Quanta Services, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; comparisons are with Q1 2015 unless stated otherwise. Quanta provides specialty contracting and infrastructure services, principally in electric power and oil and gas, and reports two segments. Results are unaudited; management notes that seasonal patterns make first-quarter results not necessarily indicative of the full year.
Financial performance
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Revenue | $1.714 billion | $1.861 billion |
| Gross profit / margin | $203.3 million / 11.9% | $237.9 million / 12.8% |
| Operating income / margin | $37.3 million / 2.2% | $84.2 million / 4.5% |
| Net income attributable to common stock | $20.5 million | $53.5 million |
| Diluted EPS | $0.13 | $0.25 |
| Cash from continuing operating activities | $199.7 million | $179.6 million |
Revenue declined 7.9%; operating income fell about 56%. Q1 2016 had no discontinued-operations income, while Q1 2015 included $5.8 million from the fiber-optic licensing business sold in August 2015. Continuing-operations EPS was $0.13 versus $0.22. Gross margin contracted as large, typically higher-margin transmission and pipeline work declined, smaller electric projects increased, and the Alaska power-plant project incurred additional costs. SG&A rose 9.0% to $158.5 million, including $6.3 million of CEO-departure and restructuring severance costs. The effective tax rate was 39.2%, versus 36.9%.
Segments and backlog
- Electric Power: Revenue was $1.187 billion, down 4.3%; operating income was $87.3 million, down 19.9%, with segment margin of 7.4% versus 8.8%. Regulatory and permitting delays constrained large transmission work; acquisitions and emergency-restoration revenue partly offset the decline.
- Oil and Gas: Revenue was $526.7 million, down 15.2%; operating income was $5.8 million, down 75.8%, with segment margin of 1.1% versus 3.9%. Delayed large pipeline projects, lower oil prices and restructuring costs weighed on results.
- Total backlog was $10.08 billion at March 31, up from $9.39 billion at December 31, 2015. Twelve-month backlog was $5.75 billion, up from $5.21 billion. Management cautions that backlog includes estimates, including MSA work, and may be delayed, reduced or canceled.
Cash, debt and liquidity
Cash and equivalents were $155.3 million at March 31, compared with $128.8 million at year-end. Continuing operating activities generated $199.7 million; continuing investing activities used $83.9 million, including $47.7 million of capital expenditures and $39.7 million for acquisitions. Continuing financing activities used $84.7 million, including $75.2 million of net credit-facility repayments. Cash increased $26.5 million overall. Working capital was $1.01 billion; DSO was 76 days versus 84 days a year earlier.
Total debt obligations were $408.2 million, down from $477.6 million at December 31, including $397.7 million drawn under the revolving facility. The $1.81 billion facility matures in December 2020; $1.09 billion remained available after borrowings and letters of credit. Quanta reported compliance with its covenants. Cash held by joint ventures is generally unavailable for other company operations.
Outlook, risks and unusual items
- Management expects 2016 continuing-operations capital expenditures of $200 million to $220 million; $47.7 million had been spent by March 31. The filing provides no specific full-year revenue or earnings guidance.
- Management described near- and long-term opportunities in electric-grid upgrades, distribution, renewable power, pipeline construction and pipeline integrity, but remained cautious about timing. Regulatory and environmental permitting delays, low oil and gas prices, customer spending cuts, competitive pricing, weather, project timing and skilled-labor availability could pressure demand and margins.
- A power-plant construction project in Alaska generated a $21.3 million estimated loss in Q1. The $201 million project was about 91% complete and expected to be substantially complete in Q3 2016; further losses from performance issues or unforeseen circumstances were reasonably possible but not estimable.
- Quanta completed three Q1 acquisitions for approximately $42.2 million in cash paid or payable, plus contingent consideration of up to $35 million; a $15.4 million liability was recorded for its estimated fair value.
- Central States multiemployer pension withdrawal liability remains disputed. Management described a reasonably possible loss range of $40.1 million to $55.4 million for the broader withdrawal matter; $12.8 million of payments had been made by March 31, and the ultimate amount remained uncertain.
- Other exposures include $2.7 billion of performance bonds, $321.1 million of letters of credit and bank guarantees, a $519.4 million maximum residual-value guarantee on equipment leases, and self-insurance accruals. The filing says material claims under these arrangements were not considered likely, but future payments cannot be ruled out.
- The SEC had made an inquiry into certain foreign activities, including South Africa and the UAE. Quanta said the SEC had not alleged violations and that it was cooperating. Quanta also retained tax and insured-claim liabilities related to the sold fiber-optic business.
- On April 12, 2016, after quarter-end, Quanta received 9.4 million additional shares in final settlement of its accelerated share repurchase; about $50.1 million remained under the repurchase program.
Important facts for investors to verify
- Whether the Alaska project is completed on schedule and without further material losses.
- Whether large electric transmission and pipeline awards move from backlog into revenue, and whether backlog estimates convert as expected.
- How sustained low commodity prices and regulatory delays affect Oil and Gas activity, customer spending and segment margins.
- The eventual resolution and financial impact of the Central States withdrawal-liability dispute and other material contingencies.
- Whether cash generation, credit availability and covenant compliance remain adequate amid planned capital spending, acquisitions and share repurchases.