Quanta Services, Inc. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. Quanta provides specialty infrastructure contracting services across electric power, communications, gas utility, pipeline and energy markets. Results are reported in Electric Power Infrastructure Solutions and Underground Utility and Infrastructure Solutions.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $3.353B | $3.020B | $9.057B | $8.290B |
| Gross profit / margin | $534.7M / 15.9% | $507.5M / 16.8% | $1.355B / 15.0% | $1.195B / 14.4% |
| Operating income / margin | $248.1M / 7.4% | $242.2M / 8.0% | $523.5M / 5.8% | $435.9M / 5.3% |
| Net income attributable to common stock | $174.4M | $162.9M | $381.2M | $275.5M |
| Diluted EPS | $1.21 | $1.13 | $2.64 | $1.90 |
| Operating cash flow | $17.9M | $114.9M | $332.4M | $839.9M |
Q3 revenue increased 11.0%, but operating income rose 2.4% as gross and operating margins declined year over year. For the nine months, revenue rose 9.2%, operating income 20.1%, and net income attributable to common stock 38.3%. The lower effective tax rate helped support earnings growth: 23.2% for the nine-month period versus 29.9% in 2020.
Q3 Electric Power revenue grew 10.5% to $2.33B and segment operating income rose 7.4% to $288.3M; its operating margin eased to 12.4% from 12.7%. Underground Utility revenue increased 12.3% to $1.02B, while segment operating income fell 10.6% to $68.2M and margin declined to 6.7% from 8.4%. For the nine months, Electric Power revenue rose 15.3%, while Underground Utility revenue declined 3.9%, reflecting reduced large pipeline work and challenging energy-market conditions.
Cash, debt and liquidity
- At September 30, cash and cash equivalents were $1.696B, versus $184.6M at December 31, 2020. Much of the increase came from the September senior-note issuance and was intended to fund the Blattner acquisition completed after quarter-end.
- Debt obligations were approximately $2.955B, including short-term debt; long-term debt net of current maturities was $2.931B. The company reported $415.9M drawn on its revolving credit facility and $333.9M in letters of credit, with $1.76B of facility availability at quarter-end.
- Nine-month operating cash flow fell to $332.4M from $839.9M, principally reflecting working-capital outflows, including higher receivables and contract assets on two Canadian transmission projects. DSO was 89 days, compared with 82 days a year earlier.
- Nine-month capital expenditures were $233.0M. Management expected full-year 2021 capital expenditures of approximately $325M and stated that cash, operating cash flow and available borrowing capacity were expected to fund needs over the next 12 months.
- At September 30, total backlog was $17.02B, up 12.5% from December 31, 2020; remaining performance obligations were $4.37B, up 9.6%. These include estimates and are not equivalent to guaranteed revenue.
Material developments and unusual items
- Blattner acquisition: Completed October 13, 2021, after the reporting date, for approximately $2.29B cash and 3.3M Quanta shares valued at $345.4M at closing. Former owners may receive up to $300M of contingent consideration based on performance over three years beginning January 2022. The purchase-price allocation was not yet finalized.
- Acquisition financing: Quanta issued $1.50B of senior notes in September, with coupons of 0.950%, 2.350% and 3.050% and maturities in 2024, 2032 and 2041. In October, it amended its credit facility, added a $750M term loan and increased revolving commitments to $2.64B. As of November 1, post-acquisition borrowings under the facility totaled $1.39B.
- Contract estimates: Favorable changes in project estimates increased gross profit by $41.9M in Q3 and $127.4M in the nine-month period. These were net positive changes across multiple projects and are subject to estimation risk.
- Change orders and claims: Quanta had recognized $254.1M of revenue for change orders and claims still being negotiated at September 30, primarily on two Canadian electric transmission projects affected by pandemic-related delays, wildfires and schedule changes. Ultimate recovery could differ materially from estimates.
- Credit loss: A $23.6M provision was recorded in Q2 for receivables from bankrupt Limetree Refining and an affiliate. The filing reported $31.3M of billed and unbilled receivables from the bankrupt customer at September 30 and noted potential for further loss.
- Q3 results also reflected Hurricane Ida disruption in Gulf Coast operations and higher interest expense. Nine-month results included a $2.3M equipment impairment charge and foreign-exchange gains in other income.
Outlook, risks and contingencies
Management described a positive long-term outlook, particularly for utility grid modernization, transmission and renewable infrastructure, gas distribution, pipeline integrity and communications projects. It also cautioned that near-term renewable work may be affected by supply-chain constraints, project delays and sourcing restrictions. The filing provides no numerical full-year revenue or earnings guidance; it does provide the approximately $325M capital-expenditure expectation.
Key risks include COVID-19 effects on workforce, supply chains and customer activity; possible vaccination and testing requirements; labor availability and wage inflation; materials and vehicle shortages; permitting and regulatory delays; weather, wildfires and operational hazards; fixed-price project estimation and execution; and energy-market cyclicality. The company also cited customer credit risk, insurance availability and wildfire coverage limitations, joint-venture and bond obligations, and multiemployer pension exposure.
Material legal matters include the Peru telecommunications project arbitrations: Quanta’s subsidiary seeks approximately $190M in one proceeding, while the counterparty claims approximately $38M in liquidated damages; the company could not estimate a reasonably possible additional loss. Other disclosed matters include the Maurepas project dispute, a California wage-and-hour class action and litigation related to a 2014 New York gas explosion. Management said ordinary-course proceedings generally were not expected to materially affect results, subject to the uncertainties described in the filing.
Investor verification priorities
- Track post-acquisition debt, leverage, integration costs and whether Blattner achieves expected performance and contingent-payment targets.
- Monitor operating cash conversion, DSO and contract-asset growth, especially collections and change-order recoveries on the Canadian transmission projects.
- Assess whether the Underground Utility segment’s margin and energy-related demand recover, and whether favorable contract-estimate revisions are sustainable.
- Verify recoveries from Limetree and other financially distressed customers, and developments in the Peru and Maurepas disputes.
- Review backlog conversion, cancellations and project timing, alongside labor, supply-chain, permitting, weather and insurance exposures.