Quanta Services, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; comparisons are with Q1 2020 unless noted. Quanta provides specialty infrastructure contracting services across electric power, communications, gas utility, pipeline and energy markets. Its reportable segments are Electric Power Infrastructure Solutions and Underground Utility and Infrastructure Solutions.
Financial performance
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Revenue | $2.704 billion | $2.764 billion | Down 2.2% |
| Gross profit / margin | $372.9 million / 13.8% | $332.2 million / 12.0% | Margin up 1.8 percentage points |
| Operating income / margin | $113.7 million / 4.2% | $80.7 million / 2.9% | Up 40.9% |
| Net income attributable to common stock | $89.8 million | $38.7 million | Up 132.0% |
| Diluted EPS | $0.62 | $0.26 | Up $0.36 |
| Operating cash flow | $125.6 million | $227.5 million | Down $101.9 million |
| Adjusted EBITDA (non-GAAP) | $220.2 million | $162.6 million | Up 35.4% |
Operating cash flow fell mainly because of working-capital needs as two large Canadian transmission projects ramped up and billing timing shifted. Q1 2020 cash flow included $82.0 million of insurance proceeds. Capital expenditures were $83.5 million, versus $68.1 million.
Segment results
- Electric Power Infrastructure Solutions: Revenue rose 16.6% to $2.060 billion; operating income increased 54.6% to $199.0 million, with margin up to 9.7% from 7.3%. Drivers included utility demand, Canadian transmission work, acquired-business revenue and higher emergency-restoration activity. Improved utilization and fixed-cost absorption supported margins.
- Underground Utility and Infrastructure Solutions: Revenue fell 35.5% to $643.5 million; operating income declined 71.8% to $8.8 million, with margin down to 1.4% from 3.1%. Lower large-pipeline activity, energy-market weakness and customer reductions or deferrals of maintenance and capital spending weighed on results.
Balance sheet, liquidity and capital allocation
- At March 31, 2021, cash and cash equivalents were $200.2 million. Total debt obligations were $1.358 billion, including $1.0 billion of 2.9% senior notes due 2030 and $321.7 million outstanding under the revolving credit facility.
- The $2.51 billion revolving facility had $1.868 billion available after borrowings and letters of credit; cash plus available commitments totaled $2.069 billion. Quanta reported compliance with its financial covenants.
- Current assets were $3.606 billion and current liabilities $2.100 billion. Contract assets rose to $518.3 million from $453.8 million, primarily due to Canadian project ramp-up and billing timing; contract liabilities were $499.5 million.
- Quanta repurchased $17.7 million of shares in Q1 and paid $8.8 million in dividends and equivalents. It had $519.1 million remaining under its repurchase authorizations.
Outlook, commentary and risks
- Management expected approximately $325 million of capital expenditures for 2021 and said available cash, operating cash flow and borrowing capacity were expected to fund operating needs, planned investment and capital allocation. The filing provides no specific full-year revenue or EPS guidance.
- Remaining performance obligations were $4.13 billion, up 3.8% from year-end; total backlog, a non-GAAP measure, was $15.83 billion, up 4.6%. Management cautioned that much backlog comes from MSAs without committed work volumes and that contracts may be delayed, reduced or cancelled.
- Management described a positive long-term outlook for grid modernization, transmission, renewables, broadband and regulated utility work. It also cited ongoing uncertainty from COVID-19, energy-market conditions, permitting delays, labor availability and customer spending.
- The effective tax rate was 13.1%, versus 28.0%, primarily reflecting an $18.0 million tax benefit from equity awards vesting above grant-date fair value. This benefited reported earnings and is an important comparison item.
- Contract-estimate revisions favorably affected Q1 gross profit overall; management attributed the net positive impact to performance and risk mitigation across projects. A $14.8 million negative estimate revision related to a U.S. communications project partly offset the benefit. Recognized change orders and claims under negotiation totaled $158.6 million, including amounts tied to delays on a Canadian transmission project.
- Significant contingencies include Peru project arbitrations: Quanta reported a roughly $120 million contract receivable, including amounts collected under bonds, and said it could not estimate any reasonably possible additional loss. Other disclosed matters include the Maurepas project dispute and a wage-and-hour case with approximately $9.5 million of trial-court liability determined, subject to ongoing litigation and appeal.
- Other exposures include customer nonpayment, fixed-price project execution, insurance and wildfire coverage, performance bonds (approximately $4.0 billion outstanding), multiemployer pension plans and equipment residual-value guarantees (maximum $860.9 million). The company reported no goodwill impairment in Q1, but identified certain businesses with heightened impairment risk.
Important facts for investors to verify
- Whether electric-power growth and margin gains can offset continued weakness in pipeline, midstream and industrial markets.
- Conversion of backlog and remaining performance obligations into revenue, particularly given MSA volume uncertainty and project cancellation or delay risks.
- Collection and resolution of the Peru receivable and arbitration claims, plus the outcome and accrual adequacy of other litigation.
- Working-capital trends, project billing and collections, and whether operating cash flow recovers from Q1’s decline.
- Whether the Q1 tax benefit and favorable project estimate revisions are repeatable; neither should be assumed to recur at the same level.
- Capital spending, debt and liquidity needs, and potential losses from insurance, bond, pension or residual-value obligations.