QUANTA SERVICES, INC. annual report, FY2015

Quanta Services, Inc. — FY 2015 Form 10-K

Reporting period: Year ended December 31, 2015; the filing also reports fourth-quarter results. Quanta provides infrastructure contracting services, principally to electric power and oil and gas customers in the U.S., Canada, Australia and select other markets. Results are reported in Electric Power Infrastructure Services and Oil and Gas Infrastructure Services. Figures below are in U.S. dollars.

Financial and operating performance

Metric	FY 2015	FY 2014
Revenue	$7.572 billion	$7.747 billion
Gross profit / margin	$923.7 million / 12.2%	$1.169 billion / 15.1%
Operating income / margin	$237.5 million / 3.1%	$429.1 million / 5.5%
Continuing-operations net income	$131.2 million	$287.6 million
Net income attributable to common stock	$310.9 million; $1.59 per share	$296.7 million; $1.35 per share
Operating cash flow from continuing operations	$618.2 million	$247.7 million

Revenue declined 2.3%. Electric Power revenue fell 6.9% to $4.937 billion; Oil and Gas revenue increased 7.8% to $2.635 billion, supported chiefly by acquisitions.
Operating income fell 44.6%; margins weakened as large, higher-margin transmission and pipeline work declined or was delayed, project mix shifted toward lower-margin work, and certain projects incurred cost overruns.
Segment operating income was $362.3 million for Electric Power (7.3% margin, versus 8.7%) and $142.9 million for Oil and Gas (5.4%, versus 6.7%). Corporate and non-allocated costs rose to $267.8 million from $196.7 million.
Continuing-operations diluted EPS was $0.62, down from $1.22. Total common-stock EPS included discontinued operations and the fiber business sale gain; it is not a measure of continuing earnings alone.
Fourth-quarter 2015 total net loss was $4.9 million ($5.1 million attributable to common stock); continuing-operations EPS was a loss of $0.02. The quarter included $58.5 million of asset impairments, or $44.6 million net of tax.

Liquidity, debt and capital allocation

At year-end, cash and cash equivalents were $128.8 million, working capital was $1.074 billion, and long-term debt, net of current maturities, was $475.4 million. Cash declined from $190.5 million and working capital from $1.389 billion at year-end 2014.
The amended senior secured revolving facility totals $1.81 billion and matures in December 2020. Quanta had $466.9 million of revolving loans and $307.0 million of letters of credit and bank guarantees outstanding, with $1.04 billion available. The company reported compliance with its covenants.
Continuing-operations investing activities used $307.1 million, including $210.0 million of capital expenditures and $112.9 million for acquisitions. Financing activities used $1.217 billion, including $1.606 billion for share repurchases, partly offset by net credit-facility borrowings.
The fiber optic licensing business was sold to Crown Castle in August 2015 for approximately $1 billion cash; after-tax net proceeds were approximately $848 million. The company recorded a $171 million after-tax gain. It repurchased 59.3 million shares for $1.46 billion during 2015. No common dividends were declared.
Management expected 2016 continuing-operations capital expenditures of $200–$220 million and said cash, operating cash flows and facility availability should fund operating needs and planned spending.

Material changes, outlook and risks

The $58.5 million fourth-quarter impairment comprised $39.8 million of goodwill, $12.1 million of intangible assets and $6.6 million of property and equipment. Goodwill and intangible impairments reflected lower oil and gas revenue forecasts in Gulf of Mexico and Australian operations amid sustained low commodity prices.
Management cited approximately $73 million of aggregate losses on three projects during 2015, driven by performance and site-related costs. Electric Power also faced delays to large transmission projects from regulatory and permitting hurdles, underused resources and more competitive pricing in smaller projects.
Oil and gas price declines reduced demand in Australia, Canada and the Gulf of Mexico. Management remained cautiously optimistic about longer-term utility investment, pipeline integrity and replacement, and transmission and mainline projects, but emphasized uncertainty around timing and customer spending. No quantified revenue or EPS guidance is provided in the supplied filing text.
Backlog was $9.387 billion at year-end, up from $9.236 billion; estimated 12-month backlog was $5.209 billion, slightly below $5.220 billion. Backlog includes estimates under master service agreements, many of which have no committed work volume and can generally be terminated on 30–90 days’ notice.
Other key exposures include weather and seasonality; fixed-price project execution, claims and change-order recovery; labor availability and union obligations; self-insured claims; foreign exchange; customer credit and concentration; and acquisition integration. The ten largest customers generated about 36% of revenue, with the largest at about 8%.
Quanta disclosed an SEC inquiry, begun in 2014, into certain foreign activities and its FCPA compliance program. The SEC had not alleged violations; Quanta said it was cooperating. Central States multiemployer pension withdrawal liability remained disputed and uncertain; management cited a possible loss range up to $55.4 million for the complete-withdrawal matter and was assessing a revised 2016 demand.
Other notable commitments include $2.6 billion of outstanding performance bonds, with estimated remaining project costs of $906 million; a $487.1 million maximum guaranteed residual value on certain equipment leases; and $209.0 million accrued for insurance claims. The filing says material bond claims were not expected, but outcomes remain uncertain.

Important facts for investors to verify

Review segment margins, project-loss explanations and the performance and close-out status of the identified loss-making projects.
Assess whether 2016 transmission and pipeline backlog converts to revenue, given permitting delays and the cancellable, estimated nature of much MSA backlog.
Reconcile continuing earnings and cash generation with the one-time fiber sale gain, discontinued operations and substantial share repurchases.
Monitor oil and gas customer spending, foreign-exchange impacts, additional impairment risk, and the outcome of the SEC inquiry and Central States pension matters.
Confirm credit-facility availability, covenant headroom, self-insurance exposure and material bond, lease and joint-venture commitments as conditions change.