Quanta Services, Inc. — FY 2018 Form 10-K
Reporting period: Year ended December 31, 2018; filed February 28, 2019. The filing also provides unaudited quarterly results, including Q4 2018. Quanta provides specialty infrastructure contracting services across electric power, pipeline and industrial, and communications markets. Its two reportable segments were Electric Power Infrastructure Services and Pipeline and Industrial Infrastructure Services; the latter was renamed from Oil and Gas Infrastructure Services without a change in segment composition.
Financial performance and liquidity
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Revenue | $11.17 billion | $9.47 billion |
| Gross profit / margin | $1.48 billion / 13.2% | $1.24 billion / 13.1% |
| Operating income / margin | $540.3 million / 4.8% | $378.8 million / 4.0% |
| Net income attributable to common stock | $293.3 million | $315.0 million |
| Diluted EPS | $1.90 | $2.00 |
| Cash from operating activities | $358.8 million | $371.9 million |
| Cash and working capital at year-end | $78.7 million / $1.52 billion | $138.3 million / $1.38 billion |
| Credit-facility borrowings at year-end | $1.07 billion | $668.4 million |
- Revenue rose 18.0%. Electric Power revenue increased 14.6% to $6.42 billion; Pipeline and Industrial revenue increased 23.0% to $4.76 billion, including about $385 million of Stronghold revenue following its 2017 acquisition.
- Operating income increased 42.6%, with margin improving to 4.8%. Common-stock net income and diluted EPS declined despite higher operating income, reflecting a higher tax provision and a substantial increase in other expense.
- Net cash used in investing activities was $402.7 million, including $293.6 million of capital expenditures and $94.9 million for acquisitions. Financing activities used $16.6 million; Quanta repurchased $451.3 million of stock during the year.
- At year-end, $1.09 billion remained available under the senior secured credit facility after borrowings and letters of credit. Quanta reported compliance with credit covenants. Facility maturity is October 2022; borrowings are variable-rate, with a 3.6% weighted-average rate in 2018.
- Backlog, a non-GAAP measure, was $12.34 billion versus $11.18 billion in 2017; $6.98 billion was estimated for the following 12 months. Remaining performance obligations were $4.68 billion, with 66.2% expected to be recognized within 12 months. Much of backlog depends on estimated MSA work that customers may not be obligated to assign.
Q4 and material changes
Q4 revenue was $3.11 billion versus $2.48 billion in Q4 2017, and gross profit was $419.7 million versus $322.9 million. Q4 net income was $57.8 million, compared with $115.6 million a year earlier; diluted EPS was $0.38 versus $0.72. Quanta cited $49.4 million of Q4 asset impairment charges related to winding down certain oil-influenced operations and $36.0 million of net tax charges, primarily associated with its final assessment of the Tax Act and 2018 regulations. Q4 2017 included one-time tax benefits.
- Full-year other expense, net increased to $47.2 million from $5.0 million, mainly due to profit deferrals on a Canadian electric transmission project in which Quanta has an equity interest. The project was about 88% complete at year-end; management expected an approximately $60 million positive net impact on equity-method earnings in 2019 as the project was completed and transferred.
- Pipeline and Industrial segment margin declined to 4.3% from 4.8%. 2018 included $52.7 million of impairment and other charges related to winding down oil-influenced operations and $49.8 million of project losses on two projects. Electric Power segment margin improved to 9.8% from 9.3%, despite a $21.8 million project loss.
- Cash from operations fell modestly despite higher earnings, as working-capital needs increased with revenue and fourth-quarter activity. Year-end days sales outstanding improved to 74 days from 76.
- Foreign operations generated 23.2% of revenue. Currency movements reduced foreign revenue by approximately $18 million year over year.
Outlook, risks and contingencies
Management described a positive long-term outlook and said both segments were generally in a multi-year up-cycle, while noting regulatory, permitting, labor and execution challenges. It expected Electric Power backlog to remain strong in 2019. The filing does not provide a consolidated revenue or earnings forecast.
- Management expected 2019 capital expenditures of approximately $260 million to $275 million and an effective tax rate of approximately 29.5% to 30.0%. It expected cash on hand, facility capacity and operating cash flow to cover 2019 requirements.
- PG&E filed for Chapter 11 protection on January 29, 2019. The filing reports $102.4 million of Quanta receivables from PG&E at December 31, of which $79.9 million remained unpaid on the filing date; another discussion estimates pre-petition receivables at approximately $150 million as of the filing date. Quanta believed collection was likely but warned recovery could be materially lower. These disclosed figures should be reconciled.
- A June 2018 borehole collapse during underground gas pipeline work led to an insurance receivable of $26.7 million at year-end. Mitigation was incomplete, costs could rise materially, and unsuccessful insurance or contractual recovery could require further charges.
- Other notable exposures include fixed-price project overruns, change orders and claims, severe weather, labor shortages, oil and gas market cyclicality, customer cancellations, insurance limits, multiemployer pension obligations and potential litigation. A Louisiana project dispute includes a maximum contractual liquidated-damages exposure of $22.0 million; the company had accrued its estimate of probable loss.
- Quanta adopted new revenue-recognition guidance in 2018, reducing opening retained earnings by $1.3 million; management said the impact on 2018 revenue was immaterial. New lease accounting effective January 2019 was expected to add approximately $280 million to $320 million of right-of-use assets and lease liabilities.
Important facts for investors to verify
- Reconcile the PG&E receivable amounts and monitor bankruptcy treatment, collections and ongoing work.
- Track resolution and remaining costs of the borehole incident, insurance recovery, and the large projects with losses or material estimate changes.
- Assess conversion, cancellation risk and profitability of backlog, especially MSA-based estimates and large pipeline projects.
- Monitor working-capital conversion, cash generation, debt growth, variable interest costs, available facility capacity and covenant headroom.
- Confirm the timing of deferred Canadian project profit recognition and the realized 2019 tax rate against management’s estimates.