 4.0% Notes and the New 4.25% Notes, respectively and, collectively, the New Notes). The terms of the New Notes are substantially identical to the Original Notes, except that the New Notes have an optional physical (common share), cash or combination settlement feature and contain certain conditional conversion features. Due to the optional cash settlement feature and managements intent to settle the principal amount thereof in cash, the conversion shares underlying the outstanding principal amount of the New Notes, totaling approximately 13.0 million shares, are not required to be included in the Companys diluted share count. If, however, the Companys average stock price per share for the corresponding period exceeds the $15.76 conversion price for the New 4.0% Notes or the $15.48 conversion price for the New 4.25% Notes, the resulting amount, in shares, of the premium over the principal amount is included in the Companys diluted share count (premium shares).
The number of common shares issuable upon conversion of the Companys Original Notes is reflected in the calculation of diluted earnings per share for the corresponding periods by application of the if-converted method to the extent their effect on the computation of earnings per share from continuing operations is dilutive. Under the if-converted method, net income from continuing operations is adjusted to add back the after-tax amount of interest recognized in the period associated with the convertible notes, and correspondingly, the convertible notes are assumed to have been converted with the resulting common shares added to weighted average shares outstanding. Premium shares associated with the New Notes are reflected in the calculation of diluted earnings per share to the extent that the Companys average stock price for the corresponding period exceeded the respective conversion prices of the New Notes, beginning with the date of issuance, or the beginning of the period, as applicable.
The following table summarizes the principal amounts of the Companys outstanding convertible notes for the periods indicated, including their respective classification within the computation of earnings per share for each period (in millions):
The Companys average stock price for the three and six month periods ended June 30, 2012 and 2011 exceeded the conversion prices of the New Notes. The number of premium shares included in the Companys diluted share count varies with fluctuations in the Companys actual share price for the related periods. Higher share prices result in a greater number of equivalent premium shares. Details of the calculation underlying the number of premium shares included in the Companys diluted share count for the periods indicated are as follows (in thousands, except per share amounts):
Note 3 Acquisitions and Other Investments
Allocations of purchase prices for acquisitions are based on estimates of the fair value of consideration paid and the net assets acquired and are subject to adjustment upon finalization of these fair value estimates. During the second quarter of 2011, the Company acquired certain businesses, as discussed below and in Note 3 Acquisitions and Other Investments of the Companys financial statements included in its Annual Report on Form 10-K, as amended, for the year ended December 31, 2011. During the second quarter of 2012, the Company revised its preliminary allocations for certain of these acquisitions based on information about the facts and circumstances existing as of the respective dates of such acquisitions and for purchase price adjustments based on the final assets and net working capital, as prescribed by the relevant purchase agreements. These adjustments resulted in the recognition of, or adjusted the fair values of, certain acquired assets and liabilities, resulting in the revision of comparative prior period financial information. The effect of measurement period adjustments to the allocation of purchase price is as if the adjustments had been taken into account on the date of acquisition. All changes that do not qualify as measurement period adjustments are included in current period earnings.
In November 2010, MasTec entered into a membership interest purchase agreement and invested $10 million in exchange for a 33% voting interest in EC Source Services LLC (EC Source) and a two-year option (the EC Source Merger Option) that granted MasTec the right, but not the obligation, to acquire the entirety of EC Sources outstanding equity pursuant to the terms of a merger agreement. On April 29, 2011, the Company exercised its EC Source Merger Option and, effective May 2, 2011, acquired the remaining 67% membership interest in EC Source for a total ownership percentage of 100%, for an aggregate purchase price composed of 5,129,642 shares of MasTec common stock, $0.3 million in cash and a five year earn-out, valued at $25.0 million as of the date of acquisition. In addition, we assumed $8.6 million of debt, which relates primarily to equipment loans payable to the former owner of EC Source. The fair value of the 33% equity investment in EC Source was estimated to be $39.6 million immediately before the closing of the merger, resulting in a gain on remeasurement of $29.0 million, which was reflected as a component of other income in the Companys results of operations during the second quarter of 2011.
The following table summarizes the estimated fair value of consideration paid and the final allocation of purchase price to the fair value of assets acquired and liabilities assumed as of the date of acquisition (in millions).
EC Sources earnings have been consolidated as of the effective date of the acquisition, May 2, 2011. Prior to the effective date of the acquisition, the Companys investment in EC Source was accounted for under the equity method of accounting.
Effective April 1, 2011, MasTec acquired all of the issued and outstanding shares of Fabcor TargetCo Ltd. (Fabcor Parent and, together with its wholly-owned Canadian subsidiaries, Fabcor 2001, Inc. and Fabcor Pipelines B.C. Inc., Fabcor) for an aggregate purchase price composed of approximately $24.2 million in cash, including a $1.4 million post-closing purchase price adjustment based on Fabcors final closing tangible net worth and net working capital, recorded in the second quarter of 2012, and a five year earn-out, valued at $16.9 million as of the date of acquisition. In addition, we assumed $7.0 million of debt, which was repaid immediately.
The following table summarizes the estimated fair value of consideration paid and the allocation of purchase price as of the date of acquisition (in millions).
Fabcors earnings have been consolidated as of the effective date of the acquisition, April 1, 2011.
Other 2011 Acquisitions
During the second quarter of 2012, $3.9 million of additional goodwill and workers compensation liabilities related to the Halsted acquisition were recorded in the second quarter of 2012 as a result of final claims data for the pre-acquisition period. Also, the estimated fair value of the contingent consideration arrangement related to Optima was increased by $1.5 million in the second quarter of 2012 to reflect additional information and analysis. Refer to Note 3 Acquisitions and Other Investments of the Companys financial statements included in its Annual Report on Form 10-K, as amended, for the year ended December 31, 2011 for details of the Halsted and Optima acquisitions.
Revenues of $44.5 million and net income of $3.3 million resulting from the year over year incremental impact of the Companys 2011 acquisitions are included in MasTecs consolidated results of operations for the three months ended June 30, 2012, and revenues of $164.7 million and net income of $11.6 million resulting from the year over year incremental impact of the Companys 2011 acquisitions are included in MasTecs consolidated results of operations for the six months ended June 30, 2012.
Through a 60%-owned consolidated subsidiary, MasTec acquired a 34% interest in a rock extraction business in Panama (for a net beneficial ownership interest of 20.4%) during 2010. This investment is accounted for under the equity method of accounting. MasTec performed construction services for this investee and recognized revenues of approximately $0.4 million and $0.9 million, respectively, for the three months ended June 30, 2012 and 2011 and recognized revenues of $1.2 million and $1.7 million, respectively, for the six months ended June 30, 2012 and 2011. As of June 30, 2012 and December 31, 2011, receivables from this investee of approximately $7.3 million and $6.7 million, respectively, were outstanding, of which $4.9 million and $4.3 million, respectively, were classified as long term.
The Company has certain other cost and equity method investments. None of these investments were material individually or in the aggregate as of June 30, 2012 and no impairment charges related to these investments were recorded during the three or six months ended June 30, 2012 or 2011.
Note 4 Discontinued Operations
In May 2012, Red Ventures exercised its option to acquire from the Company all of the issued and outstanding equity interests in DirectStar, which provides marketing and sales services on behalf of DIRECTV®. The sale of DirectStar to Red Ventures was consummated in June 2012. The Company sold DirectStar for a net purchase price of $98.9 million in cash. The DirectStar Business is presented as a discontinued operation in the Companys condensed unaudited consolidated financial statements for all periods presented.
The following is a summary of assets and liabilities associated with the DirectStar Business as of the dates as indicated (in millions):
Results from discontinued operations for the periods indicated were as follows (in millions):
Included within the above results from discontinued operations are $0.1 million of depreciation and amortization for each of the three month periods ended June 30, 2012 and 2011 and $0.1 million and $0.2 million of depreciation and amortization for the six month periods ended June 30, 2012 and 2011, respectively.
Note 5 Goodwill and Other Intangible Assets
The following table sets forth information for MasTecs goodwill and intangible assets as of the dates indicated (in millions):
The following table provides a reconciliation of changes in goodwill and other intangible assets for the period indicated (in millions):
Note 6 Fair Value of Financial Instruments
The Companys financial instruments include cash and cash equivalents, accounts and notes receivable, cash collateral deposited with insurance carriers, cash surrender value of life insurance policies, auction rate securities, cost and equity method investments, deferred compensation plan assets and liabilities, accounts payable and other current liabilities, acquisition-related contingent consideration and debt obligations.
Fair value is the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The fair value guidance establishes a valuation hierarchy, which requires maximizing the use of observable inputs. The three levels of inputs that may be used are:
Level 1 Quoted market prices in active markets for identical assets or liabilities.
Level 2 Observable market based inputs or other observable inputs.
Level 3 Significant unobservable inputs that cannot be corroborated by observable market data. These values are generally determined using valuation models incorporating managements estimates of market participant assumptions.
Carrying amounts and estimated fair values of financial instruments as of the dates indicated were as follows (in millions):
The following methods and assumptions were used to estimate the fair values of financial instruments:
Cash Surrender Value of Life Insurance Policies. Cash surrender values of life insurance policies are based on current cash surrender values as quoted by insurance carriers. Life insurance policies support the Companys split dollar agreements and deferred compensation plan assets.
Auction Rate Securities. The fair value of the Companys auction rate securities was estimated by an independent valuation firm, Houlihan Capital Advisors, LLC, using a probability weighted discounted cash flow model. See Note 7 Securities Available for Sale.
Acquisition-Related Contingent Consideration. Acquisition-related contingent consideration in the table above represents the estimated fair value of additional future earn-outs payable for acquisitions of businesses beginning with the acquisition of Precision Pipeline LLC in November of 2009. The fair value of such acquisition-related contingent consideration is based on managements estimates and entity-specific assumptions, and is evaluated on an ongoing basis.
Debt. The estimated fair values of the Companys 7.625% senior notes and Original Notes are based on quoted market prices. The estimated fair value of the debt component of the Companys New Notes is calculated using an income approach, based on a discounted cash flow model. This method is based on managements estimates of the Companys market interest rate for a similar nonconvertible instrument. See Note 10 Debt.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
As of June 30, 2012, the Company held certain assets and liabilities required to be measured at fair value on a recurring basis. The fair values of financial assets and liabilities measured on a recurring basis were determined using the following inputs as of the dates indicated (in millions):
The following tables provide a reconciliation between the beginning and ending balances of items measured at fair value on a recurring basis using significant unobservable inputs as of the dates indicated (in millions).
Three Months Ended June 30, 2012 and 2011:
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
Assets and liabilities recognized or disclosed at fair value on a nonrecurring basis include items such as equity method investments, goodwill and long-lived assets, which are initially measured at fair value and are subsequently remeasured in the event of an impairment or other measurement event, if applicable. The Company had no significant assets or liabilities measured at fair value on a nonrecurring basis during the three or six month periods ended June 30, 2012 or 2011.
Note 7 Securities Available For Sale
The Companys securities available for sale consist of auction rate securities, which represent interests in pools of student loans guaranteed by the U.S. government under the Federal Family Education Loan Program and a structured finance security. The structured finance security has an attached credit default swap under which the principal value of the structured finance security would be partially or fully forfeited at net default rates on the underlying corporate debt obligations ranging from 8% to 9%. The net default rate as of June 30, 2012 was estimated to be 6.23%. Both the structured finance security and the credit default swap are collateralized by investment grade credit-linked notes made up of floating rate international bank notes.
Due to liquidity issues in the auction rate securities market, there was insufficient observable market data to determine the fair values of the Companys auction rate securities as of June 30, 2012 or December 31, 2011. Therefore, their respective fair values were estimated by an independent valuation firm, Houlihan Capital Advisors, LLC, using a probability weighted discounted cash flow model. This valuation is sensitive to market conditions and managements judgment and can change significantly based on the assumptions used. The following tables set forth the fair values of the Companys auction rate securities by type of security and underlying credit rating as of the dates indicated (in millions):
As of June 30, 2012, the yields on the Companys auction-rate securities ranged from 1.65% to 2.74%. These yields represent the predetermined maximum reset rates that occur upon auction failures according to the specific terms within each securitys governing documents. The issuers have been making interest payments when due.
Auction Rate Securities Other Than Temporary Losses
If unrealized losses are believed to be other-than-temporary, an impairment charge is recorded. There were no other than temporary charges recognized for the three or six months ended June 30, 2012 or 2011. The Companys structured finance security, for which cumulative credit losses of $3.3 million have been recognized, had a par value of $5.0 million and a cost basis of $1.7 million as of June 30, 2012.
Auction Rate Securities Reconciliation of Cost Basis to Fair Value
The cost basis, gross cumulative unrealized (losses) gains and estimated fair values of the Companys auction rate securities as of the dates indicated were as follows (in millions):
As of June 30, 2012, contractual maturities of the Companys student loan auction rate securities ranged from 16 to 35 years, and for the structured finance security, 5 years.
Note 8 Accounts Receivable, Net of Allowance
Accounts receivable, net of allowance, classified as current, consists of the following (in millions):
Retainage, which has been billed, but is not due until completion of performance and acceptance by customers, is generally expected to be collected within one year. Receivables expected to be collected beyond one year are recorded in other long-term assets. The Company maintains an allowance for doubtful accounts for estimated losses, both for specific customers and as a reserve against other balances, resulting from the inability of customers to make required payments.
The Company has trade receivables for certain pay-when-paid projects, which provide for payment through September 2016. These receivables have been recorded at their respective net present values, with the non-current portion recorded within other long-term assets. Imputed interest is recognized as interest income as earned. As of June 30, 2012, $6.6 million was outstanding, with $4.8 million recorded in other long-term assets.
Certain of the Companys international subsidiaries utilize factoring of accounts receivable as short-term financing mechanisms. No material factoring transactions were entered into during the three or six months ended June 30, 2012, and the amount of related receivables outstanding as of June 30, 2012 was not material.
Note 9 Property and Equipment, Net
Property and equipment, net, including property and equipment held under capital leases, is composed of the following as of the dates indicated (in millions):
Depreciation expense for the three months ended June 30, 2012 and 2011 was $19.2 million and $14.7 million, respectively. Depreciation expense for the six months ended June 30, 2012 and 2011 was $37.3 million and $27.8 million, respectively.
Note 10 Debt
The carrying value of debt is composed of the following as of the dates indicated (in millions):
As of June 30, 2012, the Company had outstanding under its credit facility, also referred to as the Credit Facility, revolving loans of $63.8 million and approximately $104.0 million of letters of credit. The remaining $432.2 million of Credit Facility borrowing capacity was available in its entirety for revolving loans or up to $246.0 million of new letters of credit. Outstanding letters of credit mature at various dates and most have automatic renewal provisions, subject to prior notice of cancellation. As of June 30, 2012, interest on outstanding revolving loans accrued at a rate of approximately 3.87% per annum, and interest on outstanding letters of credit accrued at either 1.125% or 2.25% per annum, based on the type of letter of credit issued. The unused facility fee as of June 30, 2012 was 0.40%.
Senior Convertible Notes
During the first quarter of 2011, the Company exchanged $105.3 million of its Original 4.0% Notes and $97.0 million of its Original 4.25% Notes for identical principal amounts of New 4.0% Notes and New 4.25% Notes. The Company has divided the principal balance of the New Notes between the fair value of the debt component and the fair value of the common stock conversion feature. The resulting total debt discount of $17.4 million for the New Notes will be accreted to interest expense over the remaining terms of the New Notes. This will increase interest expense during the terms of the New Notes above their 4.0% and 4.25% cash coupon interest rates to an effective combined interest rate of 6.73%. The fair value of the common stock conversion feature is recorded as a component of shareholders equity. The carrying values of the debt and equity components of the New Notes as of June 30, 2012 were as follows (in millions):
Debt Guarantees and Covenants
The Companys 7.625% senior notes, New Notes and Original Notes are fully and unconditionally guaranteed on an unsecured, unsubordinated, joint and several basis by the Companys existing and future 100%-owned direct and indirect domestic subsidiaries that are guarantors of the Companys Credit Facility or other outstanding indebtedness. See supplemental financial information in Note 17 Supplemental Guarantor Financial Information.
MasTec was in compliance with all provisions and covenants pertaining to its outstanding debt instruments as of June 30, 2012 and December 31, 2011.
Interest Expense, Net
Details of interest expense, net, classified within continuing operations for the periods indicated is as follows (in millions):
Note 11 Stock-Based Compensation
The Company has certain stock-based compensation plans that have stock options and restricted share awards outstanding as of June 30, 2012. Under plans currently in effect, there were a total of 4,174,586 shares available for grant as of June 30, 2012. Details of total stock-based compensation expense and related tax benefits for the periods indicated were as follows (in millions):
During the three and six month periods ended June 30, 2012, the Company granted 30,651 and 170,004 restricted share awards, respectively. Total unearned compensation related to restricted share awards as of June 30, 2012 was $7.4 million, which is expected to be recognized over a weighted average period of approximately 2 years. The intrinsic value of options exercised during each of the three and six month periods ended June 30, 2012 was $0.3 million. Proceeds received from options exercised during the three and six month periods ended June 30, 2012 totaled $0.5 million and $0.8 million, respectively.
Note 12 Comprehensive Income
Comprehensive income consists of net income, foreign currency translation adjustments, unrealized gains and losses from securities available for sale, and losses from non-controlling interests. See condensed unaudited consolidated statements of comprehensive income for details. Accumulated other comprehensive losses of $7.9 million as of both June 30, 2012 and December 31, 2011, were primarily attributable to unrealized losses on securities available for sale, net of tax, and foreign currency translation losses and/or gains.
Note 13 Income Taxes
The Companys consolidated tax rates on income from continuing operations for the three month periods ended June 30, 2012 and 2011 were 39.7% and 39.2%, respectively, and for the six month periods ended June 30, 2012 and 2011 were 39.8% and 39.2%, respectively. In determining the quarterly provision for income taxes, management uses an estimated annual effective tax rate based on forecasted annual pre-tax income, permanent tax differences, statutory tax rates and tax planning opportunities in the various jurisdictions in which the Company operates. The impact of significant discrete items is separately recognized in the quarter(s) in which they occur.
Note 14 Commitments and Contingencies
In addition to the matters discussed below, MasTec is subject to a variety of legal cases, claims and other disputes that arise from time to time in the ordinary course of its business. MasTec cannot provide assurance that it will be successful in recovering all or any of the potential damages it has claimed or in defending claims against it
Legacy Litigation. MasTec is subject to litigation, some of which dates from the period 2001 through 2006.
Outstanding Legacy Litigation
The Company is vigorously pursuing claims in excess of $5 million against Aon Risk Services, Inc. of Florida, an insurance broker, for breach of contract and breach of fiduciary duty for the losses arising from a denial of insurance coverage. Discovery is ongoing.
The labor union representing the workers of Sistemas e Instalaciones de Telecomunicacion S.A. (Sintel), a former MasTec subsidiary that was sold in 1998, filed a claim that initiated an investigative action with the Audiencia Nacional, a Spanish federal court, against Telefonica and dozens of other defendants including current and former officers and directors of MasTec (including Jorge Mas, Chairman of the Companys Board of Directors) and Sintel, relating to Sintels 2000 bankruptcy. The labor union alleged Sintel and its creditors were damaged in the approximate amount of 300 million euros (approximately $380 million as of June 30, 2012). In June 2009, the Audiencia Nacional issued an order that the trial phase was commencing against the MasTec defendants and other defendants.
On June 14, 2012, the Sintel trial began. As a consequence of the MasTec defendants arguments and presentation of evidence, a meeting with the prosecutor took place on July 24, 2012. At that meeting, a tentative agreement (the Agreement) was reached which would result in the exoneration of the MasTec defendants (including an acknowledgement that the MasTec defendants acted in good faith and did not cause Sintels bankruptcy) and the dismissal of all the charges against them (including Jorge Mas, our Chairman). The trial is expected to continue in November 2012 against the non-MasTec defendants.
In order to avoid significant legal fees and the potential liabilities resulting from the actions of other Spanish defendants for which MasTec may be financially responsible under a theory of subsidiary (or vicarious) liability, the uncertainty of a trial before a foreign tribunal such as the Audiencia Nacional and to eliminate management time devoted to this matter, we entered into the Agreement. MasTec expects to record a pre-tax charge of approximately $10 million in the third quarter of 2012, if consummated. As part of this Agreement, MasTec would be dismissed from the case with prejudice. This Agreement is subject to further negotiation and satisfaction of several conditions. There can be no assurance that the Agreement will be completed.
Other Outstanding Litigation
During 2010 and 2011, pursuant to a written contract, the Company provided certain construction services for the City of Marathon in Marathon, Florida. We completed those services in 2011. At the end of 2011, the Company had still not been paid for all of the work performed on the project. In December 2011, the Company filed a lawsuit seeking in excess of $6 million against the City of Marathon for breach of contract and against the City of Marathons engineers for professional negligence. The City of Marathon and the engineers filed answers denying liability and claiming that the Company breached the contract. The Company is pursuing and will continue to vigorously pursue these claims.
Other Commitments and Contingencies
Leases. In the ordinary course of business, the Company enters into non-cancelable operating leases for certain of its facility, vehicle and equipment needs, including related party leases. These leases allow the Company to conserve cash by paying a monthly rental fee for use of the related facilities, vehicles and equipment rather than purchasing them. The terms of these agreements vary from lease to lease, including some with renewal options and escalation clauses. The Company may decide to cancel or terminate a lease before the end of its term, in which case the Company is typically liable for the remaining lease payments under the term of the lease. Rent expense related to operating leases, including short-term rentals, reflected within continuing operations was approximately $61.3 million and $44.7 million for the three month periods ended June 30, 2012 and 2011, respectively, and was approximately $100.7 million and $85.4 million for the six month periods ended June 30, 2012 and 2011.
Letters of Credit. In the ordinary course of business, the Company is required to post letters of credit for its insurance carriers, surety bond providers and in support of performance under certain contracts. Such letters of credit are generally issued by a bank or similar financial institution. The letter of credit commits the issuer to pay specified amounts to the holder of the letter of credit if the holder claims that the Company has failed to perform specified actions. If this were to occur, the Company would be required to reimburse the issuer of the letter of credit, which, depending upon the circumstances, could result in a charge to earnings. As of June 30, 2012 and December 31, 2011, the Company had $104.0 million and $90.0 million, respectively, of standby letters of credit issued under its Credit Facility. The Company is not aware of any material claims relating to outstanding letters of credit as of June 30, 2012 and December 31, 2011.
Performance and Payment Bonds. In the ordinary course of business, MasTec is required by certain customers to provide performance and payment bonds for some of the Companys contractual commitments related to projects in process. These bonds provide a guarantee to the customer that the Company will perform under the terms of a contract and that the Company will pay subcontractors and vendors. If the Company fails to perform under a contract or to pay subcontractors and vendors, the customer may demand that the surety make payments or provide services under the bond. The Company must reimburse the surety for any expenses or outlays it incurs. As of June 30, 2012, the estimated cost to complete projects secured by the Companys $981.5 million in performance and payment bonds was $283.8 million. As of December 31, 2011, the estimated cost to complete projects secured by the Companys $905.7 million in performance and payment bonds was $330.0 million.
Self-Insurance. MasTec maintains insurance policies subject to per claim deductibles of $1 million for its workers compensation policy, $2 million for its general liability policy and $2 million for its automobile liability policy. The Company has excess umbrella coverage up to $100 million per claim and in the aggregate. As of June 30, 2012 and December 31, 2011, MasTecs liability for unpaid claims and associated expenses, including incurred but not reported losses related to its workers compensation, general liability and automobile liability insurance policies, was $47.8 million and $39.1 million, respectively, of which $31.5 million and $22.3 million, respectively, was reflected within non-current other liabilities.
MasTec also maintains an insurance policy with respect to employee group health claims, which is subject to annual per employee maximum losses of $0.4 million. MasTecs liability for employee group claims as of June 30, 2012 and December 31, 2011 was $1.6 million and $1.4 million, respectively.
The Company is required to post letters of credit and provide cash collateral to certain of its insurance carriers and to obtain surety bonds in certain states in which the Company is self-insured. As of both June 30, 2012 and December 31, 2011, these letters of credit amounted to $51.4 million. In addition, cash collateral deposited with insurance carriers, which is included in other long-term assets in the consolidated balance sheets, amounted to $2.0 million as of both June 30, 2012 and December 31, 2011. Outstanding surety bonds related to workers compensation self-insurance programs amounted to $7.1 million as of both June 30, 2012 and December 31, 2011.
Employment Agreements. The Company has employment agreements with certain executives and other employees, which provide for compensation and certain other benefits and for severance payments under certain circumstances. Certain employment agreements also contain clauses that become effective upon a change of control of the Company. Upon the occurrence of any of the defined events in the various employment agreements, the Company would be obligated to pay certain amounts to the relevant employees, which vary with the level of the employees respective responsibility.
Collective Bargaining Agreements and Multi-Employer Pension Plans. Certain of MasTecs subsidiaries are party to various collective bargaining agreements with unions representing certain of their employees. The agreements require the subsidiaries party to the agreements to pay specified wages, provide certain benefits to their union employees and contribute certain amounts to multi-employer pension plans and employee benefit trusts. The multi-employer pension plan contribution rates are determined annually and assessed on a pay-as-you-go basis based on union employee payrolls. The required amount of future contributions cannot be determined for future periods because the number of union employees employed at any given time, and the plans in which they may participate, vary depending upon the location and number of ongoing projects and the need for union resources in connection with those projects. The collective bargaining agreements expire at various times and have typically been renegotiated and renewed on terms similar to the ones contained in the expiring agreements.
The Employee Retirement Income Security Act of 1974, as amended by the Multi-Employer Pension Plan Amendments Act of 1980, subjects employers to substantial liabilities in the event of the employers complete or partial withdrawal from, or upon termination of, such plans. Under current law regarding employers who are contributors to multi-employer defined benefit plans, a plans termination, an employers voluntary withdrawal from, or the mass withdrawal of all contributing employers from, an underfunded multi-employer defined benefit plan requires participating employers to make payments to the plan for their proportionate share of the multi-employer plans unfunded vested liabilities. Furthermore, the Pension Protection Act of 2006 added new funding rules generally applicable to plan years beginning after 2007 for multi-employer plans that are classified as endangered, seriously endangered, or critical status. If plans in which the Companys subsidiaries participate are in critical status, benefit reductions may apply and/or the Company could be required to make additional contributions if the plans are determined to be underfunded.
Based upon the information available to the Company from plan administrators as of June 30, 2012, several of the multi-employer pension plans in which the Companys subsidiaries participate are underfunded. The Pension Protection Act requires that underfunded pension plans improve their funding ratios within prescribed intervals based on the level of their underfunding. In addition, if a multi-employer defined benefit plan fails to satisfy certain minimum funding requirements, the Internal Revenue Service may impose on the employers contributing to such plan a nondeductible excise tax of 5% on the amount of the accumulated funding deficiency. The Companys subsidiaries have been notified that certain plans to which they contribute are in critical status and require additional contributions in the form of a surcharge on future benefit contributions required for future work performed by union employees covered by these plans. The amount of additional funds the Company may be obligated to contribute in the future cannot be estimated, as such amounts will be based on future levels of work that require the specific use of those union employees covered by these plans.
During the three and six month periods ended June 30, 2012 and 2011, total contributions to these plans, and the related number of employees covered by these plans, ranged as follows:
On November 15, 2011, the Company, along with other members of the Pipe Line Contractors Association (PLCA), voluntarily withdrew from the Central States Southeast and Southwest Areas Pension Fund (Central States), a defined benefit multi-employer pension plan. In connection with this withdrawal, the Company recorded a $6.4 million withdrawal liability based on an estimate provided by the plan administrator of such liability as of the date of withdrawal. The Company withdrew from the Central States Plan in order to mitigate its liability in connection with the plan, which is in critical status; however, the plan has asserted that the PLCA members did not effectively withdraw on November 15, 2011. Although the Company believes that it legally and effectively withdrew from the plan on November 15, 2011, if the plan were to prevail in its assertion that the Company in fact withdrew after that date, then the amount of the Companys withdrawal liability would increase. In addition, if this plan were to undergo a mass withdrawal, as defined by the Pension Benefit Guaranty Corporation, within the three year period commencing with the beginning of the calendar year during which the Company withdrew from the plan, there could be additional liability. The Company currently does not have plans to withdraw from any other multi-employer pension plan.
Indemnities. The Company generally indemnifies its customers for the services it provides under its contracts, as well as other specified liabilities, which may subject the Company to indemnity claims, liabilities and related litigation. As of June 30, 2012 and December 31, 2011, the Company was not aware of any material asserted or unasserted claims in connection with these indemnity obligations.
Other Guarantees. In the ordinary course of its business, from time to time, MasTec guarantees the obligations of its subsidiaries, including obligations under certain contracts with customers, certain lease obligations and in some states, obligations in connection with obtaining contractors licenses. MasTec also generally warrants the work it performs for a one to two year period following substantial completion of a project. MasTec has not historically accrued any reserves for potential warranty claims as they have been immaterial.
Note 15 Concentrations of Risk
The Company had approximately 310 customers as of June 30, 2012, which included some of the largest and most prominent companies in the communications, utilities and government industries. MasTecs customers include public and private energy providers, pipeline operators, wireless service providers, satellite and broadband operators, local and long distance carriers and government entities. The industries served by MasTecs customers include, among others: utilities (including electrical utility transmission and distribution; power generation; natural gas and petroleum pipeline infrastructure; wind farms, solar farms and other renewable energy; and industrial infrastructure), communications (including wireless, wireline and satellite communications) and government (including water, sewer and other utility and communications work on military bases).
Customer revenue by industry from continuing operations for the periods indicated is as follows (in millions):
Revenue concentration information, as a percent of total consolidated revenue from continuing operations, is as follows:
In addition, the Company derived 12% and 16% of revenues from continuing operations for the three and six month periods ended June 30, 2011 from El Paso Corporation, respectively.
Foreign Operations. The Company has operations in Canada as well as in parts of Latin America and the Caribbean. For the three months ended June 30, 2012 and 2011, revenues of $38.7 million and $20.6 million, respectively, were derived from foreign operations and for the six months ended June 30, 2012 and 2011, revenues of $102.7 million and $22.6 million, respectively, were derived from foreign operations. In addition, the Company held property and equipment in foreign countries valued at $12.7 million as of both June 30, 2012 and December 31, 2011.
Note 16 Related Party Transactions
MasTec leases employees to a customer, in which Jorge Mas and Jose Mas own a minority interest. For the three month periods ended June 30, 2012 and 2011, MasTec charged approximately $137,000 and $108,000, respectively, to the customer, and charged $259,000 and $216,000, respectively, for the six month periods ended June 30, 2012 and 2011. As of June 30, 2012 and December 31, 2011, $899,000 and $860,000, respectively, attributable to this arrangement was included as accounts receivable. The Company additionally provides satellite communication services to this customer. For each of the three month periods ended June 30, 2012 and 2011, revenues relating to this customer were approximately $262,000 and for each of the six month periods ended June 30, 2012 and 2011, revenues relating to this customer were approximately $607,000. As of June 30, 2012 and December 31, 2011, approximately $962,000 and $775,000, respectively, is included as trade accounts receivable for satellite communication services provided to this customer.
Split Dollar and Deferred Bonus Agreements
MasTec has a split dollar agreement and deferred bonus agreement with Jorge Mas. The Company paid approximately $284,000 in connection with these agreements for the three and six months ended June 30, 2012. No payments were made in connection with these agreements for the three month period ended June 30, 2011. For the six month period ended June 30, 2011, MasTec paid approximately $284,000 in connection with the split dollar agreements for Jorge Mas. MasTec also has a split dollar agreement and a deferred bonus agreement with Jose Mas. For the three and six month periods ended June 30, 2012 and 2011, no payments were made in connection with the agreements for Jose Mas.
The Company adjusts the value of life insurance policies associated with the split dollar agreements each period based on their current cash surrender values. The estimated fair value of these life insurance policies as of June 30, 2012 and December 31, 2011 of $8.5 million and $7.9 million, respectively, is included in other assets in the condensed unaudited consolidated balance sheets.
Note 17 Supplemental Guarantor Financial Information
The senior notes, New Notes and Original Notes are fully and unconditionally guaranteed on an unsecured, unsubordinated, joint and several basis by the Companys existing and future 100%-owned direct and indirect domestic subsidiaries that are guarantors of the Companys Credit Facility or other outstanding indebtedness (the Guarantor Subsidiaries). The Companys subsidiaries organized outside of the U.S. and certain domestic subsidiaries (collectively, the Non-Guarantor Subsidiaries) do not guarantee senior notes, New Notes and Original Notes. The subsidiary guarantees with respect to the senior notes, New Notes and Original Notes are subject to release in certain customary circumstances including upon the sale of a majority of the capital stock or substantially all of the assets of the subsidiary guarantor; if the guarantee under our Credit Facility and other indebtedness is released or discharged (other than due to payment under such guarantee); or when the requirements for legal defeasance are satisfied or the obligations are discharged in accordance with the related indentures.
The following supplemental financial information sets forth the condensed consolidating balance sheets and the condensed consolidating statements of operations and comprehensive income and cash flows for the parent company (MasTec, Inc.), the Guarantor Subsidiaries on a combined basis, the Non-Guarantor Subsidiaries on a combined basis and the eliminations necessary to arrive at the information for the Company as reported on a consolidated basis. Eliminations represent adjustments to eliminate investments in subsidiaries and intercompany balances and transactions between or among MasTec, Inc., the Guarantor Subsidiaries and the Non-Guarantor Subsidiaries. Investments in subsidiaries are accounted for using the equity method for this presentation.
CONDENSED UNAUDITED CONSOLIDATING BALANCE SHEET
As of June 30, 2012 (in thousands)
CONDENSED UNAUDITED CONSOLIDATING STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME
For the Six Months Ended June 30, 2012 (in thousands)
CONDENSED UNAUDITED CONSOLIDATING STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME
For the Six Months Ended June 30, 2011 (in thousands)
CONDENSED UNAUDITED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Six Months Ended June 30, 2012 (in thousands)
CONDENSED UNAUDITED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Six Months Ended June 30, 2011 (in thousands)
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of 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. While management believes that these forward-looking statements are reasonable as and when made, there can be no assurance that future developments affecting us will be those that we anticipate. All comments concerning our expectations for future revenues and operating results are based on our forecasts for our existing operations and do not include the potential impact of any future acquisitions or dispositions. 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, and elsewhere in this report and in the Companys Annual Report on Form 10-K for the year ended December 31, 2011, as amended, including those described under Risk Factors in the Form 10-K, as amended, as updated by Item 1A, Risk Factors in this report and other of our SEC filings. 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 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.
The following is a discussion of our business, financial position and results of operations as of and for the three and six months ended June 30, 2012 and 2011. This discussion and analysis should be read in conjunction with the condensed unaudited consolidated financial statements and notes contained in this Form 10-Q and the audited consolidated financial statements and accompanying notes contained in our Form 10-K, as amended, for the year ended December 31, 2011.
We are a leading infrastructure construction company operating mainly throughout North America across a range of industries. Our activities include, but are not limited to, the engineering, building, installation, maintenance and upgrade of energy, utility and communications infrastructure, including: electrical utility transmission and distribution, power generation, natural gas and petroleum pipeline infrastructure, wireless, wireline and satellite communications, wind farms, solar farms and other renewable energy, industrial infrastructure and water and sewer systems. Our customers are primarily in the utility, communications and government industries.
Including our predecessor companies, we have been in business for more than 80 years. We offer our services primarily under the MasTec service mark and, as of June 30, 2012, we had approximately 13,500 employees and approximately 380 locations. We have been consistently ranked among the top specialty contractors by Engineering News-Record for the past five years.
We serve a diversified customer base, which includes some of the leading communications and utility companies in the United States. For the quarter ended June 30, 2012, our top ten customers for our continuing operations were AT&T, DIRECTV®, Mid-American Energy, Energy Transfer Company, Duke Energy, Dominion Virginia Power, Chesapeake Midstream Partners LP, EQT Corporation, DCP Midstream and enXco. We have longstanding relationships with many customers and often provide services under multi-year master service agreements and other service agreements. Because our business is concentrated among relatively few major customers, our business could be negatively impacted if the amount of business we obtain from these customers is reduced or if we complete the required work on projects and cannot replace them with similar projects.
Revenue concentration information, as a percent of total consolidated revenue from continuing operations, is as follows:
In addition, we derived 12% and 16%, respectively, of our revenues for the three and six month periods ended June 30, 2011 from El Paso Corporation.
Our relationship with AT&T is primarily based upon master service agreements, other service agreements and construction/installation contracts for both AT&Ts wireless and wireline infrastructure businesses. Our relationship with DIRECTV® is based upon an agreement to provide installation and maintenance services for DIRECTV®.
In May 2012, Red Ventures exercised its option to purchase the DirectStar Business. DirectStar provides marketing and sales services on behalf of DIRECTV®. We consummated the sale of DirectStar to Red Ventures in June 2012 for a net sales price of $98.9 million in cash. As a result, the DirectStar Business is presented as a discontinued operation in the condensed unaudited consolidated financial statements for all periods presented. For the six month period ended June 30, 2012, revenues and pre-tax income of $60.2 million and $6.2 million, respectively, were reported within our results from discontinued operations associated with the sale of the DirectStar Business. In addition, a pre-tax loss of $0.2 million was recorded in connection with the sale. See Note 4 Discontinued Operations in the notes to the condensed unaudited consolidated financial statements for details.
For more details regarding our disposition of the DirectStar Business, please see our unaudited pro forma condensed consolidated balance sheet as of March 31, 2012 and our unaudited pro forma condensed consolidated statements of operations for the three months ended March 31, 2012 and the year ended December 31, 2011, including the notes thereto, which were filed as Exhibit 99.1 to our Current Report on Form 8-K filed with the U.S. Securities and Exchange Commission on June 18, 2012.
The following discussion set forth under Overview of Financial Results refers only to our results from continuing operations.
Overview of Financial Results
Second quarter revenue grew to $992.2 million, an increase of $275.3 million, or 38.4%, from the prior year. Organic revenue grew by $230.8 million, or 32.2%, versus the same period in the prior year. Strong end-user demand for power generation and industrial, electrical transmission and oil and gas pipeline and facility projects contributed to this growth. While overall revenues from oil and gas pipeline and facility projects increased versus the prior year due to increased levels of activity in the shale basins, long-haul pipeline project revenues decreased as a result of completion of the Ruby pipeline project in the third quarter of 2011.
Costs of revenue, excluding depreciation and amortization, as a percent of revenue increased from 85.9% in the second quarter of 2011 to 87.9% in 2012. This increase was driven primarily by lower margins on oil and gas pipeline and facility projects as compared with 2011, caused by approximately $25 million of losses on two pipeline projects.
Depreciation and amortization expense and general and administrative costs also increased, due in part to our 2011 acquisitions, as well as from increased levels of investment in our business. While depreciation and amortization and general and administrative costs increased in dollar terms, as a percentage of revenue, they declined versus the same period in the prior year. This improvement is largely due to improved leverage of these costs as a result of higher revenues.
Second quarter 2012 net income from continuing operations was $29.8 million, or $0.36 per diluted share. Second quarter 2011 net income from continuing operations of $41.8 million includes a gain of $17.7 million, net of tax, or $0.20 per diluted share, from the remeasurement of our equity investment in EC Source, which is discussed in Note 3 Acquisitions and Other Investments in the notes to our condensed unaudited consolidated financial statements. Excluding this gain, second quarter 2011 net income from continuing operations and diluted earnings per share were $24.1 million and $0.28 per share, respectively. As compared with our second quarter 2011 results, excluding the gain on remeasurement, income from continuing operations and diluted earnings per share increased by approximately $5.6 million and $0.09 per share, respectively, or 23.4% and 31.3%, respectively. See Adjusted Income and Adjusted Net Income per Diluted Share below.
Diluted earnings per share was favorably impacted by a lower number of dilutive shares outstanding as compared to the prior year because we had fewer dilutive premium shares due to a lower average stock price, as well as from the favorable impact of treasury stock purchases beginning in 2011. See Note 2 Earnings Per Share in the notes to the condensed unaudited consolidated financial statements.
Economic, Industry and Market Factors
We recognize that we continue to operate in a challenging business environment, as do our customers. We closely monitor the effects that changes in economic and market conditions may have on our customers. General economic conditions, as well as the highly competitive nature of our industry, have resulted in pricing pressure for the services we provide. Work is often awarded through a bidding process, where
price is a principal factor in the selection process. In the face of increased pricing pressure, we strive to maintain our profit margins through productivity improvements and cost reduction programs. Other market and industry factors, such as tightened access to capital for customers in the industries we serve and/or changes to our customers capital spending plans, can result, and have resulted, in decreased levels of demand in certain portions of our business, such as our power generation and industrial projects, which were negatively impacted by such trends in 2011, and our wireless projects, which have been negatively impacted by reduced work order volume during the first half of 2012. In addition, we operate in industries affected by market and regulatory impacts beyond our control. Changes in technology, tax and other incentives, renewable energy portfolio standards and new or changing regulatory requirements affecting the industries we serve can impact demand for our services. Fluctuations in market prices for oil, gas and other fuel sources can also impact demand for our oil and gas pipeline and facility construction services, as well as our power generation and industrial construction services. While we actively monitor economic, industry and market factors affecting our business, we cannot predict the impact such factors may have on our future results of operations, liquidity and cash flows.
Impact of Seasonality and Cyclical Nature of Business
Our revenues and results of operations can be subject to seasonal and other variations. These variations are influenced by weather, customer spending patterns, bidding seasons, project schedules and timing, particularly for large non-recurring projects, and holidays. Typically, our revenues are lowest in the first quarter of the year because cold, snowy or wet conditions cause delays. Revenues in the second quarter are typically higher than in the first quarter, as some projects begin, but continued cold and wet weather can often impact second quarter productivity. The third and fourth quarters are typically the best of the year, as a greater number of projects are underway and weather is normally more accommodating to work on projects. In the fourth quarter, many projects tend to be completed by customers seeking to spend their capital budgets before the end of the year, which generally has a positive impact on our revenues. However, the holiday season and inclement weather can cause delays, which could reduce revenues and increase costs on affected projects. Any quarter may be positively or negatively affected by out of the ordinary weather patterns, such as excessive rainfall or warm winter weather, making it difficult to predict quarterly revenue and profitability variations
Additionally, our industry tends to be highly cyclical. Fluctuations in end-user demand within the industries we serve, or in the supply of services within those industries, can impact demand for our services. As a result, our revenues may be adversely affected by industry declines or by delays in new projects. Variations in project schedules or unanticipated changes in project schedules, in particular in connection with large construction and installation projects, can create fluctuations in revenues, which may adversely affect us in a given period. The financial condition of our customers and their access to capital; variations in project profitability; regional, national and global economic and market conditions; regulatory or environmental influences; and acquisitions, dispositions or strategic investments can also materially affect quarterly results. Accordingly, our operating results in any particular period may not be indicative of the results that can be expected for any other period.
Customer revenues from continuing operations by industry for the periods indicated were as follows (in millions):
Approximately 40% of our revenue is derived from projects performed under master service and other service agreements, which are generally multi-year agreements. Certain of our master service agreements are exclusive up to a specified dollar amount per work order for each defined geographic area, but do not obligate our customers to undertake any large infrastructure projects or other work with us. Work performed under master service and other service agreements is typically generated through work orders, each of which is performed for a fixed fee. Services provided under these agreements range from engineering, project management and installation work to maintenance and upgrade services. Master service agreements and other service agreements are frequently awarded on a competitive bidding basis, although customers are sometimes willing to negotiate contract extensions beyond their original terms without re-bidding. Our master service and other service agreements have various terms, depending upon the nature of the services provided, and typically provide for termination on short or no advance notice.
The remainder of our work is generated pursuant to contracts for specific projects or jobs that may require the construction and installation of an entire infrastructure system or specified units within an infrastructure system. Customers are billed with varying frequency, generally 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.
Revenues from continuing operations by type of contract for the periods indicated were as follows (in millions):
As shown in the table above, approximately 60% of our second quarter revenues from continuing operations were from non-recurring, project specific work. Seasonality tends to have a greater impact on our non-recurring project revenues. The proportion of our revenues from non-recurring project work in any given quarter can fluctuate based upon our project mix. If we are not able to replace work from completed projects with new project work, we may not be able to maintain our current revenue levels, or our current level of capacity and resource utilization. We actively review our backlog of project work and take appropriate action to minimize such exposure.
Estimated backlog represents the amount of revenue we expect to realize over the next 18 months from future work on uncompleted contracts, including new contractual agreements on which work has not begun. Our backlog estimates include amounts under master service and other service agreements in addition to construction projects. We determine the amount of backlog for work under master service and other service agreements based on historical trends, anticipated seasonal impacts and estimates of customer demand based on communications with our customers. The following presents 18-month backlog for our business as of the dates indicated (in millions):
While our backlog estimates include amounts under master service and other service agreements, our customers are not contractually committed to purchase a minimum amount of services under these agreements, most of which can be cancelled on short or no advance notice. There can be no assurance as to our customers requirements or that our estimates are accurate. In addition, timing of revenues for construction and installation projects included in our backlog can be subject to change as a result of customer delays, regulatory requirements and other project related factors. These changes could cause estimated revenues to be realized in periods later than originally expected, or not at all. As a result, our backlog as of any particular date is an uncertain indicator of future revenues and earnings.
Critical Accounting Policies and Estimates
This discussion and analysis of our financial condition and results of operations is based upon our condensed unaudited consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP). The preparation of these financial statements requires us to make estimates and judgments that affect the amounts reported in our financial statements and the accompanying notes. On an on-going basis, we evaluate our estimates, including those related to revenue recognition, estimates to complete and provisions for contract losses, allowances for doubtful accounts, accrued self-insured claims, estimated fair values of goodwill and intangible assets, acquisition-related contingent consideration, securities available for sale and certain convertible debt obligations, reserves and accruals, impairment of assets, income taxes and litigation and contingencies. We base our estimates on historical experience and on various other assumptions that we believe 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. As management estimates, by their nature, involve judgment regarding future uncertainties, 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. Refer to Note 1 Business, Basis of Presentation and Significant Accounting Policies in the notes to our condensed unaudited consolidated financial statements of this Quarterly Report on Form 10-Q and to our most recent Annual Report on Form 10-K, as ,amended, for further information regarding our critical accounting policies and estimates.
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 (dollar amounts in millions):