MasTec Inc (MTZ) 2002 Q1 法說會逐字稿

Please stand by. The conference is about to begin. Good day, everyone, and welcome to the MasTec, Incorporated, first quarter earnings release conference call. Today's call is being recorded. Today I'll turn the call over to Mark Lewis, vice president of investor relations.

Good morning, I'd like to welcome you today to our first quarter conference call. With us today we have Austin Shanfelter, MasTec's President and Chief Executive Officer, and Donald Weinstein, the company's Vice President and Chief Financial Officer. The format of the call will be opening remarks from Austin followed by a financial summary from Don. Austin and Don will also discuss how we are proactively addressing challenges and opportunities in our industry and how we are working to increase profitability in the rapidly changing markets we serve. This will be followed by a question-and-answer period. We expect the call to last approximately 45 minutes. Before we continue, our assistant general council, Steve Davis, would like to make the following qualifying statement.

Thank you, Mark. The following statement is made pursuant to the Safe Harbor for forward-looking statements described in the Private Securities Litigation Reform Act of 1995. During today's conference call, we may make certain statements that are forward looking such as statements regarding MasTec's future results and plans and anticipated trends in the industry 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, and including that our revenue may differ from predicted, that we may be further impacted by slowdowns in our clients' business or deterioration in our clients' financial positions. That our reserves may be inadequate, that the outcome of pending litigation may be adverse to us, and that we may experience increased costs in realigning our business or may be unsuccessful in those efforts. Should one or more of these risks or uncertainties materialize, forcing the underlying assumptions to prove incorrect, actual results may differ significantly from results expressed or implied in any forward-looking statements made by the company in the conference call. These risks, uncertainties, and assumptions are detailed in documents filed by the company with the Securities and Exchange Commission. MasTec does not undertake any obligation to revise these forward-looking statements to reflect future events or circumstances. I'd now like to turn the call over to Austin for a generally summary of our business and a discussion of the challenges and opportunities currently presented to our sector.

Thank you, Steve. I want to talk today about performance. This boils down to what senior management said we were going to do, what we have actually done, and what you can expect from us in the future. In recent months we told you we were going to increase our liquidity, upgrade our management team, create a responsive investor relations function, improve our cash flow, aggressively market our services, and meet our earning guidance from operations in the first quarter of 2002. We have delivered on those promises. We have a new $125 million bank line and that significantly improved our liquidity position. We have made a number of management upgrades and developed a investor relation office to provide more timely responses to our investor inquiries. We've been very focused on direct marketing to enhance our revenue opportunities and we have delivered on the bottom line. But more important in the past performance is what we feel this management team can deliver in the future and how we are affected by current events in the industries we serve. There is no question this year has been challenging as capital expenditures have been delayed by our clients. However, along with these challenges MasTec is also presented with some opportunities. In the current environment a lot of smaller and less well capped large companies are going to be out of business. This is already happening. Many of those that are barely hanging on and probably going to be out of business in the future will not be able to obtain or get surety that's required in many of the contacts and markets that we serve. Folks, if you cannot get bonded you are effectively out of the business in many of the sectors that we serve. MasTec has been very aggressive, proactively finding capacity and will have a real competitive edge in the months and years ahead. Additionally when times are tough in the industry, work logically slows to the companies that have stronger financial conditions. Project managers and our customers are justifiably unwilling to risk their own jobs by contracting with less than well-capitalized contractors that might not be able or capable of completing the work on time or on budget. This will also greatly benefit MasTec. Each and every day we are focused on coordinating our current sales efforts to take advantage of market conditions. For example, with one particular customer we started with insulation and maintenance in one state a little over a year ago and today we are exclusive service advisors in 18 of the customers' states. As we continue to provide well-working, quality to our client, we expect these successes to duplicate time and time again. Finally, we are going through a top to bottom review of our organization looking for additional cost savings and revenue opportunities. Be confident that your management team will pursue every option to enhance operations and ultimately shareholder values. I'd like now to turn over the call to Don to discuss some of the detailed financial information in the first quarter.

Thank you, and good morning, everyone. As most you know, our North American operations are generally slower in the first quarter of the year. 2002 was no exception. The trend towards seasonality that we've spoken about in the past was primarily the result of client budget constraints and winter weather on some of our external activities. Some of our clients, particularly the incumbent local exchange carrier in the regional belt tend to focus and complete on their budget and capital expenditures before the end of the year and then defer additional expenditures until the following budget year. Additionally, one of our customers has all but disappeared. To remind everybody, revenue derived from the competitive local exchange carriers went from $98 million in the first quarter 2001 to almost nothing in 2002. Having said that, our revenue was $203.8 million for the three months ended March 31, 2002, compared to $337.2 million for the same period in 2001. This represents a decrease of $133.4 million or 40 percent. While this revenue was in line with our early guidance of $200 to $250 million in revenue for the quarter, we did indicate earlier in this year that we would be at the low end of the range. Now, other than our [see leck] and long-haul carrier business, the decrease was due primarily to a continued reduction in capital expenditures in our broadband clients combined with our proactive decision to reduce services to certain companies that we no longer deemed creditworthy and operationally within our core competencies. The new management team has taken positive steps in 2002 to avoid receivable and quality exposure in the future. In the short term, lower revenues will result as we turn back some work but overall the quality of our receivables and therefore our balance sheet was enhanced. Our backlog was $1.4 billion March 31st, just like year end, compared to however $1.6 at March 31st, 2001. Our cost of revenue were $164.6 million or 80.8 percent of revenue for the three months ended March 31, 2002 compared with $255.4 million or 78.7 percent of revenue for the same period in 2001. In 2002 our margins eroded slightly due to a timing lag in the labor force and equipment reductions required as a result of lower revenue. General administrative expenses or GNA were $22.1 million or 10.8 percent of revenue for the three months ended March 31st, 2002 compared to 47.9 million or 14.2 percent of revenue for the same period 2001. However, included in general administrative expenses in 2001 was a reserve for bad debt of $22 million. If you take out the additional reserve in 2001, general administrative expenses were $25.9 million or 7.7 percent of revenue. For the three months ended March 31st, 2002 our effective tax rate was 41.8 percent as compared to 41.9 percent in 2001. For the three months ended March 31st, 2002 we did receive a federal income tax refund of approximately $44.2 million from the Internal Revenue Service. The federal tax refund resulted from net losses reflected through December 31st, 2001 as we have talked about quite a bit, and we did use the proceeds to repay borrowings under our facility. Net cash provided by operating activities was $41.3 million for the first quarter of 2001 compared to 24 -- I'm sorry, for the first quarter of 2002 compared to 24 million used in the first quarter of 2001. The net cash provided by operating activities in 2002 increased due to our federal tax refund for the 2001 net operating loss I mentioned a moment ago, collection of receivables and other changes in the working capital. Our liquidity position, folks, is very good. We currently have no outstanding draws on our credit line, our credit facility is in place, and we are in compliance with all of our covenants. We have two covenants in our credit facility and we are in compliance with both of them. Also on a positive note, we have seen month to month revenue increase in the first quarter and believe the same trend holds true so far in the second quarter. We feel that our receivable quality remains good and adequately reserved. During the first quarter of this year, our five largest customers in alphabetical orders were Bell South, Comcast, Direct TV, the local telecommunications arm of Sprint, and U.S. West. If you went to the next five largest customers, three of the next five largest customers were in the energy area. I have one final note about the detailed financial accounting. The financial accounting standards board issued [FAS] 142 regarding good will and other intangible assets. [FAS] 142 requires that good will be assessed at least annually for impairment by applying a fair value base test. Good will on our books will no longer be amortized. Effective January 1st of this year, the impact of [FAS] 142 resulted in a noncash writedown of our good will, net of tax in the amount of $25.7 million which was reflected in our consolidated financial statement as a cumulative effect due to a change in accounting principal. Therefore we need to talk about adjusted earnings. Adjusted earnings per share before the cumulative effect of this noncash good will [FAS] 142 accounting change was three cents per share for the quarter just ended compared with an accounting principal change adjusted ten cents for the first quarter of 2001. Our first quarter EPS is within our guidance. Reported per share net income after the effect of the accounting change was seven cents and a loss of 51 cents for 2001 and 2002, respectively. Focusing on the rest of 2002, we expect second quarter revenue to be between 230 and $260 million and earnings per share to range between ten and fifteen cents. Looking at the entire year, exclusive of accounting change pursuant to 142, we renew our original forecast which reflects between 900 million and $1 billion of revenue and 55 and 65 cents in earnings per share. At this point let me talk about how we are proactively responding to what is a lower revenue environment. For the quarter just ended we have revenues of $200 million, a profit before the accounting charge of about 1.2 million. Frankly, I will tell you as members of our management team will reiterate, fellow shareholders, we are clearly not happy with the results. It can and will be better. We have made that commitment. MasTec went through a lot of organic growth and acquisitions. We acquired a number of quality operations strategically located in North America and Brazil. Each of these acquisitions brought a skill set and a synergy to MasTec. We are reviewing amongst these the best practices throughout our organization and in the industry we serve. We obtained the services of an experienced industry consulting firm to assist us in streamlining our organization, leveraging and capitalizing on our existing strengths, and significantly reducing our operating costs. The action that you can expect from our management team not only includes flattening out the organization, but looking at cost savings and revenue enhancement. So it's not just about cost savings, available through closer integration of our operating division. The last 12 months, as a example, we've gone from a North American work force of about 11,300 people to approximately 7500 today. We are also constantly looking for ways to more efficiently share our interdivision resources and integrate our back offices for more efficiency. As you know we're in the middle of a [orkle] at the same time provide management with more timely and reliable data with which it obviously enhance or ability to manage the company. We are not waiting on external events to turn around. We are proactively managing the business with the bottom line possibility in mind. So with that, let me turn it back over to Austin.

I'd like to echo what Don just stated. The buck stops here. We'll be improving operations performance and efficiency. Management as MasTec is dedicated to improving shareholder value, and we're taking aggressive steps to increase revenue and decrease costs. We are not doing it because it's required. We're doing it because it's the right thing to do for our business. In order to ensure we have enough time for Q and A sessions, I'd like to turn the call over to the conference call operator so we can devote as much time as possible to the listeners' questions.

Thank you, sir. Today's question-and-answer session will be conducted electronically. If you would like to signal to ask a question, please press star one on your touch tone phone. Once again, that's star one to signal for a question. We will pause for just a moment to assemble today's question roster. Our first question comes from Mark Hughes with Sun Trust.

Thank you very much. Good morning. Give us some general thoughts in terms of the gross margin and the backlog, what kind of your expectation might be as we progress through the year and then on the SG&A side kind of what's your percent target relative to revenue? Thanks.

Mark, good morning. I think if we look at the business, certainly it's our goal as I mentioned to approach the expense reductions, and let me focus on that because that clearly is the focus of the business is to look at both operating expenses and SG&A. And I think as we've looked at, you know, how we're going to deploy these improvements, long and short of it is we've already improved it in the first quarter and we've taken a lot of actions in the second quarter so what you saw in the first quarter alone, our numbers were improved by a $1.5 million or $1.5 million reflects [inaudible]. Therefore on a run rate basis you can see that with the actions that we've taken to date and the actions that we've taken through the second quarter. We have about $10 million of savings which are split probably 60 percent toward cost of [good sole] and the balance toward SG&A. We're not satisfied there. As I mentioned in my prepared remarks, we have engaged a group to come and assist us and really what we're hiring is experienced arms and legs and really bright people. You know, we're not a fat organization, and therefore what we're doing is we're bringing in people who have done this before who can be very proactive, and, you know, as we look at the business we anticipate being able to double that run rate improvements through the balance of the year so that you can see how the numbers would affect our results going into 2003. In terms of the backlog, you know, the backlog again reflects the ongoing MSA nature of our business. The reason it's unchanged from fourth quarter to first quarter really reflects positively on the business. You know, as we look at our revenue, I think we're all disappointed by the broadband, certainly we had expected and planned for on a proactive because as in the long haul business, but when we look at our telecom business, it's holding its own. So I think as you look at the consistent backlog it really shows the underlying strength of our MSA business.

As a follow-up, are you going to provide the Datacom energy and Brazil segments for revenue going forward?

We don't really have revenue per se. I think in the past as we look at the business there were some pretty bright lines between datacom and the way we were organized in terms of service lines. As we've gone through a consolidation, the service lines are no longer really service lines as much as we have service offerings. So our telecom group would do work for the energy folks, who would do work for the broadband folks. Then to say our service line was purely telecom at this stage of the game is a bit of a misnomer. When you look at the underlying services we do perform, I think we can say in the first quarter probably, I'm going to use round numbers, about 18 percent of it was broadband, about 30 percent of the teleco, about 20 percent was energy, call it 16 percent, ITS, governmental work, and then you have about 8 percent network services and the balance international.

Right. That's kind of a bump in energy. Anything going on there in particular?

Energy, if you look at it last year to this year, it's about a 3 percent increase. When you look at the customer base we operate with, essentially we're mirroring the organic growth at their level. So I think the ongoing growth in our energy group will be driven by both new MSA but currently in this environment it's been driven by the organic growth in our underlying customer.

Thank you very much.

Our any question comes from Brian Ferguson with the Boston company.

Hi, good morning. Just wondering if you could kind of go over the cash flow objectives for the full year. I think you indicated that the cash from operations in the first quarter was $43 million, if I'm not mistaken. And I guess that's the first question. The second question is just in terms of the revenues, you mentioned that within the first quarter that revenues were up sequentially month to month and clearly the next quarter outlook, you know, indicates the continuation of that trend, and I'm just curious if you could elaborate on that as to why that's happening, especially in a environment where, you know, we've seen continuous reductions in capital spending and also trying to get your sense as to, you know, I mean, where do you think these -- some of the cap X budgets are relative to the minimum maintenance cap X more just on the teleco and the [arbuck] side?

All right. Let's start with cash flow. Year end we identified a cash flow objective between approximately $115 and $135 million, and that's about where we believe we'll be at this time.

Just a quick question on the cash flow. Is that inclusive of the tax payments from the government.

More of a EBITDA based number.

Okay.

On the revenue side, starting last year, sometime in the third quarter, MasTec tremendously focused on a market share approach to gain market share, and we accomplished that in the telecom business. We continue to do so. We've accomplished it in some of the broadband sector, we've accomplished it definitely in some of the energy sectors and the ITS sector has been very favorable in the market share side. We're going to continue that process and that's why we feel comfortable what's coming up in the second quarter and third quarter this year for opportunity of the company. So even though cap X is down, I believe MasTec has been able to take advantage some of our competitors going out of the business, some weakness there, some of the bonding capacity issues are starting to show up in a few of the sectors that we have now, we expect to show up even further in the third and fourth quarter this year so I think that's adding to our ability to see the view of the revenue stream coming forward in the future is gaining.

Okay. Just a follow-up on the revenue. One would be, you know, what kind of activity have you seen from AT&T and sort of what do you expect? And second question, just seeing that, you know, we've -- looking at all the cap X numbers in the quarter from the [arbucks] relative to their annual budget, it would imply a sequential ramp in capital spending throughout the year. However, over the last year and a half, you know, one could have said the same thing looking for a sequential ramp, but the overall budget came down so much that, you know, that it didn't pan out that way. And I guess I just wonder, are we to the point where, you know, the cap X budgets that are being articulated at least on a percent of revenues are sort of low enough relative to historic norms and, you know, to sort of minimal, you know, maintenance cap X required that it gives you comfort that, you know, that we are closer to the bottom and rightly so should look for sort of the sequential ramp in spending, translating into sequential improvement of revenues for you.

Let's answer the AT&T question first. We are just now seeing a lot more activity with AT&T putting out bids to major markets. It's been announced that they are going to spend $1.4 billion that they need to because of some franchise commitments that haven't been reached over the last couple of years. So we're starting to see a lot more flow in the opportunities of AT&T right now. As far as looking at the telecom business, I think we are at historical lows. We are at the very minimum [inaudible] for them to provide service to their customers out there on a daily basis. And at some point the worm does turn and you cannot continue to support these items at this low level for a year, two, three, at some point the profits don't turn here. We're positioned well to take advantage of that when it does take place. But we're at the historical lows now. We believe we're very focused on what can happen in the future.

Okay. Thank you.

Our next question comes from Jim [McEllery] with [Unterberg Thoban].

Thank you. At least according to my math you need some fairly significant improvement in gross margins and/or reductions in SG&A above and beyond what you were talking about earlier, and I was hoping I could get some clarification on that.

I think if we do the math, when you look at 900 to a billion of revenue, when you look at the expense savings we've identified, I think you can see how you get to the level of cash flow that we were describing and the level of earning.

So would that imply gross margin improvement to above 20 percent for the second half of the year?

Yes.

And would that imply SG&A at 9 percent or below for the second half of the year?

I'm sorry. Could you repeat the question, please?

Would that imply SG&A as a percent of revenue in the second half of the year below 9 percent?

Yes, it would.

Okay. Thank you.

Our next question comes from Joe [Gladeau] with Chapman Company.

Hi. Just wondering if you could take, I guess, a little bit about a couple of the services you provide, you know, what's the outlook for some of the areas in network services that I guess at last quarter you said you'd be looking at particularly, enterprise and switching access sights, and wondered if you would touch on the access for intelligent transportation services, what's the outlook for getting some I guess new projects underway or any bids for substantial projects out.

Let me take this opportunity to just review all five parts of our business, number one, telecom, let's go over that real quickly. At Don stated earlier, we're very comfortable with the model that we're going with be we continue to see market share gains and we're also seeing some processes with the distressed assets buying in the marketplace from the local telecom businesses. But our core business, the [arbuck] business that we're seeing market share gains in, we look forward to increasing that there. The ITF business continues to be strong and we continue to see this as an engine to MasTec's future. Broadband, we've spoken about that, very slow in the first quarter and will continue to have some slowness in the second quarter, but we believe the second half of 2002 will be very strong and push right into 2003 and then a little bit beyond. Energy remains stable, for those we have slow growth there, feel there's some very positive market share gain potential that exists in that sector for us. The network operation, we continue to be a diminishing part of the business. We don't see a lot of switching on the access side. Wireless is beginning to stabilize and have some upside in the very near future. Wireless has been slow but that's a diminishing part of our overall strategy at this point in time.

Just one question I guess on your deselecting of customers. You said you were doing -- on the last conference call you said you have done some of that. I guess we've still seen some continuing carriers that are deteriorating. And I'm just wondering, are you finding the need to continually deselect customers?

I think it's important for everybody to understand that we watch our customers very close and that's customers that are on the per se bubble and we're not sure where they're at, we're keeping our business down to a very, very low amount for those customers and watching our DSOs daily. But at the end of the day, we still look at the fact that there's regulated activities out there that they're going to have the customer basis so we take that into consideration, but I'm talking way less than a million dollars exposure, $500,000 level exposures to any customers we might be talking about that are on the bubble that we're watching.

And one last thing. If you said it earlier, I didn't hear, but what is the level of receivables now?

In terms of what is the dollar amount of receivables on the balance sheet?

Yes.

Approximately $225 million and that includes receivables, unbilled revenue and retainage.

Okay. Thank you.

Our next question comes from Eric warren with [Kaufman] brothers.

Good morning. A question on market share. Are you basically gaining market share from competitors, and are you seeing new outsourcing opportunities?

I'll go two ways with you. What we're seeing is market share gains because we're sitting down with our customer and discussing long-term strategies and our customers are a little bit nervous about some of the smaller firms out there servicing and they're trying to make long-term plans at the same time so they envision MasTec to be a company that can provide services for quite some time to come, and we're excited about that opportunity. The second thing is you've got a couple of things happening. We've got the entries of the mom and pop market that they got in the last two or three years that are not surviving, not getting through the period of time. Your older mom and pop organizations, you're $5 to $15 million company that have been here for 15 or 20 years are surviving, being cautious in what they do, but they're not actively competing in the marketplaces that we serve. Then you have a whole middle tier of rollups of small company that try to become a little bit larger during the end of this market and those companies are going through some tough times right now trying to survive and put their marketing position out there. We're also, as I noted in my original comments, the bonding and surety markets are getting tighter on some of those same type of operations out there. and when you can't get insured, you can't get into certain of the opportunities that MasTec serves. For example, all our ITS work and government work and some of our telecom work is bonded, along with some of the energy work is bonded as well and you see some exiting of personnel. At the beginning of this year, if you look at the bid activity on certain projects you might go to a meeting that 30, 40 companies attended. Now those numbers are down in the 20s and slowly moving down a little bit more as we go forward. But then we also have the opportunity to negotiate with a number of our customers because of their concern who is going to be here in the long haul.

You talked about the [arbucks] had scaled back to below maintenance levels. Are you seeing that turn around are they addressing the market that they've basically boot strapped?

First of all, we didn't say they'd gotten below maintenance levels. That's right where they are. They've very good at it. They're professionals at it. They're going to spend just the dollars they need to spend to not be fined by PUCs going forward. But they're at the very minimum level. Are they pushing some things off, yes, they are, possibly growth or new development. Those opportunities will be put on the back burner. But they are at minimum. At some point that does catch up to them, and you've got to keep moving forward on the new product.

Last two questions, geographical break down and your liquidity.

We haven't updated the math, yet, Eric in terms of geographic. But fairly consistent with what currently exists in our investor presentation which is located on our website, WWW.MasTec.Com. I would encourage all of you to take a look, pull down the investor package and take a look. There is a picture gram of the United States with the level of revenue we do in each region. It's essentially unchanged at this time.

And liquidity?

From a liquidity perspective we have no draws against our credit facility. At the end of the first quarter we had about $15 million of cash. We feel we're in a very strong liquidity position.

Are you expecting any more on the tax rebate side, a extra 1.5 or anything like that.

We actually did get the $1.2 million check that was outstanding.

So that's in the 15.

I will also tell you the current writeoff of the good will that we do anticipate receiving approximately $13 million from the IRS.

Okay. Thank you.

Next we'll go to [Ram Causergod] with [Morgan Kegan].

I've got a couple of questions for you guys. One is the breakdown that you gave of your operations would imply that revenue was roughly $16 million or 8 percent of first quarter revenue. Can you comment about that and then give us perspective as to what is going on in Brazil right now and what are the plans in Brazil?

Ram, I will tell you your math is excellent. That is approximately the revenue we earned in Brazil in the first quarter. If you'll recall back at the beginning of the year, we felt that Brazil would be approximately $60 million of revenue for the year. It would

come in approximately pro rata through the year and then it would contribute to just a handful of pennies in terms of EPS. I will tell you Brazil was positive earnings, not quite a penny, but certainly positive earnings in the first quarter. From a operational perspective, it continues to do quite well. It's principally outside planned focus and continues to grow market share with the teleco providers located in Brazil today.

Ram, we're concentrating on the wireless side and the outside plant construction down there. We've taken a manager by the name of Pablo Alvarez and put him in the marketplace, doing a spectacular job for us turning that operation around down there and we're excited about where the knew examiner can bring for us in the operations.

And there are no credit issues in Brazil with bad debt or anything like that right now?

We have none of that. We have no credit issues in Brazil. We have no financing issues. Brazil is self-financed. We have no currently, fluctuation risks. It's a nice operation for us. It generates cash every month.

The second question I have, you know, you talk about broadband being a disappointment. If you look at the revenue being down 40 percent or roughly 40 percent in the first quarter, you talk about the broadband, telecom, and energy, how it did on a year to year basis?

Sure. If you go back to the first quarter of '01, broadband was down about $20 million in revenue and I think that's why we felt it was a disappointment, you know, given the fact that broadband, you know, had some significant expected growth, upon the completion of the AT&T and Comcast transaction and upon other transactions that might occur in that arena, we were, again -- I think the term we used is disappointed that we saw such a pull back in the first quarter. In terms of telecommunications, the biggest change we saw was the fact that we no longer do work for the [see lecks] marketplace. The [see lecks], as I mentioned, about $98 million in the first quarter of last year was fairly low in the first quarter of this year. In terms of energy, again, energy had about a 2 1/2 percent year over year increase in revenue, network services, revenue dropped by about half, what's called $32 million to about $16 million, again, I'm rounding here, and I think as we've talked about, network services continues to be a declining portion of our business.

Then when you look at your head count, you give us a idea of what your head count was coming into this earnings report. With are your goals for a head count for the balance of the year and then your capital spending budget, where do you stand with respect to that?

In terms of head count goals, let me go back to the point that Jim from [Under Berg] was making. Certainly our goal is to have a gross margin in excess of 20 percent. A part of the work we're doing now is to make sure that the nature of the way we perform our work, size of the crews, the way we deploy the crews, the support, level of management or the number of levels of management in the operation is at the appropriate level to help us generate stronger growth margin. I don't want to say we have a target head counts because revenue continues to grow. Certainly we need to have the right folks to envision that growing revenue. In terms of your second

question, could you be a little bit clearer?

My second question was on cap X where were you terms of utilization on your existing equipment and what are your budgets for this year on cap X?

Again, at year end where I commented on that we had about $43 million of cap X for the 12 months ended December 31st of 2001 and at that time I committed that of those $43 million, about 8 1/2 million dollars related to [orkle], so therefore we had about 34 1/2 million of capital that I said we would not exceed for operating cap X for the year. In the first quarter of this year we had about $2.7 million of operating cap X. We sold equipment in the first quarter of this year, which did two things. One, there was some proceeds from the sale of assets of about $1 million and it did also show up as a nominal loss on our financial. So we continue to right size the level of equipment we have. As we look out in cap X, cap X like employees is really something we're going to manage to the appropriate revenue and work flow.

And Ram, because our

businesses are very similar across the line, it's very easy for us to move equipment from a telecom to cable, cable to government project. So we're looking for efficiencies across the board to make sure we're using our equipment going forward.

And then the final question, you said your backlog is staying relatively stable at that $1.4 million level. What is the maturity of that backlog? How much of it is 12 months and how much of it is beyond 12 months? And then the final one is, you know, after you took the $142 writedown, what is the good will that's still on the books and what happens next to that good will?

First of all, the backlog question, the 1.4 represents 18 months of a lookout for MasTec.

And that's how we've been doing it for quite some time. In terms of the good will on the books, we have $232 million of good will remaining and good will continue to fluctuate as we have contingent payment agreements for previous acquisitions to the extent that those acquisitions achieve their earning targets. We would then have further targets which would increase tangibles,

but other than continuing to evaluation the value of checks pursuant to Financial Accounting Standard 142, we don't see any further decline.

Okay. Thank you.

Our next question comes from Chris [Gutek] with Morgan Stanley.

Thanks, Austin and Don. If I could follow up on the good will and the writedown issue, the writedown wasn't as small than we were expecting, and I guess it states in your press release it was - the writedown really [inaudible] to inside plan infrastructure of companies, not any outside plan telecom companies that were acquired. I'm just curious if there are any debt covenants either with your credit facility or with your longer term notes that would be negatively impacted by a larger write down of good will.

No. Which is the short answer. Now let me expand. Obviously we just put in place the new credit facility and the credit facility has a tangible network concept in it and again, it's a North American only facility. So from a tangible network perspective, we assume that there was zero good will outstanding so we don't have any covenant issues regardless. We could have

written off 100 percent of our good will and not had a covenant issue.

Okay. Great. And then Don, you mentioned in your prepared comments that you believe your CSOs were adequately reserved. What that, some of the news we've seen about large telecom companies like WorldCom, being an example, of companies that a few months ago would have looked much more financially stable and now are looking less so. When you comment that you believe your DSLs are adequately reserved, is that because you think you've been conservative with your prior reserve accruals, or is that because -- and because that is the case that even if you do have some customers that are experiencing deteriorating credit quality you feel that reserves are not adequate? Is that appropriate? Presuming you do have some customers within the customer base that experience some deteriorating fundamentals.

I will tell you even though we took a chart at year end it's not like we banked a giant reserve on our book for something potential and horrible that might arise. When you look at MCI WorldCom, I will tell you that our exposure

is, as Austin pointed out, less than a half a million dollars on the books and therefore I think what you see is that our ability to manage our exposure is really more operational management and that we monitor the level of work we do. And as often pointed out, when a customer gets on the bubble, we materially dial down the amount of work we're willing to do. We aggressively watch the payment schedules and we keep our exposure from a operational level at a minimum so that we don't have financial exposure.

Chris, I think it's important to reiterate every single Monday our senior management team gets together. We're talking about collections and customers on a regular basis. So nothing gets out further than a week, and if we feel a trend going down, we will pare down quickly to make sure we're going in the right direction.

And the third question, if I could, the depreciation was somewhat lower than we were expecting, and Don, you mentioned that there were some sales of equipment in the quarter but it was a pretty significant decline in depreciation. Is that fully explained by the sale of equipment

or is something else happening there?

Well, remember, depreciation and amortization, and the way you're required to report out numbers, it's the actual 2001 depreciation amortization where 2002 only has depreciation.

And just to be clear, I was looking at depreciation line which I think in the fourth quarter was 12.6, excluding the 2.8 million of amortizations. So your depreciation -- surely your depreciation was 12.6, to 10.0, unless I'm misinterpreting the numbers.

No, that's exactly it. The reduction and depreciation amortization was both the sale of assets and the sale of assets was about, you know, $6 million of book value of assets, along with a call it a nominal reclass of operating assets to assets held for resale.

Okay. And just to finalize the thought there, with things going slow your run rate is about $10 million going forward or is that artificially low?

No, that seems about right.

Okay. Great. Thanks.

Our next question comes from Greg

Margolis with [Eli] Asset Management.

Just going through the numbers.

That's okay, Greg, we knew where you were from.

Just going through the numbers, you know, talking let's say $125 million in EBITDA, interest is roughly $18 million in tax expense $17 million, cap X is $34 million. You're talking about doing over $50 million of free cash flow this year. Does that sound about right to you?

I understand how your math arrived there.

Which would basically be over a dollar a share. The other question is from a strategic standpoint, now that you've been in there a while, what are your thoughts on your international operation and is that something you would ever look to sell off? I know that's a --

No, I think we as a organization have been very clear about all of our assets. I don't think we are wed to any of them. Clearly the focus here, this is not a clearly a cliche with our management team. We are here to maximize investor value and that's it.

As we look at our Brazil operation, our Brazil operations do quite nice. As indicated earlier, it's a contributor to revenue, revenue growth, it's profitable and it makes cash. And in the nature of the work is exactly the type of work we do domestically. If there was a tremendously compelling offer, I think we would look at a compelling offer whether it was Brazil or any of our group equally hard. However, we are in the business of operating, and that is, you know, certainly what we're engaged here to do, so again, sort of a compelling offer for a portion of our business, you know, we're going to continue to operate the business and prove the operations generate more cash flow and earnings.

One other question is one of the risks, you know, in this industry of cutting back SG&A is mispricing projects. Can you give us some assurance that that's something that, you know, might not happen down the road or that's not where you're cutting expenses or that you have a good handle on that and we should feel comfortable going forward?

We can go through a full

process, Greg. Literally sits down when we get a customer and an opportunity. We look at it from a legal perspective, from the operational perspective, the longevity of the client. We're being selective right now on the clients we choose and the operations, locations we choose to serve with them, and the level of comfort is that this management team has put the checks and balances in and it will continue to do so over the next years to come and we're not going to default on any of these processes. We want to work with customers that are going to be here a long period of time that provide us a long view of what we're going to be offering for services, and we want to make sure that happens on a daily basis.

The SG&A improvement, a lot of that is going to be driven by [orkle] if you weren't going to improve the processes around it and reap the financial rewards that a quality system like [orkle] can provide.

Great job in your numbers. Keep it up.

Thank you.

We'll take our next question from Evan Smith with Sanders, Morris, Harris.

Hi, good morning. Can you touch on [Adelphia], just talk about your relationship with those guys on the cable side as well, maybe some opportunities you see with asset sales from them?

Well, first of all, I don't know if you've read the news today but there's some management changes in [Adelphia] today, so we're going to watch that very carefully. We have a history with [Adelphia], we're going to continue to watch the opportunity. They pulled back real hard when this news came out. I think it's important for everybody to understand there's a lot of work that needs to be accomplished to upgrade the [Adelphia] system. MasTec feels they should be in a very good position to offer services to them on a full turnkey basis if necessary, anyplace in the country that they may need to do that with. We also have -- at the beginning of the year, one of the softest broadband groups as we did have quite a bit of [Adelphia] group lined up, we pulled back on and they pulled back on in the first quarter and the second quarter. I think with the new management changes we heard about today, I would tend to say that MasTec is very excited about the opportunities that might present themselves in the very near future.

Thank you very much.

And due to time constraints, today's last question comes from Keith Hansen with the Ohio State Teachers.

I just had one housekeeping item. What were the shares outstanding at the end of the quarter?

There were approximately 48 million shares outstanding on a basic and approximately 48 million shares outstanding on a fully diluted.

Great. Congratulations and thank you.

Good talking with you again.

Folks, thanks very much for joining us today. We look forward to continuing to communicate with you in the future and performing the guidance that we've put out for you. Thank you very much.

This concludes today's conference. You may disconnect at this time.