Quanta Services, Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; unaudited. Quanta provides specialty contracting and infrastructure services, principally in electric power and oil and gas, plus fiber-optic licensing. Amounts below are in U.S. dollars; financial figures are rounded to millions unless stated otherwise.
Financial results and liquidity
| Metric | Q1 2014 | Q1 2013 or comparison |
|---|---|---|
| Revenue | $1,762.6 million | $1,585.7 million; up 11.2% |
| Gross profit / margin | $272.1 million / 15.4% | $238.3 million / 15.0% |
| Operating income / margin | $90.5 million / 5.1% | $119.3 million / 7.5% |
| Net income attributable to common stock | $54.4 million; $0.25 per diluted share | $72.1 million; $0.34 per diluted share |
| Cash from operations | $(60.5) million | $44.1 million |
| Cash and cash equivalents | $273.3 million at March 31 | $488.8 million at December 31, 2013 |
| Debt and revolving credit availability | $6.2 million of current and long-term debt; no credit-facility borrowings; $1.11 billion available | $213.5 million of letters of credit outstanding |
| Working capital | $1.23 billion | As reported by management at March 31 |
Gross margin improved, but operating and net income declined. Selling, general and administrative expense rose to $173.3 million from $113.7 million, principally reflecting a $38.8 million charge from an adverse arbitration decision and higher acquisition and integration costs. The effective tax rate was 36.0%, versus 35.3%.
Segments and material changes
- Electric Power: Revenue rose 8.2% to $1,278.2 million; operating income increased 8.9% to $144.4 million. Acquisitions and customer spending contributed, partly offset by severe winter weather and foreign-exchange effects.
- Oil and Gas Infrastructure: Revenue increased 24.2% to $445.9 million, including substantial acquired revenue. The segment recorded an operating loss of $21.2 million, versus income of $10.4 million, primarily due to the NGC arbitration charge and an increased estimate of Central States pension-plan withdrawal liability.
- Fiber Optic Licensing and Other: Revenue declined 15.8% to $38.5 million and operating income fell to $12.1 million from $16.9 million, reflecting fewer ancillary telecom projects, higher network maintenance costs and lit-service startup costs.
- Five acquisitions closed during the quarter for total consideration of approximately $116.5 million, comprising $79.9 million cash and $36.6 million in issued shares and exchangeable shares. Acquired businesses contributed $37.0 million of Q1 revenue.
- Total backlog was $9.05 billion at March 31, up from $8.73 billion at December 31, 2013. Management cautions that backlog includes estimates and may change or not be realized.
Cash flow, debt and capital plans
Operating cash outflow reflected working-capital needs, including receivables and unbilled contract assets, project ramp-ups, weather delays and billing-milestone timing. Investing cash outflow was $145.0 million, including $71.4 million of capital expenditures and $76.4 million for acquisitions. Financing cash outflow was $10.2 million, mainly debt repayments. The company expects 2014 capital expenditures of $300–$325 million, including $50–$60 million for fiber-optic network expansion; it had spent $71.4 million through March 31. Management expects cash on hand, operating cash flow and credit availability to fund operating needs and planned investment.
The $1.325 billion revolving facility matures October 2018. Quanta reported compliance with its covenants at quarter-end. Effective April 1, 2014, facility pricing became leverage-ratio based. Reported balance-sheet debt was modest, but letters of credit and other contingent commitments are material considerations.
Outlook, risks and unusual items
- Management sees growth opportunities in electric-grid upgrades, transmission, shale-related pipeline and gathering infrastructure, pipeline integrity work, and fiber-optic lit services. It expects electric-power backlog to remain strong in 2014 and is optimistic about oil-and-gas opportunities, while noting project timing and execution uncertainty. No specific revenue or earnings guidance is provided.
- Management anticipated adverse weather effects in Q2 2014, including possible late seasonal thaw in Canada and the northern U.S. The business is seasonal and sensitive to weather, customer budgets, permitting, project schedules, labor availability, commodity markets and margins on fixed-price work.
- NGC arbitration: A March 2014 panel decision awarded National Gas Company of Trinidad and Tobago $17.3 million in damages plus approximately $11.0 million in legal fees and interest. Quanta recorded a total $38.8 million SG&A charge, including a $10.5 million receivable write-off; it recovered none of its claim.
- Sunrise Powerlink dispute: Quanta subsidiary PAR seeks more than $165 million plus interest for a change order; SDG&E counterclaimed for approximately $32 million. The arbitration hearing was set for March 2015. Quanta states an adverse outcome could materially affect financial condition, results and cash flows. A significant related receivable was reclassified to long-term assets.
- Pension-plan exposure: Revised estimates for the Central States Plan withdrawal scenarios ranged from $40.1 million to $55.4 million. Quanta increased its recognized liability, but the final amount remains uncertain and could be materially higher than accrued.
- SEC inquiry: The SEC notified Quanta of an inquiry into certain activities in foreign jurisdictions, including South Africa and the UAE, and requested document preservation. The filing says the SEC had not alleged violations and Quanta was cooperating.
- Other notable exposures include $2.50 billion of performance bonds outstanding, $213.5 million of letters of credit, $163.1 million of accrued insurance claims, and a $329.5 million maximum guaranteed residual value on equipment leases. Quanta reported no material changes to the risk factors in its 2013 Form 10-K.
Important facts for investors to verify
- How much of the operating-income decline and oil-and-gas segment loss is attributable to the NGC charge, pension-liability adjustment and other nonrecurring items?
- What is the status and likely recoverability of the Sunrise Powerlink claim and its related long-term receivable?
- How will the Central States Plan dispute resolve, and what liability has Quanta recognized relative to the revised $40.1–$55.4 million estimate range?
- Are working capital and operating cash flow recovering, and can the company fund its $300–$325 million capital plan and acquisitions without materially drawing on its credit facility?
- What developments arise from the SEC inquiry, and how do customer concentration, backlog conversion, weather and project execution affect expected results?