Quanta Services, Inc. — Q2 2010 Form 10-Q
Reporting period: Three and six months ended June 30, 2010; comparisons are with the corresponding 2009 periods. Quanta provides infrastructure contracting services across electric power, natural gas and pipelines, telecommunications, and fiber-optic licensing. Price Gregory, acquired October 1, 2009, materially expanded pipeline operations and is included in 2010 results.
Financial performance
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Revenue | $870.5m | $813.4m | $1,618.8m | $1,551.9m |
| Gross profit / margin | $156.0m / 17.9% | $137.8m / 16.9% | $285.2m / 17.6% | $254.9m / 16.4% |
| Operating income / margin | $64.8m / 7.4% | $59.9m / 7.4% | $107.1m / 6.6% | $98.5m / 6.4% |
| Net income attributable to common stock | $33.0m | $33.4m | $56.7m | $54.8m |
| Basic and diluted EPS | $0.16 | $0.17 | $0.27 | $0.28 |
| Operating cash flow | $28.5m | $59.4m | $33.4m | $170.6m |
Cash, debt and liquidity: At June 30, cash and cash equivalents were $519.8m, down from $699.6m at December 31, 2009. Working capital was $1.01bn. The company had no revolving loans outstanding under its $475m credit facility; $283.8m remained available after $191.2m of letters of credit. The $143.8m convertible notes were redeemed in May, leaving no notes outstanding. Quanta reported compliance with credit-facility covenants.
Other metrics: Six-month capital expenditures were $82.4m; 2010 capital expenditures were estimated at approximately $185m, including $35m–$45m for fiber-network expansion. Backlog was $5.84bn at June 30, including $2.66bn expected to be realized within 12 months. Backlog includes master-service-agreement estimates and is not necessarily firm or immune to delay or cancellation.
Changes versus prior year and drivers
- Q2 revenue rose 7.0%; six-month revenue rose 4.3%. Pipeline revenue growth was primarily attributable to Price Gregory. Electric Power revenue fell 8.1% in Q2 and 11.4% in the first half, reflecting lower customer spending and timing of major transmission projects.
- Gross margin improved in both comparison periods, primarily due to higher-margin pipeline transmission work and the non-recurrence of certain lower-margin 2009 pipeline contracts. Electric Power operating income and margin declined; telecommunications six-month margin also eased, partly due to first-quarter weather-related productivity losses.
- Q2 operating income increased, but common-stock net income and EPS declined, principally because of the debt-redemption charge. The $7.1m early-extinguishment loss included a $2.3m redemption premium and non-cash write-offs. Management expects the redemption to eliminate approximately $6.7m of aggregate 2011 annual cash and non-cash interest expense, net of tax.
- Operating cash flow fell sharply year over year, especially for the first half, due to seasonal working-capital demands on large pipeline projects and unusually high receivable collections in Q1 2009.
Outlook, risks and contingencies
- Management expected economic conditions and industry activity to improve in the second half of 2010 and in 2011, while noting uncertainty from customer funding, regulatory approvals, permitting and project timing. Distribution spending remained weak; management anticipated longer-term opportunities in transmission, pipelines, renewables, broadband, wireless and fiber licensing.
- The filing gives a capital-spending estimate, but no specific revenue or earnings guidance. Management cautioned that results are seasonal and can vary with weather, project mix, productivity and customer spending.
- Key exposures include fixed-price contract estimates and claims, customer credit and collections, project delays or cancellations, natural-gas prices, insurance and self-insured claims, labor availability, and integration of Price Gregory. Approximately $33.6m of contract change orders and claims were included as price adjustments under negotiation.
- Contingencies include $1.08bn of performance bonds supporting projects with an estimated $256.0m cost to complete; $125.8m maximum guaranteed equipment-lease residual value; and $146.3m accrued gross insurance claims. Two multi-employer pension plans were in critical status; one requires a surcharge whose future amount was not estimable. Unrecognized tax benefits were $50.2m, with up to $10.2m potentially decreasing within 12 months. Management did not expect ordinary-course litigation to have a material adverse effect.
- Management stated that disclosure controls were effective as of June 30, 2010 and reported no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether pipeline revenue and margins can be sustained apart from Price Gregory’s acquisition contribution, and whether Electric Power weakness persists.
- Cash conversion, working-capital needs and receivable collections as large projects ramp up.
- Backlog conversion and the proportion dependent on estimated MSA volumes, renewals, funding or regulatory approvals.
- Execution of the $185m capital-spending plan and returns from fiber-network investment.
- Potential changes in insurance, bond, pension, tax and contract-claim exposures, and continued compliance with credit-facility covenants.