Quanta Services, Inc. — Q2 2011 Form 10-Q
Business context and period. Quanta provides specialty infrastructure contracting services to electric power, natural gas and oil pipeline, telecommunications, and fiber optic licensing markets. This unaudited filing covers the quarter and six months ended June 30, 2011, compared with the corresponding 2010 periods.
Financial performance
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Revenue | $1,010.9m | $870.5m | $1,859.9m | $1,618.8m |
| Gross profit / margin | $154.1m / 15.2% | $156.0m / 17.9% | $225.0m / 12.1% | $285.2m / 17.6% |
| Operating income / margin | $57.7m / 5.7% | $64.8m / 7.4% | $30.8m / 1.7% | $107.1m / 6.6% |
| Net income attributable to common stock | $31.8m | $33.0m | $14.2m | $56.7m |
| Diluted earnings per share | $0.15 | $0.16 | $0.07 | $0.27 |
| Cash provided by operating activities | $56.2m | $28.5m | $52.0m | $33.4m |
- Q2 revenue increased 16.1%, but gross profit fell 1.2% and operating income declined 10.9%. Common-stock earnings decreased 3.6%.
- Six-month revenue grew 14.9%, while gross profit declined 21.1% and operating income fell 71.2%. The pipeline segment’s first-quarter losses were the principal drag on the half-year result.
- At June 30, cash and cash equivalents were $380.4m, down from $539.2m at year-end 2010. Working capital was $972.6m; current assets were $1,476.6m and current liabilities $504.0m.
- Debt was minimal: $1.2m of notes payable and no revolving borrowings. The $475m secured revolver had $187.5m of letters of credit outstanding and $287.5m available; Quanta reported compliance with its covenants.
- Six-month investing cash use was $120.1m, including $89.7m of capital expenditures and a $35m investment in Howard Midstream Energy Partners. Financing cash use was $93.1m, including $94.5m of share repurchases.
Material changes and segment results
- Electric power: Q2 revenue rose 44.0% to $667.1m, helped by customer spending, $55m of Valard revenue, and storm restoration work. Six-month revenue increased 34.1% to $1,233.5m. Segment operating margins nevertheless declined year over year.
- Natural gas and pipeline: Q2 revenue declined 20.3% to $209.7m and the segment recorded a $1.2m operating loss. For the six months, revenue fell 14.5% to $386.5m and the operating loss was $38.2m, versus $44.3m of operating income in 2010. Management cited delayed or fewer transmission projects, adverse weather, and regulatory restrictions that contributed to project performance problems.
- Telecommunications: Q2 revenue declined 9.6% to $106.4m; six-month revenue fell 5.1% to $185.8m. Q2 operating income improved, partly due to a better mix of engineering work and lower fixed costs; the half-year result declined.
- Fiber optic licensing: Revenue increased 5.2% in Q2 and 6.6% for the first half. Segment margins were lower, reflecting maintenance, marketing, and construction activity.
- Valard, acquired in October 2010, contributed $55.0m of Q2 and $96.6m of six-month revenue, primarily in electric power. The company also invested $35m for an approximately 39% equity interest in Howard Midstream Energy Partners.
Outlook, risks, and unusual items
- Management expects increased activity and spending in the second half of 2011 and beyond, especially in electric transmission, solar, telecommunications, and fiber licensing. It expects gas and pipeline projects to remain affected by delays, with some projects shifted into 2012. These are expectations, not quantified revenue or EPS guidance.
- 2011 capital expenditures were expected to be $180m–$200m, including $30m–$35m for fiber network expansion. Management said cash, available credit, and operating cash flow should fund operating needs, planned investment, and anticipated repurchases.
- Backlog at June 30 was $6.90bn, versus $6.32bn at December 31, 2010; $3.17bn was expected to be realized within 12 months. Backlog includes estimates under master service agreements that may lack committed volumes and may be terminable; projects can also be delayed.
- After quarter-end, Quanta amended its revolver to $700m, with maturity extended to August 2, 2016. On August 5, it acquired Canadian electric-power contractor McGregor for approximately $38.5m cash and 898,440 shares.
- Key business risks include project execution and fixed-price contract estimates, weather, customer spending and credit, regulatory and permitting delays, competitive pricing, labor availability, and insurance and pension costs. Quanta reported $55.9m of unrecognized tax benefits; up to $8.7m could decrease within 12 months due to statute expirations.
- Contingencies include the Witch Creek fire claims, for which Quanta recorded a $35m liability and matching insurance recovery but cannot estimate potential loss beyond coverage; insurers dispute coverage. In a separate Amador County fire matter, the USDA has sought approximately $8.5m in suppression costs and indicated it may seek another $51.3m in restoration and other damages; Quanta recorded an $8.5m liability and matching insurance receivable and cannot estimate potential uninsured exposure.
- Outstanding performance bonds totaled approximately $1.6bn, with estimated completion costs of $682.3m. Quanta also disclosed a maximum $116.8m residual-value guarantee on equipment leases and potential future multi-employer pension contributions that it could not estimate.
- The board authorized up to $150m of repurchases; $94.5m was spent in Q2. No goodwill impairment was recorded in the latest annual test. Management reported disclosure controls were effective and no material change in internal control during the quarter.
Most important facts for investors to verify
- Whether the pipeline segment can recover from its $38.2m first-half operating loss and whether weather, regulatory constraints, or project costs continue to affect margins.
- Whether backlog converts to revenue on schedule, given master-service agreement volume uncertainty, termination rights, and project delays.
- Cash generation and liquidity after share repurchases, planned capital spending, the HEP investment, and the McGregor acquisition.
- Insurance coverage and potential uninsured exposure from the California fire matters, alongside self-insurance reserves and pension-plan funding risk.
- Whether management’s expected second-half spending improvement materializes; the filing provides no specific revenue or earnings forecast.