Quanta Services, Inc. — Form 10-Q summary
Reporting period: Quarter and nine months ended September 30, 2016. Quanta provides specialty contracting and infrastructure services, primarily in electric power and oil and gas markets, and reports two segments: Electric Power Infrastructure Services and Oil and Gas Infrastructure Services. Figures below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $2,042.2 | $1,939.4 | $5,548.4 | $5,673.2 |
| Gross profit / margin | $302.6 / 14.8% | $235.2 / 12.1% | $706.1 / 12.7% | $700.6 / 12.3% |
| Operating income / margin | $130.2 / 6.4% | $80.9 / 4.2% | $202.9 / 3.7% | $233.9 / 4.1% |
| Continuing-operations net income | $73.5 | $45.7 | $111.1 | $133.6 |
| Net income attributable to common stock | $73.7 | $216.4 | $110.8 | $316.0 |
| Basic and diluted EPS | $0.48 | $1.15 | $0.70 | $1.53 |
| Operating cash flow, continuing operations | $(69.3) | $108.9 | $196.9 | $394.7 |
Q3 revenue rose 5.3%, while nine-month revenue fell 2.2%. Nine-month common-stock net income and EPS comparisons are heavily affected by the 2015 fiber-optic licensing sale: 2015 included $193.1 million of discontinued-operations net income, including the after-tax disposal gain. Continuing-operations income is a more comparable indicator.
Q3 gross margin improved 2.7 percentage points, supported by better project performance and activity. For the nine months, gross profit increased slightly but operating income declined, as SG&A rose 8.7% to $479.5 million and operating margin fell to 3.7%. The nine-month SG&A increase included technology and business development spending, acquired-company costs, severance and restructuring, and higher compensation. Interest expense was $10.9 million for the nine months, up from $5.1 million.
Segments and material changes
- Electric Power: Q3 revenue increased 3.3% to $1,222.4 million and segment operating income rose to $119.0 million (9.7% margin). For the nine months, revenue declined 2.1% to $3,568.5 million, while operating income rose 3.0% to $282.3 million (7.9% margin). Acquisitions, emergency restoration work and improved resource utilization helped; regulatory and permitting delays weighed on larger projects.
- Oil and Gas: Q3 revenue increased 8.4% to $819.8 million and operating income rose to $65.7 million (8.0% margin), reflecting projects entering full construction and stronger distribution work. Nine-month revenue declined 2.3% to $1,979.8 million and operating income fell 29.9% to $83.4 million (4.2% margin), as delayed larger pipeline projects reduced higher-margin work and resource utilization.
- Backlog at September 30 was $9.84 billion, versus $9.39 billion at December 31, 2015. Twelve-month backlog was $5.77 billion. Management cautions that backlog estimates can change and many master service agreements do not guarantee specific work volumes.
- Quanta completed five acquisitions in the first nine months, for estimated total consideration of $96.1 million, including contingent consideration. Acquired businesses contributed approximately $49.1 million of nine-month revenue and a pretax loss of $1.6 million after acquisition dates.
Cash, debt, and liquidity
- Cash and equivalents were $117.4 million at September 30, down from $128.8 million at year-end. Working capital was $1.16 billion.
- Continuing-operations operating cash flow was $196.9 million for the nine months, down from $394.7 million. Q3 operating cash flow was negative $69.3 million, principally reflecting working-capital needs as projects expanded and billing delays on two Canadian transmission projects.
- Capital expenditures were $144.4 million for the nine months. Management expected full-year 2016 continuing-operations capital expenditures of $205–$215 million.
- Total debt obligations were $487.5 million, including $479.7 million drawn on the revolving facility. The $1.81 billion facility matures in December 2020; $1.02 billion remained available after loans and letters of credit. Quanta reported compliance with all credit covenants.
- Cash flow from investing activities was a use of $201.9 million for the nine months. Financing activities of continuing operations used $2.3 million; the prior-year period included substantial share repurchases.
Outlook, risks, and unusual items
- Management expressed cautious optimism about longer-term demand, citing electric-grid upgrades, renewable generation connections, gas distribution replacement and pipeline integrity work. It expected electric-power backlog to remain strong through the rest of 2016 and anticipated larger pipeline project activity, while noting that timing remained uncertain. The filing does not provide a clear numerical revenue, earnings or EPS forecast.
- Management identified low oil and natural-gas prices, customer capital-spending reductions, regulatory and permitting delays, project timing, competition, weather, labor availability, foreign exchange and execution on fixed-price work as key uncertainties.
- Alaska power plant project: Quanta recorded $54.8 million of losses in the first nine months of 2016, including an additional $3.0 million in Q3. The $201 million project was approximately 97% complete and expected to reach substantial completion near year-end. Possible additional losses could not be estimated; potential claims and cost recovery were not included in its loss estimate.
- Contract estimates and claims: Q3 operating results were positively affected by 6.3% from aggregate changes in estimates on projects in progress at June 30, mainly numerous individually immaterial favorable revisions. Contract price adjustments for unsettled change orders and claims totaled $115.6 million; ultimate recovery could be higher or lower.
- Customer concentration and billing: One electric-power customer represented 16% of net receivables, or $287.0 million, including $224.1 million in costs and estimated earnings exceeding billings, associated with billing and documentation delays on two Canadian projects.
- Pension and guarantees: The disputed Central States Plan withdrawal liability was described as having a reasonably possible loss range of $40.1–$55.4 million; Quanta had paid $15.9 million by quarter-end and said the ultimate amount could exceed recognized expense. Outstanding performance bonds were approximately $3.5 billion, with estimated project costs to complete of $1.3 billion. Equipment lease residual-value guarantees had a maximum stated value of $544.7 million.
- Other items: Quanta recorded $59.5 million in unrecognized tax benefits and said up to $32.1 million might decrease within 12 months. The SEC notified Quanta on October 27, 2016 that it had closed its inquiry into certain foreign activities without intending further action. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether the Alaska project reaches completion as expected, and whether further losses or recoveries arise.
- Collection and billing progress on the two Canadian transmission projects and the $287.0 million customer exposure.
- Conversion of backlog into revenue, particularly whether delayed large electric and pipeline projects proceed; backlog is not guaranteed work.
- Whether working-capital demands and operating cash flow improve as projects progress and billings are collected.
- The outcome and eventual cost of the Central States pension withdrawal dispute, and the adequacy of reserves for self-insurance, bonds and other contingencies.
- Effects of low commodity prices, permitting delays, foreign exchange and acquisition integration on Oil and Gas segment margins and consolidated results.