Quanta Services, Inc. — FY2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. The filing also reports unaudited fourth-quarter results. Quanta provides specialty infrastructure contracting services across electric power, pipeline and industrial, and communications markets; approximately 40,300 employees served customers primarily in the U.S., Canada and Australia.
Financial performance and liquidity
| Metric | FY2019 | FY2018 | Change |
|---|---|---|---|
| Revenue | $12.11 billion | $11.17 billion | +8.4% |
| Gross profit / margin | $1.60 billion / 13.2% | $1.48 billion / 13.2% | +8.1% gross profit |
| Operating income / margin | $554.9 million / 4.6% | $540.3 million / 4.8% | +2.7% |
| Net income attributable to common stock | $402.0 million | $293.3 million | +37.1% |
| Diluted EPS | $2.73 | $1.90 | +43.7% |
| Cash from operating activities | $526.6 million | $358.8 million | +46.8% |
Electric Power Infrastructure Services generated $7.12 billion (58.8% of revenue); Pipeline and Industrial Infrastructure Services generated $4.99 billion (41.2%). Fourth-quarter revenue was $3.11 billion, net income attributable to common stock was $118.1 million, and diluted EPS was $0.80.
At year-end, cash and cash equivalents were $164.8 million and working capital was $1.57 billion. Total debt obligations were approximately $1.36 billion, including $1.35 billion under the senior secured credit facility. Revolving-facility availability was $1.65 billion; cash plus available facility commitments totaled $1.81 billion. The company was in compliance with its debt covenants. Capital expenditures were $261.8 million in 2019; management expected approximately $300 million in 2020.
Operating cash flow improved partly because less cash was used for operating assets and liabilities, but included $112 million paid after Peru project bonds were exercised. Year-end days sales outstanding rose to 81 days from 74, reflecting billing and collection timing on larger pipeline projects.
Material changes and unusual items
- Backlog increased 21.6% to $15.00 billion; remaining performance obligations rose 13.3% to $5.30 billion. A substantial portion of backlog is estimated work under master service agreements, which generally do not guarantee specific work volumes and may be terminated on short notice.
- Electric Power revenue rose 11.0%, supported by grid modernization, fire-hardening work, communications growth and acquisitions. Segment operating income fell 5.9% to $591.2 million, including significant Latin American losses. Excluding Latin America, segment operating income was $676.9 million, up 6.4%.
- Pipeline and Industrial revenue increased 4.9% to $4.99 billion, while segment operating income rose 62.6% to $332.0 million, reflecting better execution and utilization. Larger pipeline project revenue declined.
- A terminated telecommunications project in Peru resulted in a $79.2 million charge in the second quarter. Quanta paid $112 million after advance-payment and performance bonds were exercised and reported a net receivable of approximately $120 million at year-end. Arbitration is pending; the company could not estimate a reasonably possible additional loss.
- Other income included $60.3 million of previously deferred earnings and a $13.0 million gain from the sale of Quanta’s interest in a Canadian electric transmission project. These items materially supported the year-over-year increase in pretax income.
- A processing-facility project incurred a $28.3 million loss in 2019 due to engineering and production delays. Fourth-quarter asset impairment charges were $13.9 million, primarily related to oil-influenced operations and assets and planned foreign-operations exits.
- Seven businesses were acquired in 2019; acquired businesses contributed approximately $305 million of revenue during the year. The Hallen acquisition also brought contingent liabilities connected with a 2014 New York gas explosion; the company reported no accrual for a probable, estimable loss at year-end.
Outlook, commentary and risks
Management described a positive long-term outlook, citing utility grid investment, reliability and modernization programs, renewable-generation connections, 5G deployment, gas-utility replacement and pipeline-integrity work. For 2020, it expected a further reduction in revenue from larger pipeline projects, while noting that successful new opportunities could change that expectation. Management expected an effective tax rate of approximately 29.8%–30.3% and planned an orderly exit from Latin American operations, anticipating near-term exit costs but expecting improved overall profitability.
Key risks include project delays, cancellations and cost overruns; fixed-price contract estimation and execution; labor shortages and wage pressure; customer credit and collection risk; oil-and-gas market cyclicality; weather and natural disasters; and regulatory, permitting and foreign-currency changes. Quanta highlighted wildfire liability and stated that wildfire insurance coverage was expected to decrease at its spring 2020 renewal. Other exposures include multiemployer pension obligations, litigation and indemnities, surety and bond requirements, and variable-rate debt. A 50-basis-point interest-rate change would affect annual pretax earnings by approximately $6.7 million based on year-end variable-rate debt.
The company adopted the new lease accounting standard in 2019, recording $301.1 million of operating lease right-of-use assets and liabilities at adoption; the change materially affected the balance sheet but not results of operations or cash flows. Management and the auditor concluded internal control over financial reporting was effective as of December 31, 2019; seven 2019 acquisitions were excluded from that assessment.
Important facts for investors to verify
- Progress and recoveries in the Peru arbitration, including the $120 million net receivable, bond payments and any potential additional loss.
- Whether backlog converts to revenue as anticipated, especially the estimated MSA work that lacks guaranteed volumes and is subject to cancellation or delay.
- The effect of reduced wildfire insurance coverage, wildfire-related liabilities and the resolution of the assumed Hallen litigation exposure.
- Execution and final costs on the processing-facility project and other contracts with significant estimate changes, liquidated damages or claims.
- 2020 delivery against management’s outlook, including larger pipeline activity, Latin America exit costs, the expected tax rate and approximately $300 million of capital expenditures.
- Debt, covenant headroom and cash generation after acquisitions, dividends, capital spending and potential insurance or legal payments.