Quanta Services, Inc. — FY 2014 Form 10-K
Reporting period: Year ended December 31, 2014. This is an annual filing, not a standalone fourth-quarter filing. Amounts are U.S. dollars unless stated otherwise.
Business context
Quanta provides specialty contracting and infrastructure services, primarily for electric power and oil and gas customers in the U.S., Canada and Australia. Its segments are Electric Power Infrastructure Services, Oil and Gas Infrastructure Services, and Fiber Optic Licensing and Other. FY 2014 revenue was 67%, 31% and 2% of the total, respectively. The company completed nine acquisitions during 2014 and had approximately 24,600 employees at year-end.
Financial performance and liquidity
| Metric | FY 2014 | FY 2013 |
|---|---|---|
| Revenue | $7.851 billion | $6.523 billion |
| Gross profit / margin | $1.234 billion / 15.7% | $1.055 billion / 16.2% |
| Operating income / margin | $475.6 million / 6.1% | $526.9 million / 8.1% |
| Net income attributable to common stock | $296.7 million | $401.9 million |
| Continuing-operations EPS, diluted | $1.35 | $1.87 |
| Operating cash flow from continuing operations | $310.8 million | $446.6 million |
| Capital expenditures | $301.5 million | $263.6 million |
- Revenue grew 20.4%; gross profit rose 16.9%, while operating income fell 9.7% and common-stock net income fell 26.2%.
- Electric Power revenue rose 16.9% to $5.239 billion, but segment operating income fell to $458.3 million from $521.9 million; its margin declined to 8.7% from 11.6%. Oil and Gas revenue rose 30.8% to $2.445 billion and segment operating income increased to $162.8 million from $138.5 million, although its margin declined to 6.7% from 7.4%. Fiber Optic revenue declined 2.6% to $168.1 million.
- FY 2014 cash and equivalents were $190.5 million, working capital was $1.417 billion, and total debt was approximately $81.4 million, including $68.8 million drawn on the credit facility. Of the $1.325 billion revolving facility, $919.5 million remained available after borrowings and letters of credit. Quanta reported compliance with its credit covenants.
- Backlog was $9.762 billion at year-end, up from $8.728 billion; $5.317 billion was estimated for realization within 12 months. Backlog is a company estimate, not a GAAP measure, and contracts may be cancelled or changed.
- Quarterly FY 2014 revenue was $2.053 billion in Q4; Q4 net income was $71.0 million and continuing-operations EPS was $0.30.
Material changes and unusual items
- FY 2014 SG&A included a $102.5 million provision on the Sunrise Powerlink receivable and a $38.8 million charge arising from an adverse arbitration decision involving a 2010 directional-drilling project. Together, these charges materially reduced operating income.
- In December 2014, Quanta settled the Sunrise Powerlink arbitration for $65 million, compared with a previously recorded receivable of approximately $165 million. The settlement payment was received in January 2015.
- Quanta paid $28.3 million in April 2014 following the NGC arbitration decision. The 2014 cash-flow comparison was also affected by higher working-capital requirements and project timing; DSO increased to 83 days from 72 days.
- FY 2013 included a $112.7 million pretax gain from selling Quanta’s interest in Howard Midstream Energy Partners. This nonrecurring gain contributed to the higher prior-year earnings and makes year-over-year profit comparisons less like-for-like.
- Operating cash flow declined to $310.8 million from $446.6 million. Investing activities used $542.9 million, including $301.5 million of capital expenditures and $262.2 million for acquisitions; financing activities used $58.3 million, including $93.5 million of share repurchases.
Outlook, risks and contingencies
- Management expected strong electric-power backlog to support activity in 2015 and cited opportunities from grid upgrades, reliability work, generation changes and transmission expansion. It also noted that permitting, regulation, weather and customer spending can delay projects.
- Management viewed oil and gas infrastructure as a longer-term growth opportunity, but warned that the sharp decline in oil prices since mid-2014 could reduce near-term customer investment if low prices persist. The timing of a recovery was uncertain.
- Management forecast 2015 capital expenditures of $275–$300 million, including $50–$60 million for fiber-network expansion. It expected to fund these primarily from operating cash, cash on hand and the credit facility. No earnings or revenue guidance was provided in the filing text.
- Quanta reported a possible Central States multi-employer pension withdrawal liability of up to $55.4 million and said the final amount could be materially higher than the liability recognized. Several contributing plans were in endangered or critical status; future additional contributions could not be estimated clearly.
- The SEC had inquired into certain activities in foreign jurisdictions and requested document preservation related, among other things, to Quanta’s FCPA compliance program. The company said the SEC had not alleged violations and that it was cooperating.
- Other key risks include project execution and fixed-price contract losses, customer cancellations and collection risk, labor availability and safety, weather and seasonality, foreign exchange, acquisition integration, self-insured claims, environmental liabilities, and dependence on bonding and letters of credit. Performance bonds outstanding were estimated at $2.8 billion, with estimated cost to complete of $701 million.
- Management and the auditor reported effective internal control over financial reporting at year-end; the assessment excluded 2014 acquisitions, representing 9.7% of assets and 4.0% of revenue. The auditor gave an unqualified opinion on the financial statements and controls.
Important facts for investors to verify
- Whether operating margins recover from FY 2014 levels, particularly in Electric Power, and whether the Sunrise and NGC charges are fully isolated from ongoing performance.
- Whether the $65 million Sunrise settlement was collected as disclosed and how elevated DSO, retainage and working capital affect cash conversion.
- How sustained lower oil prices affect Oil and Gas awards, backlog conversion and project profitability.
- The final Central States pension withdrawal liability and any further required contributions or assessments.
- Backlog quality and cancellation exposure, given that many master service agreements do not guarantee specific work volumes and may be terminated on short notice.
- Execution of the $275–$300 million 2015 capital plan, fiber-network returns, and the impact of the additional $182 million of share repurchases made in Q1 2015.
- Developments in the SEC inquiry, foreign-currency exposure, and liabilities from self-insurance, performance bonds and other contingencies.