Quanta Services, Inc. — Q3 2010 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2010; unaudited. Quanta provides infrastructure contracting services across electric power, natural gas and pipelines, telecommunications, and fiber-optic licensing. Results include Price Gregory beginning October 1, 2009, making comparisons materially affected by that acquisition.
Financial performance
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Revenue | $1,206.0m | $780.8m | $2,824.8m | $2,332.7m |
| Gross profit / margin | $190.0m / 15.8% | $147.6m / 18.9% | $475.2m / 16.8% | $402.5m / 17.3% |
| Operating income / margin | $94.6m / 7.8% | $71.2m / 9.1% | $201.7m / 7.1% | $169.7m / 7.3% |
| Net income attributable to common stock | $62.8m | $63.4m | $119.5m | $118.2m |
| Basic / diluted EPS | $0.30 / $0.30 | $0.32 / $0.32 | $0.57 / $0.57 | $0.60 / $0.59 |
| Operating cash flow | $(54.7)m | $108.0m | $(21.3)m | $278.6m |
- Quarterly change: Revenue rose 54.5%, primarily from Price Gregory. Operating income increased, but gross and operating margins declined. Common-stockholder net income slipped 1.0%, and EPS fell to $0.30.
- Nine-month change: Revenue rose 21.1% and common-stockholder net income increased about 1.1%, while basic EPS declined to $0.57. Gross and operating margins were lower than in 2009.
- Segment mix: Q3 Natural Gas and Pipeline revenue increased to $551.7m from $131.6m, largely due to Price Gregory; segment operating income was $53.1m. Electric Power revenue rose 3.9% to $532.6m, but operating income fell 9.6% to $60.4m. Telecommunications revenue declined 17.9% to $93.6m and operating income fell 54.5% to $5.6m. Fiber Optic Licensing revenue rose 25.7% to $28.1m.
- Taxes and unusual items: Q3 effective tax rate was 33.1%, versus 7.7% a year earlier; the filing cites tax benefits from releases of uncertain-tax-position reserves of $9.4m and $22.4m, respectively. Nine-month results include a $7.1m loss on early extinguishment of debt.
Financial position, cash flow and debt
- At September 30, cash and equivalents were $441.2m, versus $699.6m at December 31, 2009. Current assets were $1,621.3m and current liabilities $504.4m, implying working capital of approximately $1,116.9m.
- Operating cash flow was negative $21.3m for the first nine months, primarily reflecting increased working-capital needs on large pipeline projects and comparison with unusually strong 2009 receivable collections. Costs and estimated earnings in excess of billings increased to $266.0m from $61.2m at year-end.
- Investing activities used $92.8m in the first nine months, including $114.0m of capital expenditures. Management expected full-year 2010 capital expenditures of $170m–$180m, including $35m–$45m for fiber-network expansion.
- Quanta redeemed all $143.8m of its 3.75% convertible notes in May 2010 for approximately $146.1m plus accrued interest. At quarter-end it had no revolving loans and only a nominal amount of other debt. Its $475m revolving facility, maturing September 2012, had $191.2m of letters of credit outstanding and $283.8m available; the company reported compliance with covenants.
- Backlog was $5.724bn, compared with $5.649bn at December 31, 2009; $2.475bn was estimated for realization within 12 months. Management cautions that MSAs may lack committed volumes and contracts may be delayed or canceled.
Outlook, risks and notable items
- Management expected 2010 customer spending to remain constrained by the slow economy, weak capital markets, and regulatory delays, but anticipated increased industry activity and spending in 2011. This was an outlook, not specific revenue or EPS guidance.
- Management cited long-term opportunities in electric transmission, renewables, natural-gas transmission, broadband and wireless networks, and fiber licensing. Timing and scale remain uncertain and may depend on customer funding, regulation, energy prices, and government incentives.
- On October 25, 2010, after quarter-end, Quanta acquired Valard for approximately $118.9m cash, securities valued at approximately $88.5m, and repayment of about $12.5m of Valard debt.
- Key exposures include seasonal and weather-driven results, fixed-price project estimates and execution, customer credit and collections, and customer concentration: two pipeline customers represented 18% and 15% of Q3 revenue. The filing identifies $40.6m of negotiated change orders and claims included in contract price adjustments.
- Other significant commitments and contingencies include $1.1bn of performance bonds (with estimated completion costs of $246.1m), $191.2m of letters of credit, a maximum $118.0m residual-value guarantee on leased equipment, $48.5m of unrecognized tax benefits, and two multi-employer pension plans in critical status. Management said ordinary-course litigation was not expected to have a material adverse effect.
Most important facts for investors to verify
- How much of revenue growth and pipeline profitability reflects Price Gregory versus organic growth, and how sustainable are the acquired margins?
- Whether working-capital investment converts to cash as pipeline projects progress, particularly the growth in unbilled contract assets and the decline in operating cash flow.
- Whether margins recover in Electric Power and Telecommunications amid pricing pressure, lower customer spending, and project delays.
- Whether the 2011 spending outlook materializes, given regulatory, economic, customer-funding, and energy-price uncertainties.
- The collectability and concentration of receivables, the realization of backlog, and potential cash exposure from bonds, insurance claims, pension plans, and other contingencies.