Quanta Services, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparisons are with Q1 2018 unless noted. Quanta provides infrastructure contracting services across electric power, pipeline and industrial, and communications markets. Results are reported in Electric Power Infrastructure Services and Pipeline and Industrial Infrastructure Services.
Financial performance
| Metric | Q1 2019 | Q1 2018 / comparison |
|---|---|---|
| Revenue | $2.807 billion | $2.418 billion; up 16.1% |
| Gross profit / margin | $364.0 million / 13.0% | $301.0 million / 12.5% |
| Operating income / margin | $119.5 million / 4.3% | $75.2 million / 3.1% |
| Net income attributable to common stock | $120.5 million; diluted EPS $0.82 | $37.6 million; diluted EPS $0.24 |
| Operating cash flow | $(82.8) million | $26.0 million |
| Investing cash flow | $(147.2) million | $(91.9) million |
| Financing cash flow | $236.3 million | $26.7 million |
Revenue growth reflected increases in both segments, particularly pipeline and industrial work. Gross margin improved by 0.5 percentage points, while SG&A declined to 8.3% of revenue from 8.9%. Net income included a $60.3 million recognition of previously deferred earnings on a Canadian electric transmission investment after the project entered commercial operation; this materially boosted other income and is an important non-recurring comparison factor. A completed Canadian transmission project also increased Q1 2019 gross profit by $25.5 million from revisions to prior-period estimates.
- Electric Power: Revenue of $1.664 billion, up 6.1%; segment operating income of $161.6 million, up 14.7%, with a 9.7% margin versus 9.0%. Growth reflected transmission and distribution spending, grid modernization and fire-hardening programs; lower emergency restoration revenue partly offset it.
- Pipeline and Industrial: Revenue of $1.143 billion, up 34.6%; segment operating income of $40.7 million, versus $10.1 million, with a 3.6% margin versus 1.2%. Higher customer spending and more large pipeline project activity contributed to growth.
Liquidity, debt and capital allocation
At March 31, 2019, cash and cash equivalents were $85.4 million and working capital was $1.78 billion. Total debt obligations were approximately $1.378 billion, including $1.372 billion under the senior secured credit facility; the facility had $812.9 million of availability after outstanding letters of credit and guarantees of $385.0 million. Quanta was in compliance with its credit covenants. The facility matures October 31, 2022. The quarterly weighted-average interest rate on credit-facility borrowings was 3.92%, up from 3.34%.
Operating cash use reflected a $250.2 million net working-capital outflow, including receivables growth, delayed collections and the PG&E bankruptcy matter. Days sales outstanding rose to 88 from 77 a year earlier. Capital expenditures were $68.6 million; management expected approximately $275 million for full-year 2019. The company paid a $0.04-per-share dividend during the quarter and had $286.8 million remaining under its repurchase authorization.
Backlog, outlook and risks
- Remaining performance obligations were $4.71 billion, with 70.3% expected to be recognized in the following 12 months. Total estimated backlog, including MSA and short-term non-fixed-price work, was $12.61 billion. Management cautions that MSAs generally do not guarantee volumes and contracts may be terminated.
- Management described demand trends as favorable and both segments as generally being in a multi-year up-cycle; it expected Electric Power backlog to remain strong through the rest of 2019. No specific full-year revenue, earnings or EPS guidance was provided in the filing text.
- Key operating risks include seasonality and weather, project timing and execution, fixed-price cost estimates, permitting and regulatory delays, skilled-labor availability, commodity-market cyclicality, foreign exchange, and customer credit and collection risks.
- PG&E: The customer filed for Chapter 11 on January 29, 2019. Approximately $157 million of pre-petition receivables remained unpaid at quarter-end. After quarter-end, two contracts were assumed by PG&E, authorizing payment of approximately $116 million; collection of the remaining approximately $41 million remained uncertain.
- Peru concessions: After quarter-end, PRONATEL issued a termination notice and called $25 million of on-demand bonds. Quanta disputed the actions and expected to pursue arbitration. The projects were about 85% complete at March 31, and Quanta could not estimate a potential loss; no loss was accrued.
- Pipeline incident: Quanta recorded a $45.8 million insurance receivable related to a borehole collapse. Claims are expected to exceed the recorded receivable; unsuccessful insurance or contractual recovery could require material additional charges.
- Other disclosed exposures include a disputed Maurepas liquidated-damages claim (maximum contractual liability $22 million), a California wage-and-hour matter with reasonably possible exposure estimated up to approximately $11 million plus fees, performance bonds estimated at $2.5 billion, and equipment lease residual-value guarantees with a maximum of $697.3 million.
Most important facts for investors to verify
- How much of reported earnings is repeatable after excluding the $60.3 million deferred investment earnings and the $25.5 million project estimate benefit.
- Whether working capital, DSO and operating cash flow improve, and whether PG&E receivables are collected as expected.
- Progress and financial outcomes of the Peru contract dispute and pipeline insurance recovery.
- Whether backlog converts to revenue on schedule, particularly given MSA volume uncertainty and project permitting, weather and execution risks.
- Debt levels, borrowing costs, covenant headroom and planned capital spending relative to cash generation.