Quanta Services, Inc. — 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. Quanta provides specialty contracting and infrastructure services, primarily to electric power and oil and gas customers in the U.S., Canada, Australia and select international markets. Revenue mix was 63% electric power and 37% oil and gas.
Financial performance and liquidity
| Metric | 2016 | 2015 |
|---|---|---|
| Revenue | $7.651 billion | $7.572 billion |
| Gross profit / margin | $1.014 billion / 13.3% | $924 million / 12.2% |
| Operating income / margin | $321 million / 4.2% | $238 million / 3.1% |
| Net income from continuing operations | $200 million | $131 million |
| Net income attributable to common stock | $198 million | $311 million |
| Continuing-operations EPS | $1.26 | $0.62 |
| Cash from continuing operating activities | $381 million | $618 million |
- Total net income fell to $200 million from $322 million, largely because 2015 included the after-tax $171 million gain on the sale of fiber optic licensing operations. The business was reported as discontinued operations.
- Cash and cash equivalents were $112 million; working capital was $1.084 billion. Total debt obligations were about $358 million, including $351 million of revolving credit borrowings. The $1.81 billion facility had $1.15 billion available after borrowings and letters of credit; it matures in December 2020. Quanta reported covenant compliance.
- Operating cash flow declined year over year, reflecting working-capital needs as large pipeline projects entered construction and billing delays on two Canadian transmission projects. Capital expenditures were $213 million.
- Backlog was $9.75 billion, up from $9.39 billion; estimated 12-month backlog was $5.85 billion, versus $5.21 billion. Backlog includes estimates under master service agreements and is not a GAAP measure; contracts may be terminated, and customers generally need not commit to specific MSA work volumes.
Material changes versus 2015
- Revenue increased 1.0%. Oil and gas revenue rose 6.3% to $2.80 billion, while electric power revenue declined 1.8% to $4.85 billion.
- Gross margin improved to 13.3% from 12.2%, and operating income rose 35%. Management cited improved utilization and productivity on larger projects and more favorable weather. SG&A increased 10.2% to $653 million, including higher compensation, technology and business-development costs, and severance and restructuring charges.
- Foreign-currency translation reduced 2016 foreign revenue by approximately $41 million. Foreign operations generated $1.59 billion, or 20.8% of consolidated revenue.
- Operating cash flow was lower than in 2015, which had benefited from a $65 million project-receivable settlement and favorable billing terms on certain projects.
Outlook, risks and unusual items
- Management expressed a positive long-term outlook, describing both segments as entering a potential multiyear upcycle. It expected electric-power backlog to remain strong through 2017 and anticipated significant larger pipeline project activity during 2017. These are expectations, not guaranteed outcomes.
- 2017 continuing-operations capital expenditures were forecast at $210 million to $225 million, funded primarily from cash, operating cash flow and credit-facility borrowings. No specific revenue or earnings guidance is provided in the filing text.
- A $54.8 million loss was recorded in 2016 on an Alaska power-plant construction project with a $202 million contract value, substantially completed in the fourth quarter. Quanta cited performance and commissioning issues and a claimed force majeure event; it had recorded no recovery for claims under development and warned that additional losses were possible.
- Two Canadian transmission projects had billing and documentation delays. At year-end, the associated customer represented 16% of net receivables ($277 million), including $176 million of costs and estimated earnings in excess of billings. Management said billing and payment activity improved in the latter half of 2016.
- Other key risks include oil and gas price volatility and customer spending, permitting and regulatory delays, weather and seasonality, labor shortages, fixed-price project execution, foreign-exchange movements, customer collections, self-insured claims and multiemployer pension exposure. Certain Central States Plan withdrawal claims had a reasonably possible loss range of $40.1 million to $55.4 million; Quanta had paid $17.5 million toward the assessment by year-end.
- Quanta recorded $8.0 million of asset impairment charges in 2016, primarily associated with a pending disposition of international renewable-energy operations. The SEC concluded its inquiry into certain foreign activities in October 2016 and stated it did not intend to pursue further action.
Important facts for investors to verify
- Whether backlog, especially MSA and larger pipeline work, converts to revenue on expected timing and margins.
- Progress in billing and collecting the large Canadian transmission-project receivable and resolution of related change orders and claims.
- Final costs, claims recovery and close-out results for the Alaska project.
- Developments in Central States Plan withdrawal liability and other material legal matters, including the California wage-and-hour case, for which the filing describes a possible loss of up to $23 million.
- Whether management’s 2017 project and capital-spending expectations are realized, and how operating cash flow and leverage respond to working-capital demands.