Quanta Services, Inc. — Q1 2010 Form 10-Q
Reporting period: Three months ended March 31, 2010; unaudited. Comparisons are with Q1 2009 unless otherwise noted. Quanta provides specialty infrastructure contracting and fiber-optic licensing services. Price Gregory, acquired October 1, 2009, contributed to the current-period results.
Financial performance
| Metric | Q1 2010 | Q1 2009 | Change |
|---|---|---|---|
| Revenue | $748.3 million | $738.5 million | +1.3% |
| Gross profit / margin | $129.1 million / 17.3% | $117.1 million / 15.9% | Margin +1.4 percentage points |
| Operating income / margin | $42.3 million / 5.7% | $38.6 million / 5.2% | +9.5% |
| Net income attributable to common stock | $23.7 million | $21.4 million | +11.2% |
| Diluted EPS | $0.11 | $0.11 | Unchanged |
| Operating cash flow | $3.6 million | $111.2 million | Down $107.6 million |
| Capital expenditures | $43.8 million | $41.3 million | Up $2.5 million |
Gross margin improved mainly from negotiated increases to certain gas-transmission contract values and a more favorable service mix; weather-related productivity losses and lower-margin restoration work partly offset the improvement. SG&A rose 10.1% to $81.0 million, increasing from 10.0% to 10.8% of revenue. The effective tax rate was 40.0%, versus 41.9%.
Cash and cash equivalents were $659.8 million at March 31, down from $699.6 million at year-end. Current assets were $1.505 billion and current liabilities $402.5 million. Long-term convertible notes had a $127.7 million carrying value, representing $143.8 million principal. There were no revolving-credit borrowings; $284.9 million remained available after $190.1 million of letters of credit. Quanta reported compliance with credit-facility covenants.
Segments and material changes
- Electric Power: Revenue declined 14.6% to $456.8 million and operating income fell 24.9% to $39.8 million. Lower customer distribution spending, project timing and heavy rain and snow weighed on results; restoration revenue increased to $52.9 million.
- Natural Gas and Pipeline: Revenue rose 69.6% to $188.9 million, largely reflecting Price Gregory. The segment recorded $18.4 million operating income versus a $1.4 million loss, helped by contract-value increases and a higher proportion of gas-transmission work.
- Telecommunications: Revenue increased 6.5% to $78.2 million, but the segment posted an $0.8 million operating loss, compared with $1.0 million operating income, due to weather-related slowdowns, seasonality and reduced customer spending in some service lines.
- Fiber Optic Licensing: Revenue rose 28.7% to $24.3 million; operating income increased 32.7% to $12.1 million, supported by network expansion and licensing revenue.
Total backlog was $5.583 billion at March 31, 2010, down from $5.649 billion at December 31, 2009. Estimated backlog expected to be realized within 12 months rose to $2.530 billion from $2.471 billion. Management cautions that portions reflect master service agreements without committed volumes and contracts that may be terminated.
Outlook, risks and unusual items
- Management said customer spending remained weak or stagnant in some markets, but expected improving conditions to support increased demand in the second half of 2010. The filing gives no numerical revenue or earnings guidance.
- 2010 capital expenditures were estimated at approximately $215 million, including $60–$70 million for fiber-network expansion. Management expected to fund spending substantially from cash on hand and internal cash flow.
- On April 12, 2010, after quarter-end, Quanta announced redemption of all $143.8 million principal of its 3.75% convertible notes on May 14 at 101.607% of principal plus accrued interest. Holders could instead convert. Quanta expected approximately $146.1 million of cash payments if all notes were redeemed, a $2.4–$4.4 million after-tax extinguishment loss, and approximately $6.5 million of annual after-tax cash and non-cash interest savings.
- Operating cash flow fell sharply, mainly because Q1 2009 included collection of unusually high receivables and Q1 2010 had greater income-tax payments, including acquired obligations. Q1 cash flow is also subject to seasonal working-capital patterns.
- Key exposures include customer credit and collections, weather and project delays, fixed-price contract estimates, Price Gregory integration, natural-gas prices, and uncertain stimulus, renewable-energy and infrastructure spending. Change orders and claims of about $25.0 million were included as contract-price adjustments while negotiations continued.
- Contingencies include $760.2 million of outstanding performance bonds (estimated completion cost $150.6 million), $190.1 million of letters of credit, $137.0 million of future operating-lease payments, and a maximum $129.6 million guarantee of equipment lease residual values. Two multi-employer pension plans were in critical status; one required a surcharge whose future amount was not estimable. Management did not expect ordinary-course litigation to have a material adverse effect.
- Unrecognized tax benefits were $47.6 million; management said up to $10.2 million could decrease within 12 months through statute expirations. Management reported no goodwill impairment indicator at quarter-end and effective disclosure controls.
Investor verification points
- Assess whether the backlog converts to revenue, particularly amounts estimated under non-volume-committed service agreements.
- Track cash conversion, receivables, tax payments and working-capital needs alongside the planned $215 million of capital spending.
- Verify the final cash-versus-stock outcome of the convertible-note redemption and its actual extinguishment charge and interest savings.
- Monitor electric-power customer spending and weather impacts, and whether Price Gregory’s pipeline work sustains segment profitability.
- Review estimates for contract claims, insurance liabilities, performance-bond exposure and critical-status pension contributions.