Quanta Services, Inc. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. Figures below are in U.S. dollars; “m” and “b” denote millions and billions. Quanta provides specialty infrastructure contracting services through Electric Power and Oil and Gas Infrastructure Services segments.
Financial performance
| Metric | Q3 2017 | Q3 2016 | First 9 months 2017 | First 9 months 2016 |
|---|---|---|---|---|
| Revenue | $2.609b | $2.042b | $6.988b | $5.548b |
| Gross profit / margin | $350.6m / 13.4% | $302.6m / 14.8% | $919.0m / 13.2% | $706.1m / 12.7% |
| Operating income / margin | $140.4m / 5.4% | $130.2m / 6.4% | $325.3m / 4.7% | $202.9m / 3.7% |
| Net income attributable to common stock | $89.3m | $73.7m | $201.4m | $110.8m |
| Diluted EPS | $0.56 | $0.48 | $1.28 | $0.70 |
- Revenue and segment trends: Q3 revenue rose 27.8%; nine-month revenue rose 25.9%. Electric Power revenue was $1.505b in Q3 and $4.025b year to date; Oil and Gas revenue was $1.105b and $2.963b, respectively. Nine-month segment operating margins improved to 9.0% for Electric Power and 5.6% for Oil and Gas, from 7.9% and 4.2%.
- Cash flow: Operating cash flow was $173.7m in Q3, versus an outflow of $68.5m in Q3 2016. For nine months, operating cash flow was $174.8m versus $205.1m. Investing used $567.1m and financing provided $370.0m in the nine-month period; cash declined $20.7m to $91.5m.
- Liquidity and debt: Working capital was $1.36b. Long-term debt, including current maturities, totaled $763.0m, principally $757.5m drawn under the revolving facility. The company reported $659.7m of remaining facility availability after outstanding loans and letters of credit, and compliance with its covenants at quarter-end.
- Balance sheet: Total assets were $6.640b, versus $5.354b at December 31, 2016; goodwill was $1.937b. Receivables were $1.980b and costs and estimated earnings in excess of billings were $642.8m, reflecting significant project working-capital balances.
Material changes and notable items
- Stronghold was acquired July 20 for $360.0m cash and 2.69m Quanta shares valued at $81.3m, with up to $100m additional contingent consideration. The acquisition contributed approximately $80m of revenue through September and expanded downstream and midstream industrial services. Nine-month acquisition cash spending was $360.5m.
- Q3 growth reflected increased midstream gas pipeline spending, electric transmission work, and $100.1m of additional emergency restoration revenue, primarily related to Hurricanes Harvey and Irma. Nine-month emergency restoration revenue increased $126.9m.
- Q3 gross margin fell to 13.4%, primarily from Canadian pipeline project weather, delays and production issues; hurricane-related disruptions and support costs; and costs on an electric transmission project. That project generated a $9.4m Q3 loss and $13.2m for the nine-month period, and was approximately 80% complete at September 30.
- Nine-month results benefited from comparison with $54.8m of losses on an Alaska power plant project in the first nine months of 2016. Q3 Oil and Gas operating margin declined to 5.3% from 8.0%, despite higher revenue.
- Backlog was $10.55b at September 30, up from $9.75b at year-end; $6.19b was expected to be realized within 12 months. The company reduced Oil and Gas 12-month backlog by about $100m following cancellation of a pipeline project, for which it received a termination fee. Backlog includes estimates, and MSA customers generally are not committed to specified volumes.
- The October 31, 2017 credit-facility amendment extended maturity from December 2020 to October 2022 and lowered certain borrowing-rate margins. It is a subsequent event, not a September 30 balance-sheet change.
Outlook, risks and contingencies
- Management described a positive long-term outlook and expected renewed multi-year up-cycles in both principal segments, citing grid upgrades, pipeline work, communications investment, and infrastructure needs. No specific revenue, earnings or EPS guidance was provided. 2017 capital expenditures were expected to be $240m–$250m; $168.3m had been spent through September.
- Risks include project delays or cancellations, permitting and environmental constraints, weather, fixed-price project execution, labor availability, commodity prices and customer spending, foreign exchange, customer collections, and seasonal and cyclical fluctuations. Management noted persistent energy-market uncertainty and regulatory delays.
- Central States multiemployer pension withdrawal liability was estimated at a reasonably possible $42.2m–$48.2m; Quanta said the final amount could be materially higher than the expense recognized. It had paid $22.3m by September 30.
- Other disclosed exposures include a disputed Maurepas Pipeline liquidated-damages claim with potential loss up to $22m and a wage-and-hour class action with potential exposure up to approximately $11.1m plus fees. Quanta disputes both matters.
- Outstanding performance bonds were approximately $3.5b, with estimated cost to complete the bonded projects of $889m. The company also disclosed a $614m maximum guaranteed residual value under certain equipment leases, while stating it did not expect significant payments. These are contingent exposures, not reported debt balances.
- Foreign operations generated 26.2% of nine-month revenue. Variable-rate debt was $757.5m; management estimated that a 50-basis-point rate change would affect annual pretax earnings by approximately $3.8m.
Important facts for investors to verify
- Whether the Q3 margin pressure and the electric transmission project loss are resolved, and how much additional cost or delay remains.
- Backlog conversion, particularly the timing and profitability of large pipeline and transmission projects, and the amount dependent on non-firm MSA estimates.
- Receivables, retainage, contract assets and collections, given the working-capital use and lower nine-month operating cash flow.
- Stronghold’s subsequent performance, integration costs, and any contingent consideration earned or payable.
- Final Central States withdrawal liability and outcomes of the Maurepas and employment litigation.
- Debt, interest costs, and remaining revolver availability after the October credit amendment and any further acquisition or investment spending.