Quanta Services, Inc. — Q3 2009 Form 10-Q
Business context and reporting period. This unaudited quarterly report covers the three and nine months ended September 30, 2009. Quanta provides specialty contracting and network infrastructure services to electric power, natural gas and oil pipeline, telecommunications, and fiber-optic customers. During the quarter, it began reporting four segments: Electric Power, Natural Gas and Pipeline, Telecommunications, and Fiber Optic Licensing. Dollar amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q3 2009 | Q3 2008 | Nine months 2009 | Nine months 2008 |
|---|---|---|---|---|
| Revenue | $780.8 | $1,053.4 | $2,332.7 | $2,858.7 |
| Gross profit | $147.6 | $185.6 | $402.5 | $468.1 |
| Gross margin | 18.9% | 17.6% | 17.3% | 16.4% |
| Operating income | $71.2 | $96.4 | $169.7 | $211.5 |
| Net income attributable to common stock | $63.4 | $51.9 | $118.2 | $111.1 |
| Diluted EPS | $0.32 | $0.28 | $0.59 | $0.63 |
| Operating cash flow | $108.0 | $16.8 | $278.6 | $50.1 |
Revenue fell 25.9% in Q3 and 18.4% for the nine-month period, primarily reflecting reduced customer project spending and fewer large pipeline projects. Gross margins improved year over year, but operating income declined. Q3 net income increased despite lower operating income, notably because the income-tax provision included $22.4 million of benefits from reversals of uncertain-tax-position reserves. The Q3 effective tax rate was 7.7%, versus 41.3% a year earlier; the nine-month rate was 27.4%, or 41.1% excluding the tax benefits.
Q3 segment revenue and operating income were: Electric Power $512.8 and $66.8; Natural Gas and Pipeline $131.6 and $2.1; Telecommunications $114.0 and $12.3; Fiber Optic Licensing $22.4 and $11.8. Pipeline results were particularly weak; fiber licensing grew and remained highly profitable. The filing restates prior-period segment presentation to reflect the new reporting structure.
Cash, debt, and liquidity
At September 30, 2009, cash and cash equivalents were $584.0 million, compared with $437.9 million at December 31, 2008. Current assets were $1,403.0 million and current liabilities $390.1 million; reported working capital was $1.01 billion. Total liabilities were $810.4 million and total equity $2,823.7 million.
Quanta had no revolving loans outstanding under its $475 million secured credit facility; $183.9 million of letters of credit left $291.1 million available. It reported compliance with facility covenants. Convertible notes had $143.8 million principal outstanding and a $125.5 million balance-sheet carrying value, net of discount. Nine-month capital expenditures were $120.9 million; management expected approximately $170 million for full-year 2009, including about $85 million for fiber-network expansion.
Operating cash flow rose substantially year over year, which management attributed mainly to receivable and retainage collections and lower working-capital requirements amid reduced activity. Nine-month investing cash use was $130.2 million, chiefly capital expenditures and acquisitions.
Material changes and unusual items
- Q3 2009 revenue was also compared against an unusually strong Q3 2008, when hurricane-related restoration work generated about $115 million in electric-power revenue; Q3 2009 hurricane restoration revenue was about $5 million.
- Natural Gas and Pipeline revenue declined 50.1% in Q3, with operating margin falling to 1.6%, reflecting fewer large projects, lower customer spending, fixed-cost under-absorption, and rain-related productivity issues.
- Telecommunications revenue declined 10.3% in Q3 and 33.8% for nine months, including lower spending by a significant customer. Q3 operating income improved against a prior-year period affected by a $7.7 million project loss.
- Fiber Optic Licensing revenue increased 32.9% in Q3 and 47.2% for nine months, supported by network expansion.
- Quanta revised its December 2008 balance sheet for prior deferred-tax-account errors, increasing reported assets by $3.9 million and equity by $11.2 million. Management said the errors were not material to affected prior periods but that a current-period correction would have materially affected 2009 interim results.
- Accounting for convertible debt was retrospectively changed, adding non-cash interest expense and reducing reported comparative-period earnings. The 2008 comparative financial statements reflect that accounting change.
Outlook, risks, and contingencies
Management said customer spending had declined in 2009 and expected Q1 2010 to be challenging, while expressing a belief that conditions could improve over the following six months and demand could increase in the second half of 2010. This is qualitative outlook, not earnings guidance. Longer-term opportunities cited include electric transmission upgrades, smart-grid and renewable projects, pipeline infrastructure, broadband and wireless deployment, and fiber licensing. Timing and funding remain uncertain.
On October 1, 2009, after quarter-end, Quanta acquired Price Gregory for approximately $231.8 million in stock and $95.8 million in cash. Price Gregory expands pipeline services; its results are not included in this quarter’s financial statements. Management identified integration, project execution, customer spending, energy prices, weather, skilled-labor availability, and potential delays or cancellations as risks.
Other exposures include $725.3 million of outstanding performance bonds, with estimated completion costs of $225.8 million; $183.9 million of letters of credit; $143.5 million of future minimum operating-lease payments; and $141.2 million of maximum guaranteed equipment residual values. Insurance deductibles increased for most casualty policies effective August 1, 2009. The company also disclosed joint-venture guarantees and joint-and-several obligations, multi-employer pension exposure, and $43.3 million of unrecognized tax benefits. Management did not expect ordinary-course litigation to have a material adverse effect.
Investor verification priorities
- Assess how much of the increase in earnings and operating cash flow reflects the $22.4 million tax benefit and working-capital timing rather than underlying operating improvement.
- Track pipeline-segment margins and project productivity, and determine whether customer spending and large-project activity recover.
- Review the Price Gregory acquisition’s integration, financing and share dilution, pro forma contribution, and realization of expected benefits; the filing did not yet provide pro forma results.
- Verify delivery against the $170 million full-year capital-expenditure expectation and the returns from fiber-network investment.
- Monitor covenant headroom, available revolver capacity after letters of credit, convertible-note terms, insurance claims and deductibles, performance-bond obligations, and tax contingencies.
- Evaluate whether goodwill assumptions remain supportable if customer spending, market conditions, or major-customer relationships deteriorate.