Quanta Services, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; balance-sheet comparisons are to December 31, 2014. Quanta provides infrastructure contracting services, primarily for electric power and oil and gas customers, and also operates a fiber-optic licensing business.
Financial results
| Metric | Q1 2015 | Q1 2014 / prior date | Change |
|---|---|---|---|
| Revenue | $1.887 billion | $1.763 billion | Up 7.1% |
| Gross profit / margin | $252.7 million / 13.4% | $272.1 million / 15.4% | Profit down 7.1%; margin down 2.0 points |
| Operating income / margin | $93.7 million / 5.0% | $90.5 million / 5.1% | Income up 3.6%; margin down 0.1 point |
| Net income attributable to common stock | $53.5 million | $54.4 million | Down 1.7% |
| Diluted EPS | $0.25 | $0.25 | Unchanged |
| Operating cash flow | $189.2 million | $(60.5) million | Improved |
| Cash and cash equivalents | $135.5 million | $190.5 million at Dec. 31, 2014 | Down $55.0 million |
| Working capital | $1.26 billion | Not stated here | — |
- Segment revenue: Electric Power $1.226 billion, down 4.1%; Oil and Gas $621.1 million, up 39.3%; Fiber Optic Licensing and Other $40.1 million, up 4.1%.
- Segment operating income: Electric Power $107.9 million versus $144.4 million; Oil and Gas $24.1 million versus a $21.2 million loss; Fiber Optic Licensing and Other $11.5 million versus $12.1 million.
- Cash flow and uses: Investing activities used $99.9 million, including $66.2 million of capital expenditures and $34.7 million for acquisitions. Financing activities used $142.2 million, including $182.0 million of share repurchases, partly offset by $43.5 million of net credit-facility borrowings.
- Debt and liquidity: Long-term debt obligations were $120.3 million, with $4.1 million of short-term borrowings. The $1.325 billion revolving facility had $106.4 million drawn and $890.1 million available after letters of credit and guarantees. Quanta reported compliance with its credit covenants.
Material changes and operating drivers
- Revenue growth was driven mainly by Oil and Gas, including approximately $130 million from businesses acquired after Q1 2014 and increased customer spending. Foreign-exchange movements reduced reported international revenue by approximately $65 million.
- Gross margin declined amid severe Canadian snowfall, an early thaw in western Canada, unfavorable foreign exchange, and lower Electric Power emergency-restoration work. Management also reported that favorable revisions to estimates on projects already in progress positively affected Q1 2015 operating results by approximately 8.9%.
- Q1 2014 results included a $38.8 million expense related to an adverse arbitration decision involving National Gas Company of Trinidad and Tobago and an increased Central States pension withdrawal-liability estimate. This contributed to the year-over-year improvement in Oil and Gas segment operating income.
- Operating cash flow benefited from a $65 million receipt in January 2015 settling the Sunrise Powerlink arbitration, as well as collection timing, lower tax payments and reduced incentive-compensation payments. DSO was 83 days, versus 80 days at March 31, 2014.
- Total backlog was $9.664 billion at March 31, down from $9.762 billion at year-end; estimated backlog realizable within 12 months was $5.196 billion, versus $5.317 billion.
Outlook, risks and notable items
- Management expressed optimism about long-term opportunities in electric-grid upgrades, utility distribution, pipeline gathering and integrity work, while cautioning that customer spending timing remains uncertain. The filing provides no numeric revenue or EPS guidance.
- Management expected 2015 capital expenditures of $275–$305 million, including $50–$60 million for fiber-network expansion; $66.2 million had been spent through March 31.
- Management cited falling oil prices as a near-term risk to some oil and gas markets, particularly Canadian oil sands and Gulf of Mexico work. Other key uncertainties include weather, permitting and regulatory delays, project timing and execution, foreign exchange, labor availability, customer spending, and fixed-price contract estimates.
- On April 29, 2015, Quanta agreed to sell its fiber-optic licensing operations for approximately $1 billion in cash, subject to adjustments, regulatory approvals and other conditions. The company anticipated closing by December 31, 2015; the business was not classified as held for sale at March 31.
- Quanta completed three acquisitions in Q1 for approximately $36.9 million in cash. It also disclosed two subsequent-quarter acquisitions for approximately $25.4 million in cash.
- Contingencies include a disputed Central States multi-employer pension withdrawal liability, with a stated possible loss range up to $55.4 million and potential for the final amount to be higher than the liability recognized. Quanta also disclosed an SEC inquiry concerning activities in certain foreign jurisdictions; the SEC had not alleged violations, and Quanta said it was cooperating.
- Other exposures include $2.7 billion of performance bonds, $328.5 million of letters of credit and bank guarantees, $233.6 million of future minimum operating lease payments, and a $459.5 million maximum guaranteed equipment residual value. Management did not expect significant payments on the residual guarantees but gave no assurance.
Important facts for investors to verify
- Whether the fiber-optic sale closes on the expected terms and schedule, and how its proceeds will be used.
- Whether Oil and Gas demand and margins withstand continued weakness in oil prices, and whether backlog converts to revenue as estimated.
- The sustainability of gross margins and the effect of project estimate revisions, weather, foreign exchange and project execution.
- The final Central States pension withdrawal liability and the outcomes of related appeals and proceedings.
- Cash generation, working-capital collection and capital-spending needs, particularly alongside repurchases and acquisition activity.