Quanta Services, Inc. — Q2 2012 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2012; unaudited. Quanta provides infrastructure contracting services in electric power, natural gas and oil pipelines, telecommunications, and fiber optic licensing.
Financial performance
Amounts are in millions of dollars, except per-share data and percentages.
| Metric | Q2 2012 | Q2 2011 | H1 2012 | H1 2011 |
|---|---|---|---|---|
| Revenue | $1,516.7 | $1,010.9 | $2,941.9 | $1,859.9 |
| Gross profit / margin | $235.4 / 15.5% | $154.1 / 15.2% | $430.9 / 14.6% | $225.0 / 12.1% |
| Operating income / margin | $111.1 / 7.3% | $57.7 / 5.7% | $190.6 / 6.5% | $30.8 / 1.7% |
| Net income attributable to common stock | $65.5 | $31.8 | $111.2 | $14.2 |
| Diluted EPS | $0.31 | $0.15 | $0.52 | $0.07 |
| Cash provided by operating activities | $86.3 | $56.2 | $26.1 | $52.0 |
- Q2 revenue rose 50.0%; H1 revenue rose 58.2%. Management attributed growth primarily to increased customer capital spending and larger or more numerous transmission projects, with acquired businesses also contributing.
- Cash and cash equivalents were $172.9 million at June 30, down from $315.3 million at year-end 2011. H1 investing cash outflow was $200.3 million, including $85.3 million of capital expenditures, $68.7 million for acquisitions and $53.8 million of equity investment contributions, primarily to HEP. Financing provided $33.7 million in H1.
- Working capital was $1.04 billion. The company had $39.0 million outstanding under its $700 million revolving credit facility, $173.7 million in letters of credit and $487.3 million available. It reported compliance with facility covenants. Long-term debt was $39.0 million.
- H1 operating cash flow was below the prior-year period despite higher earnings, primarily because increased project activity raised working-capital requirements. Costs and estimated earnings in excess of billings increased to $352.9 million from $206.2 million at year-end.
Segments and material changes
- Electric Power: H1 revenue was $1,947.7 million, up 57.9%; operating income was $220.5 million versus $98.5 million. Higher project volume and margins on certain transmission work helped; lower emergency restoration revenue partly offset growth.
- Natural Gas and Pipeline: H1 revenue was $698.8 million, up 80.8%; operating income was $4.3 million versus a $38.2 million loss. Management cited shale-related pipeline activity, new service agreements and recovery from prior-year weather-, delay- and regulatory-related project losses.
- Telecommunications: H1 revenue increased 28.9% to $239.6 million and operating income increased to $22.2 million from $5.4 million, primarily with stimulus-funded broadband and fiber-to-cell-site work.
- Fiber Optic Licensing: H1 revenue increased 3.2% to $55.8 million; operating income increased 14.3% to $28.8 million.
- Backlog at June 30 was $7.284 billion, compared with $7.239 billion at December 31, 2011; $4.080 billion was expected to be realized within 12 months. Management cautioned that MSAs may not guarantee work volumes, contracts can be terminated, and projects can be delayed.
- Four 2012 acquisitions had aggregate consideration of approximately $105.8 million. Quanta also completed approximately $52.3 million of additional contributions to its HEP investment during 2012; its ownership interest declined from about 39% to about 31%.
Outlook, risks and contingencies
- Management expected activity and spending growth across its segments to continue through 2012 and the following years, and anticipated improved margins over the near and long term. These are expectations, not quantified earnings or revenue guidance.
- 2012 capital expenditures were expected to be $200–$220 million, including $40–$50 million for fiber optic networks; management expected funding substantially from internal cash flow and cash on hand.
- Key uncertainties include weather and seasonality, project execution and fixed-price contract risk, customer spending and access to capital, regulatory and environmental permitting delays, energy-price volatility, skilled-labor availability, and acquisition integration. Management noted that certain proposed large pipeline projects for 2013–2014 had not yet resulted in awards.
- Contract price adjustments for change orders and claims under negotiation totaled approximately $207.1 million at June 30, versus $77.3 million at year-end. Recovery and timing remain uncertain.
- Two wildfire matters could result in material uninsured losses. For the San Diego-area Witch Creek fire litigation, management said settlement discussions were progressing and estimated uninsured liability to be immaterial if resolved on discussed terms; otherwise, the potential loss beyond insurance could not be estimated. In an Amador County fire matter, the USDA filed suit on August 3, 2012; Quanta had recorded an $8.5 million liability and corresponding insurance receivable but could not estimate potential losses above coverage.
- A $32.6 million partial withdrawal liability related to the Central States multi-employer pension plan was recorded in 2011. The plan disputes the asserted withdrawal timing; a later withdrawal date could increase the liability, potentially significantly, and the final assessment was not yet available.
- Other exposures include $2.15 billion of performance bonds, $189.1 million of gross accrued insurance claims, $150.2 million maximum guaranteed equipment residual value, and unrecognized tax benefits of $52.1 million. One customer represented 13.6% of billed and accrued receivables ($185.7 million).
- Management stated disclosure controls were effective as of June 30, 2012; no material change in internal control over financial reporting was reported. The filing reported no material changes to the previously disclosed risk factors.
Important facts for investors to verify
- Whether backlog converts to revenue and cash on the anticipated schedule, given termination rights, project timing and working-capital needs.
- Whether the $207.1 million of negotiated change orders and claims is ultimately approved, collected and reflected in margins.
- Developments in the wildfire cases, insurance coverage, and the Central States pension withdrawal assessment.
- Execution and returns from acquisitions, the HEP investment and planned capital expenditures, while cash declined and working capital absorbed funds.
- Whether management’s expected growth and margin improvement materialize amid regulatory, permitting, weather, pricing and customer-spending risks.