Quanta Services, Inc. — Q1 2011 Form 10-Q
Reporting period: Three months ended March 31, 2011; unaudited. Quanta provides infrastructure contracting services across electric power, natural gas and pipelines, telecommunications, and fiber-optic licensing. Results are seasonal, and management cautions that first-quarter performance may not indicate full-year results.
Financial performance
| Metric | Q1 2011 | Q1 2010 |
|---|---|---|
| Revenue | $849.0 million | $748.3 million |
| Gross profit / margin | $70.9 million / 8.4% | $129.1 million / 17.3% |
| Operating income (loss) / margin | ($26.9) million / (3.2%) | $42.3 million / 5.7% |
| Net income (loss) attributable to common stock | ($17.6) million; ($0.08) per diluted share | $23.7 million; $0.11 per diluted share |
| Operating cash flow | ($4.2) million | $3.6 million |
| Capital expenditures | $37.5 million | $43.8 million |
Revenue grew 13.5%, supported mainly by electric-power work, including $41.6 million of Valard revenue following its 2010 acquisition. The sharp decline in profitability reflected losses on two gas transmission projects, lower-margin electric-power mix, and reduced emergency-restoration work. SG&A rose 13.0% to $91.5 million; it included $1.7 million of severance tied to a natural-gas and pipeline reorganization. Interest expense fell to $0.3 million from $2.9 million, primarily because the company redeemed its convertible notes in May 2010. The tax benefit was $10.6 million, with a 39.5% effective rate.
Segments and backlog
- Electric Power: Revenue increased 24.0% to $566.5 million; operating income declined to $31.3 million from $39.8 million, with margin falling to 5.5% from 8.7%.
- Natural Gas and Pipeline: Revenue declined 6.4% to $176.8 million; the segment recorded a $37.0 million operating loss versus $18.4 million income a year earlier. Cost overruns on two completed gas-transmission projects were attributed to weather, regulatory delays, cleanup costs, and difficult directional drilling. Related change orders remained under negotiation and did not benefit Q1 results.
- Telecommunications: Revenue increased 1.5% to $79.4 million; operating loss widened to $3.6 million, partly due to lower-margin work and weather-related productivity slowdowns.
- Fiber Optic Licensing: Revenue increased 8.1% to $26.3 million; operating income was $12.0 million.
- Backlog: Total backlog was $6.56 billion at March 31, up from $6.32 billion at December 31, 2010. Backlog expected to be realized within 12 months was $2.96 billion, versus $2.87 billion. Management notes that some master-service agreements are cancellable or lack committed service volumes, and project timing may shift.
Liquidity, debt, and cash flow
At March 31, cash and cash equivalents were $503.0 million, down from $539.2 million at year-end; working capital was $1.08 billion. Current assets totaled $1.56 billion and current liabilities $482.7 million. The company had no revolving loans outstanding and $287.1 million of borrowing or letter-of-credit capacity available under its $475 million revolver, which matures September 19, 2012. Letters of credit under the facility totaled $187.9 million. Reported notes payable were $1.2 million; the $143.8 million convertible notes had been redeemed in 2010. Quanta reported compliance with its credit-facility covenants.
Cash decreased by $36.2 million during the quarter. Operating cash use was $4.2 million, while investing cash use was $34.3 million, primarily for capital spending. Management expects 2011 capital expenditures of $180–$210 million, including $30–$35 million for fiber-network expansion, and expects cash on hand, operating cash flows, and available credit to fund operating needs and planned investment.
Outlook, risks, and unusual items
- Management expects gradual economic improvement and increased activity in the second half of 2011 and beyond, but cites regulatory hurdles, customer spending delays, capital constraints, competition, and project-timing uncertainty. It expects electric and gas distribution spending to remain weak near term; several natural-gas projects anticipated for 2011 had been delayed to 2012.
- Management sees longer-term opportunities in electric transmission, renewables, telecommunications, pipeline integrity, and fiber licensing. These expectations depend on project approvals, funding, customer spending, and market conditions. No specific revenue or earnings guidance was provided in the supplied filing text.
- Two California fire matters remain significant contingencies. For the Witch Creek matter, a subsidiary faces indemnity claims related to a 2007 wildfire; a $35 million liability and corresponding insurance receivable were recorded, but potential losses beyond insurance could not be estimated. For the Amador County fire claim, the USDA has demanded $8.5 million in suppression costs and indicated it may seek about $51.3 million more in restoration and other damages; an $8.5 million liability and matching insurance receivable were recorded. The company says material uninsured losses could adversely affect results.
- Other exposures include $1.4 billion of outstanding performance bonds, $218.6 million accrued for insurance claims (with $64.9 million of related recovery receivables), a maximum $116.4 million equipment-lease residual-value guarantee, and multi-employer pension plans, some in critical status. A total $53.2 million of unrecognized tax benefits was recorded; management said up to $8.7 million could decrease within 12 months due to statute expirations.
- On May 3, 2011, after quarter-end, the board authorized a stock repurchase program of up to $100 million, funded with cash on hand. It does not require the company to repurchase a specific amount. The filing also reports effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the gas-project overruns are contained, whether negotiated change orders recover costs, and how the segment performs in subsequent quarters.
- Whether backlog converts to revenue and cash on schedule, given cancellations, uncommitted MSA volumes, and regulatory or weather delays.
- Insurance coverage, litigation developments, and potential uninsured exposure in both California fire matters.
- Cash conversion and working-capital trends, planned capital expenditures, and the effect of the proposed repurchases on liquidity and credit-facility capacity.
- Whether projected second-half market improvement and the stated longer-term infrastructure opportunities materialize.