MasTec - #1 and Looking Up

South Florida-based Specialty Contractor Taking Advantage of Increased Capital Spending

By Scott Judy

A comparison of MasTec's 2005 numbers reported in this year's Top Specialty Contractors ranking to what the firm reported in 2004 does not show a significant difference. For 2005, the Coral Gables-based telecommunications contractor reported approximately $487.1 million in revenue from the four-state area of Florida, Georgia, North Carolina and South Carolina.

That's a big number - more than twice that of this year's second-place firm - but it's only about 5 percent more than the $464.7 million MasTec reported for the Southeast for 2004.

Even though those big numbers might indicate much success, the publicly traded MasTec has been through some tough times in recent years.

For example, in 2004, the company reported a total net loss of $49.4 million on revenue of $807.2 million. In 2005, MasTec's financial condition improved somewhat, with the total net loss for the year down to $14.6 million, while revenue grew to $848 million.

However, positive results from the first quarter of 2006 indicate that 2005 was possibly a turning point for the company. In its recent conference call for first quarter earnings results - historically the weakest quarter of the year, officials stated - the company posted net income of $3.6 million on revenue of $218.8 million. That compared to a loss of $5.4 million on revenue of $194 million in the prior year's first quarter.

"What a difference a year makes," Bob Campbell, MasTec's chief financial officer, said during the conference call. Campbell cited a 13 percent jump in first-quarter revenue over the previous year, plus a significant improvement in the firm's liquidity. As of May 2005 - prior to a bank amendment - Campbell said the company's liquidity was roughly $10 million. The company defines liquidity as bank cash plus available credit.

"We had the worst balance sheet among the public companies in our sector," Campbell said during the conference call.

By May of this year, at the time of the first quarter results report, liquidity was up to $105 million, thanks in large part to a bank credit facility of $156 million. The company also had obtained better financing terms, and, "We (now) have one of the best balance sheets in our space," Campbell added.

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Refocused

Austin Shanfelter is MasTec's president and chief executive officer, a position he's held since 2000. He was named to the top post from his position as chief operating officer, which he had held since March 2000.

He also had served as president of MasTec's Broadband Network Service group since 1997 - the year in which the cable television infrastructure provider he founded, Shanco Corp., was acquired by MasTec.

During the conference call, Shanfelter cited internal company improvements as well as increasing demand from MasTec's core customers for the improved financials.

"The CapEx spend(ing) in voice, video and data space continues to expand as our customers continue to upgrade their networks in the quest to provide additional and bundled services," he said. "As a result, we're seeing increased flow of RFP activity from Telcos to meet those future needs."

Currently, more than 81 percent of MasTec's revenues come from about 11 companies. DirecTV is MasTec's largest customer, accounting for 38 percent of the firm's revenue. BellSouth accounted for 13 percent; Verizon 8 percent; and Florida Power & Light, Progress Energy and Texas energy firm TXU, all 4 percent each. Additionally, Dominion, Arizona Public Service and Qwest account for about 1 percent each of MasTec's revenues.

Energy and other companies will likely increase outsourcing of installation services as they seek to greatly expand their infrastructure systems, Shanfelter added.

"Energy and utility demand is very high and trending higher," he said. "Both upgrade and maintenance spendings are on the rise. Outsourcing continues to grow as our customers seek cost-efficient alternatives to their in-house workforce.

Shanfelter also cited Florida as a "good source of organic energy growth" from increased business activity in maintenance service, as well as work resulting from hurricane-hardening and burial of lines, and significant numbers of home-replacement projects.

Additionally, MasTec is witnessing increased interest from the power companies to deliver broadband over existing power lines. Shanfelter said, "Some of our key energy customers have either committed to or are seriously reviewing BPL (broadband-over-power lines) development projects."

To get all of this work done, MasTec is dropping out of transportation-related projects. The company announced last year it is selling its stake in current projects and indicated it should accomplish this during 2006.

J. Marc Lewis, vice president for investor relations, explained the company's reasoning.

"Some of our projects were not profitable, and we decided to exit the space and concentrate on our core businesses," he said in response to questions e-mailed to him from Southeast Construction. "It is all about refocusing the company to our core businesses."

The focus away from DOT-type projects appears to have been continuing through 2005. For 2004 revenue, MasTec reported for last year's Top Specialty Contractors ranking that 16 percent of its revenues were from "traffic systems" work. For this year's ranking, MasTec indicated 6 percent of revenues were from "government projects."

Additionally, 80 percent of 2005 revenues came from telecommunications work, up from the 65 percent the company indicated in last year's ranking.

The percentage of overall revenues attributed to "electrical" construction was also down in 2005, compared to 2004, from 19 percent in last year's ranking to 14 percent in the latest listing.

Growing?

Though officials won't state this publicly, MasTec may take advantages of its increased liquidity to acquire other firms.

It recently purchased Georgia-based Digital Satellite Services Inc., an installer of residential and commercial satellite and security services whose primary markets include Atlanta, the Greenville-Spartanburg area of South Carolina, Asheville, N.C., and portions of Tennessee, Kentucky and Virginia.

DSSI's 2005 revenues were estimated at approximately $50 million. MasTec reported the purchase price as including $18.5 million in cash, $7.5 million of company common stock and an earn-out based on performance. MasTec completed this acquisition in early 2006.

MasTec's Lewis would not comment on any other acquisition targets, saying only, "We are already nationwide and will seek to expand in those areas with new and existing customers."

During the conference call, Shanfelter was more telling in his remarks.

"There are absolutely some opportunities out there," he said. "I think MasTec's appetite is definitely there, probably in the install-to-the-home space to some extent. We will look at the communications space, and we will absolutely look at the energy space."