Quanta Services, Inc. — Q2 2018 Form 10-Q
Business context and reporting period. Quanta provides infrastructure contracting services, principally for electric power and oil and gas customers, with additional communications and related services. This unaudited filing covers the three and six months ended June 30, 2018; comparisons are with the same 2017 periods. Quanta reports Electric Power Infrastructure Services and Oil and Gas Infrastructure Services. Results are seasonal, and interim results may not indicate full-year performance.
Key financial results
| Metric | Q2 2018 | Q2 2017 | First half 2018 | First half 2017 |
|---|---|---|---|---|
| Revenue | $2.656 billion | $2.200 billion | $5.074 billion | $4.379 billion |
| Gross profit / margin | $333.4 million / 12.5% | $302.2 million / 13.7% | $634.4 million / 12.5% | $568.4 million / 13.0% |
| Operating income / margin | $123.0 million / 4.6% | $109.8 million / 5.0% | $198.3 million / 3.9% | $184.9 million / 4.2% |
| Net income attributable to common stock | $74.4 million | $63.8 million | $112.0 million | $112.1 million |
| Diluted EPS | $0.48 | $0.41 | $0.72 | $0.72 |
| Operating cash flow | $156.5 million | $4.8 million | $182.5 million | $1.1 million |
Segment performance. Q2 Electric Power revenue rose 20.7% to $1.570 billion and operating income rose to $146.0 million; segment operating margin improved to 9.3% from 8.7%. Oil and Gas revenue rose 20.7% to $1.086 billion, substantially reflecting the Stronghold acquisition, but operating income fell 35.3% to $43.8 million and margin declined to 4.0% from 7.5%. For the first half, Electric Power revenue increased 24.5% and operating income increased 34.9%; Oil and Gas revenue increased 4.1%, while operating income decreased 49.4%.
Balance sheet and liquidity at June 30, 2018. Cash and cash equivalents were $120.4 million; working capital was $1.38 billion. Debt comprised $840.2 million of revolving loans, $12.9 million of short-term debt and other long-term debt and capital leases. The $1.81 billion revolving facility had $529.9 million available after outstanding loans and letters of credit/bank guarantees. Quanta reported compliance with its credit covenants. First-half capital expenditures were $148.6 million; management expected full-year 2018 capital expenditures of $290–$310 million. First-half share repurchases cost $193.9 million in total, of which $189.9 million had been paid in cash by period-end.
Changes versus prior comparable periods
- Revenue growth reflected stronger electric transmission and distribution activity, storm restoration, and acquired businesses, especially Stronghold. Lower customer spending on large-diameter pipeline work partly offset Oil and Gas growth.
- Gross margin declined in both comparison periods, mainly because large-diameter pipeline work—which typically has higher margins—was a smaller share of activity and resource utilization was weaker. Oil and Gas segment margins were particularly pressured.
- Q2 common-stock income increased, but first-half common-stock income was essentially unchanged. Higher interest expense and substantially higher other expense offset operating growth. Other expense included equity-method losses/profit deferrals on a Canadian transmission project.
- Operating cash flow improved markedly year over year, with management attributing the change principally to timing of payments on accounts payable and accrued liabilities and lower income-tax payments, partly offset by working-capital needs for electric projects.
Outlook, risks and unusual items
- Management described a positive long-term outlook and expected strong Electric Power backlog in 2018, citing grid modernization, reliability, renewable generation and communications infrastructure demand. It also anticipated executing a significant number of larger pipeline projects during 2018. No specific revenue or EPS guidance is provided in the filing.
- Remaining performance obligations were $5.58 billion at June 30, with 79.8% expected to be recognized in the following 12 months. Total backlog, a non-GAAP measure that includes estimated MSA and short-term non-fixed-price work, was $11.49 billion. MSA work is not necessarily firm and contracts may generally be terminated on 30–90 days’ notice.
- Risks include project delays or cancellations from permitting, regulation, environmental access, weather and customer capital constraints; fixed-price execution and cost-estimate risk; skilled-labor availability; cyclical energy markets and commodity prices; customer collection risk; foreign currency movements; and acquisition integration and impairment risk. Management noted pressure on some Oil and Gas operating units and no interim goodwill impairment in the first half.
- Q2 included a $6.3 million operating-income benefit from a decrease in acquisition contingent-consideration fair value. Changes in estimates on previously commenced fixed-price work added $0.8 million to Q2 gross profit and $14.2 million to first-half gross profit; the Canadian transmission project contributed favorable estimate changes, partly offset by adverse changes on other projects. Additional profit deferrals on that Canadian project were expected through the first half of 2019.
- The effective tax rate was 28.2% for Q2 and 29.5% for the first half; management expected approximately 29% for 2018. Analysis of certain Tax Act provisions was ongoing. Adoption of new revenue-recognition guidance reduced opening retained earnings by $1.8 million; reported-period effects were immaterial.
- Contingencies include a disputed Maurepas project liquidated-damages claim with a reasonably possible loss of up to $22.0 million, plus later-noticed warranty claims for which loss could not be estimated. A separate employment class action could expose Quanta to up to approximately $11.1 million plus fees if it is unsuccessful and staffing agencies cannot fund damages; management did not consider a material loss probable at filing. Outstanding performance bonds were approximately $3.2 billion, with estimated cost to complete of $864 million. The filing also cites a maximum $651.5 million residual-value guarantee on equipment leases, though management expected no significant payment.
- Subsequent to quarter-end, Quanta acquired a 30% interest in an Australian water and gas pipeline contractor for $22.2 million, with an option to acquire the remaining equity through 2020.
Important facts for investors to verify
- Whether large pipeline project awards, permitting and schedules support the expected second-half activity, and whether Oil and Gas margins recover.
- How much of backlog converts to revenue: distinguish firm remaining performance obligations from estimated, cancellable MSA and non-fixed-price work.
- Whether operating cash generation remains strong after the favorable working-capital timing effects, alongside planned capital spending and continued repurchases.
- Debt and financing capacity, including variable-rate exposure, facility availability, covenant headroom and commitments for letters of credit, bonds and acquisitions.
- Developments in the Maurepas and employment litigation, contingent consideration, insurance and multiemployer pension exposures, and the Canadian project’s deferred profit recognition.
- Final effects of Tax Act accounting and foreign-currency movements, plus integration and performance of acquired businesses.