Quanta Services, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; unaudited. Quanta provides specialty infrastructure contracting services, reported in Electric Power Infrastructure Services and Oil and Gas Infrastructure Services. Results are subject to seasonal fluctuations, and the first quarter is typically among its slower periods.
Financial performance and position
| Metric | Q1 2018 | Q1 2017 / comparison |
|---|---|---|
| Revenue | $2.418 billion | $2.178 billion; up 11.0% |
| Gross profit / margin | $301.0 million / 12.5% | $266.2 million / 12.2% |
| Operating income / margin | $75.2 million / 3.1% | $75.1 million / 3.4% |
| Net income attributable to common stock | $37.6 million; diluted EPS $0.24 | $48.3 million; diluted EPS $0.31 |
| Operating cash flow | $26.0 million provided | $3.7 million used |
- Net income fell despite higher revenue and gross profit. Other expense was $12.0 million, versus $0.4 million, primarily reflecting deferred equity earnings associated with a Canadian electric transmission project. Interest expense rose to $6.8 million from $4.0 million.
- Cash and cash equivalents were $101.7 million at quarter-end, down from $138.3 million at year-end. Cash, cash equivalents and restricted cash in the cash flow statement totaled $105.3 million. Working capital was $1.41 billion.
- Long-term debt and notes payable, including current maturities, totaled $885.6 million, up from $671.9 million at December 31, 2017. The revolving facility had $882.0 million outstanding, $446.8 million of letters of credit and guarantees, and $481.2 million available. The company reported compliance with its debt covenants.
- Investing activities used $91.9 million, including $66.8 million of capital expenditures and $30.7 million for acquisitions. Financing activities provided $26.7 million, including $214.6 million of net revolving-facility borrowings, offset in part by $173.9 million of stock repurchases.
Material changes versus prior-year quarter
- Electric Power revenue rose 28.6% to $1.569 billion; operating income increased 41.4% to $140.9 million, with segment margin up to 9.0% from 8.2%. Drivers included electric transmission work, progress on a Canadian project and storm restoration.
- Oil and Gas revenue declined 11.4% to $849.1 million; operating income fell 74.1% to $10.1 million, with margin down to 1.2% from 4.0%. Lower customer spending on large-diameter pipelines, reduced resource utilization and severe-weather impacts weighed on results; acquired-business revenue partly offset the decline.
- Revenue growth included $349.0 million of increased Electric Power revenue, partly offset by a $109.6 million Oil and Gas decrease. Acquisitions and favorable foreign exchange also contributed.
- Foreign-currency translation produced a $25.0 million other comprehensive loss, compared with a $13.8 million gain in Q1 2017.
- Quanta adopted the new revenue recognition standard on January 1, 2018. The transition reduced opening retained earnings by $1.8 million; management said the effect on Q1 revenue, contract assets and liabilities was immaterial.
Outlook, commentary and risks
- Management described its long-term outlook as positive and expects favorable infrastructure demand in both segments. It expected Electric Power backlog to remain strong during 2018 and anticipated execution on a significant number of larger pipeline projects, while noting that awards and schedules remain uncertain.
- Remaining performance obligations were $5.19 billion, with 80% expected to be recognized in the following 12 months. Total backlog was $11.66 billion; it includes estimated MSA and short-term non-fixed-price work and is not a GAAP measure. MSA work is not generally committed to specific volumes and may be terminated on notice.
- Management expected approximately $275 million of 2018 capital expenditures, including $66.8 million spent through March 31. It expected cash, available borrowing capacity and operating cash flow to cover operating needs and planned capital expenditures. The company provided no specific earnings or revenue guidance in the supplied filing text.
- Management expected an effective tax rate of approximately 29% for 2018. Its Tax Act analysis remained subject to refinement, including unresolved accounting treatment for GILTI.
- Risks include weather and seasonality, permitting and regulatory delays, project cancellations, fixed-price project cost overruns, labor availability, customer credit and collections, commodity-price-driven spending, foreign exchange, acquisition integration, insurance and multiemployer pension exposure, and debt and interest-rate risk. A 50-basis-point change in variable rates would affect pretax earnings by approximately $4.4 million annually, based on quarter-end debt.
- Contingencies include a disputed Maurepas project liquidated-damages claim with reasonably possible loss up to $22.0 million, and a wage-and-hour class action with potential loss up to approximately $11.1 million plus fees if Quanta is unsuccessful and staffing agencies cannot pay. The filing says management did not believe a material loss was probable for the class action.
- Other exposures include approximately $3.1 billion of outstanding performance bonds, $634.6 million of maximum guaranteed equipment-lease residual value, and insurance claims accrued at $262.1 million. Management said it was not aware of circumstances likely to result in material bond or residual-value payments.
Important facts for investors to verify
- Whether Electric Power growth and margins can offset continued weakness and low margins in Oil and Gas, especially on large pipeline work.
- Whether backlog converts to revenue as estimated, given MSA termination rights, permitting, weather, customer spending and project execution risks.
- Cash conversion and working-capital trends, including receivables, contract assets and liabilities, and the use of revolving debt to fund repurchases and investment.
- Acquisition performance, contingent consideration (estimated fair value $79.3 million; aggregate maximum payout $154.6 million) and goodwill impairment risk in certain Oil and Gas reporting units.
- Developments in the Maurepas and Benton matters, tax examinations and the company’s remaining Tax Act accounting analysis.