Business context and reporting period
Quanta Services, Inc. filed this unaudited Form 10-Q for the quarter ended September 30, 2014. It provides specialty contracting and infrastructure services, principally for electric power and oil and gas customers in the U.S., Canada and Australia, and operates Electric Power Infrastructure Services, Oil and Gas Infrastructure Services, and Fiber Optic Licensing and Other segments. The filing cautions that results are seasonal and interim results are not necessarily indicative of full-year performance.
Financial performance and liquidity
Amounts below are in U.S. dollars; financial-statement figures are converted from thousands to millions where appropriate.
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $2,171.1 million | $1,645.1 million | $5,798.3 million | $4,705.2 million |
| Gross profit / margin | $353.0 million / 16.3% | $273.1 million / 16.6% | $906.5 million / 15.6% | $752.6 million / 16.0% |
| Operating income / margin | $142.9 million / 6.6% | $141.1 million / 8.6% | $366.8 million / 6.3% | $377.5 million / 8.0% |
| Net income attributable to common stock | $94.6 million | $92.9 million | $230.1 million | $235.2 million |
| Diluted EPS | $0.43 | $0.43 | $1.05 | $1.10 |
| Operating cash flow | $64.1 million | $83.2 million | $37.5 million | $245.1 million |
- Q3 revenue rose 32.0%, led by electric power (+31.6%) and oil and gas (+35.7%); fiber optic and other revenue fell 5.0%. Nine-month revenue rose 23.2%, while common-stock net income declined 2.2% and diluted EPS declined from $1.10 to $1.05.
- Q3 operating income was broadly flat despite higher revenue; operating margin fell 2.0 percentage points. For the first nine months, operating income fell 2.8% and operating margin declined 1.7 points. Lower power segment margins and unusual charges weighed on results.
- At September 30, cash was $144.2 million, down from $488.8 million at year-end 2013. Working capital was $1.41 billion. Total debt was approximately $84.9 million, including $76.9 million borrowed under the revolving facility. Of the $1.325 billion facility, $927.9 million remained available after borrowings and letters of credit; the company reported covenant compliance.
- Nine-month operating cash flow fell to $37.5 million, primarily reflecting increased working-capital needs from project ramp-ups and timing of billings and collections, as well as the cash payment related to the NGC arbitration. Accounts receivable increased to $1.873 billion from $1.439 billion at December 31, 2013.
- Capital expenditures were $226.7 million through September. Management expected full-year 2014 capital expenditures of $320–$330 million, including $50–$60 million for fiber optic network expansion.
Material changes and unusual items
- Quanta recorded a $52.5 million Q3 charge in SG&A to reduce the carrying value of the disputed Sunrise Powerlink contract receivable. The original receivable was approximately $165 million; the company continued to pursue recovery beyond the revised carrying value.
- Nine-month SG&A included a $38.8 million charge related to an adverse arbitration decision involving the National Gas Company of Trinidad and Tobago. Quanta paid $28.3 million in damages, fees and interest in April 2014 and wrote off approximately $10.5 million of related receivables.
- The estimated possible loss associated with withdrawal liability to the Central States multi-employer pension plan was up to $55.4 million. Quanta disputed the liability and said the final amount could be materially higher than the recognized amount.
- Quanta completed eight acquisitions in the first nine months of 2014 for aggregate consideration of approximately $241.6 million, comprising $171.5 million cash and $70.2 million in issued common and exchangeable shares. Acquired companies contributed $183.5 million of revenue in the period after their acquisition dates.
- Backlog was $9.63 billion at September 30, up from $8.73 billion at December 31, 2013; $5.25 billion was estimated for realization within 12 months. Backlog is a non-GAAP industry measure and includes estimates for master service agreements, renewals and certain change orders; it may be delayed, reduced or cancelled.
Outlook, commentary and risks
Management described growth opportunities across its markets and expected electric power backlog to remain strong through the rest of 2014 and into 2015. It cited utility transmission and distribution investment, shale-related gathering and pipeline work, and mainline pipe opportunities as potential drivers. Management also noted that regulatory and permitting hurdles, customer spending uncertainty, weather, project execution and labor availability could affect demand and margins. The company characterized 2014 as a transition year for expanding its fiber optic lit-services offering.
Key exposures include fixed-price project execution and cost-estimate risk; customer collections and contract claims; weather and seasonality; volatile oil and gas markets; acquisition integration; foreign-exchange movements; insurance and joint-venture obligations; multi-employer pension liabilities; and the ability to renew or realize backlog. The Sunrise arbitration hearing was scheduled for July 2015; SDG&E disputed Quanta’s claim and counterclaimed for approximately $32 million. The SEC had requested document preservation and was inquiring into activities in certain foreign jurisdictions, including South Africa and the UAE; the filing stated that the SEC had not alleged violations and that Quanta was cooperating.
Management said cash, available credit and expected operating cash flows should support operating needs and planned capital spending. This is forward-looking and subject to the risks described in the filing. Disclosure controls were reported effective as of September 30, 2014, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Progress and outcome of the Sunrise Powerlink arbitration, and recoverability of the remaining receivable beyond the $52.5 million provision.
- Final Central States Plan withdrawal liability, payments made, and any additional expense or cash requirements.
- Collection trends, receivables and unbilled contract balances, working-capital needs, and the conversion of backlog into revenue and cash.
- Whether margin recovery follows the Q3 and year-to-date declines, particularly in electric power, and the contribution of acquired businesses versus organic growth.
- Actual 2014 capital spending and cash generation relative to management’s outlook, while maintaining access to the revolving facility and covenant compliance.
- Developments in the SEC inquiry and any related legal, compliance or disclosure consequences.