Quanta Services, Inc. — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. Quanta provides infrastructure contracting services across electric power, renewable energy, communications, pipeline and energy markets. Results include Blattner, acquired in October 2021; prior-period segment information was recast to the current reporting structure. Financial amounts below are in U.S. dollars.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $4.232B | $3.000B | $8.198B | $5.703B |
| Gross profit / margin | $624.6M / 14.8% | $447.7M / 14.9% | $1.173B / 14.3% | $820.6M / 14.4% |
| Operating income / margin | $208.4M / 4.9% | $161.7M / 5.4% | $325.9M / 4.0% | $275.4M / 4.8% |
| Net income attributable to common stock | $88.0M | $117.0M | $172.7M | $206.8M |
| Diluted EPS | $0.59 | $0.81 | $1.16 | $1.43 |
| Operating cash flow | $118.7M | $188.9M | $203.8M | $314.6M |
Q2 revenue rose 41.1%, while operating income rose 28.9%; common-stock net income fell 24.8%. Growth reflected higher activity across all segments, including substantial acquired revenue from Blattner. Earnings were weighed down by a $41.7M unrealized Starry investment loss ($34.7M net of tax), increased acquisition-related amortization, and higher financing costs. Adjusted EBITDA, a non-GAAP measure, was $422.1M for Q2 versus $281.3M; six-month adjusted EBITDA was $767.6M versus $501.5M.
For the six months, revenue increased 43.7%, but operating margin declined to 4.0% from 4.8% and common-stock net income decreased 16.5%. Higher amortization and corporate/non-allocated costs, interest expense, and the Starry valuation loss more than offset operating growth.
Segments and operating trends
- Electric Power: Q2 revenue increased 21.1% to $2.199B; operating margin decreased to 10.6% from 11.4%. Utility grid modernization and hardening work supported growth; supply disruption and higher consumables costs pressured margins.
- Renewable Energy: Q2 revenue increased 178.4% to $924.2M, primarily reflecting Blattner. Margin was 8.8% versus 9.0%, affected by delays and added costs on a large Canadian transmission project.
- Underground Utility and Infrastructure: Q2 revenue increased 30.1% to $1.108B; margin improved to 8.1% from 2.8%. Gas utility and industrial demand, Canadian pipeline work, improved execution and the prior-year credit-loss charge contributed.
Liquidity, debt and cash flow
- Cash and cash equivalents were $150.7M at June 30, 2022, down from $229.1M at year-end 2021. Some cash is held by joint ventures or the captive insurer and is generally not available for other operations.
- Total debt obligations were $3.898B, up from $3.738B at December 31, 2021. Long-term debt, net of current maturities, was $3.871B. Quanta reported compliance with its credit-facility covenants.
- Unused revolving commitments were $1.626B; together with cash, total available commitments and cash were $1.777B. The company said it expected cash flow, cash on hand and borrowing capacity to meet requirements for the next 12 months and longer term.
- Six-month operating cash flow fell to $203.8M from $314.6M, mainly due to increased working-capital requirements, including Canadian transmission projects and billing timing. Capital expenditures were $231.5M versus $158.4M.
- Management expected 2022 property-and-equipment capital expenditures of approximately $400M. Six-month financing included $94.4M of stock repurchases and $20.9M of dividends.
Backlog, outlook and notable items
- Remaining performance obligations were $6.92B, up from $5.90B at year-end; 79.1% was expected to be recognized in the following 12 months. Total backlog, a non-GAAP measure that includes estimated MSA and short-term non-fixed-price work, was $19.85B, up from $19.27B. MSA volumes are generally not contractually guaranteed and may be terminated or change.
- Management described long-term demand opportunities in grid modernization, renewable generation and interconnection, broadband, regulated utility work and industrial services. It also noted ongoing risks from inflation, labor availability, supply-chain constraints, permitting, weather and project timing. No specific consolidated revenue or EPS guidance is provided in the supplied filing text.
- Quanta had recognized $497.1M of revenue for change orders and claims still being negotiated. A large Canadian renewable transmission project was substantially affected by pandemic-related delays and labor constraints; its plan now calls for work through spring 2024. Quanta recorded a $13.0M Q2 negative estimate change for that project, partly offset by favorable estimate changes across other projects; aggregate project estimate changes increased Q2 gross profit by $62.3M.
- Other unusual items include $2.8M of impairment related primarily to the planned headquarters move and a $6.7M gain on sale of a technology investment during the first half.
Risks and contingencies
- Fixed-price project execution, cost estimates, supply and labor costs, project delays, and recovery of change orders can affect margins and may result in losses. The Canadian project claims and cost-to-complete estimates warrant monitoring.
- In the Peru telecommunications dispute, Quanta’s subsidiary seeks approximately $190M in arbitration claims; the counterparty asserted approximately $41M in liquidated damages. Quanta said an unfavorable outcome could cause an additional significant loss, but it could not estimate a reasonably possible loss range.
- In the Maurepas matter, the counterparty revised claimed damages to approximately $48M; Quanta disclosed a range of possible additional loss from no additional loss up to the claim, less its accrual. Other matters include the Silverado wildfire claims, for which no accrual or loss range was recorded, and the Hallen-related New York explosion litigation, for which no accrual was recorded.
- Quanta reported no material changes to previously disclosed risk factors. Disclosure controls were assessed as effective at June 30, 2022; acquired businesses were still being integrated into internal financial controls.
Important facts for investors to verify
- Whether Canadian transmission project schedules, cost estimates, and the $497.1M of negotiated change orders and claims support the reported revenue and expected recoveries.
- How much of backlog converts to revenue and cash, given that much includes non-guaranteed MSA estimates.
- Whether working-capital needs, billing delays and capital spending affect cash generation, and how higher variable interest rates change financing costs.
- The continuing earnings impact of Blattner-related amortization and contingent consideration, and the market value and potential liquidity of the Starry investment.
- Developments in the Peru, Maurepas, Silverado wildfire and Hallen litigation matters, including potential uninsured or unestimable losses.