Quanta Services, Inc. — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. Quanta provides specialty infrastructure contracting services in electric power, oil and gas, and communications markets. Results are unaudited; the company notes that quarterly results are seasonal and may not indicate full-year performance.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $2,985.3m | $2,609.3m | $8,059.2m | $6,987.9m |
| Gross profit / margin | $425.8m / 14.3% | $350.6m / 13.4% | $1,060.2m / 13.2% | $919.0m / 13.2% |
| Operating income / margin | $192.6m / 6.5% | $140.4m / 5.4% | $390.8m / 4.8% | $325.3m / 4.7% |
| Net income attributable to common stock | $124.6m | $89.3m | $236.5m | $201.4m |
| Diluted EPS | $0.81 | $0.56 | $1.52 | $1.28 |
| Operating cash flow | $39.1m | $173.6m | $221.6m | $174.7m |
Q3 revenue rose 14.4%; nine-month revenue rose 15.3%. Common-stock net income increased approximately 39% and 17%, respectively. Nine-month operating cash flow exceeded the prior-year period, but Q3 cash flow declined sharply. Nine-month capital expenditures were $222.7m, leaving cash flow less capital expenditures of approximately negative $1.1m; the comparable 2017 amount was positive $6.4m.
Balance sheet and liquidity: Cash and cash equivalents were $113.5m at September 30, versus $138.3m at year-end 2017. Working capital was $1.56bn. Current assets were $3.38bn and current liabilities $1.82bn. Debt, including current and short-term amounts, totaled approximately $975.7m, up from $671.9m at year-end; cash less debt was approximately negative $862m. The company had $407.6m of revolving-facility availability at quarter-end and reported compliance with credit covenants.
Material changes and operating drivers
- Electric Power segment nine-month revenue increased 18.2% to $4.76bn and operating income increased 28.5% to $466.1m. Growth reflected transmission and distribution work, including favorable progress on a large Canadian transmission project.
- Oil and Gas segment nine-month revenue increased 11.5% to $3.30bn, partly due to Stronghold, acquired in July 2017. Operating income fell 9.2% to $150.0m; margin declined to 4.5% from 5.6%, reflecting lower large-diameter pipeline activity and $43.3m of charges across three projects, among other factors.
- Q3 oil and gas operating income improved to $96.1m from $58.5m, supported by pipeline activity and Stronghold; it included $28.9m of charges on two projects.
- Q3 gross profit benefited from favorable estimate revisions, particularly on the Canadian transmission project. Changes in estimates added $30.7m to Q3 gross profit (7.2% of gross profit); nine-month results were reduced by $4.6m overall by estimate changes on earlier-period work.
- Other expense was $37.9m for the first nine months, versus $3.8m a year earlier, primarily reflecting deferral of construction profit on a Canadian transmission project in which Quanta has an equity investment. Additional deferrals were anticipated through the first half of 2019.
- Backlog was $12.21bn, compared with $11.18bn at December 31, 2017. Estimated 12-month backlog was $7.48bn. Separately, remaining performance obligations were $5.29bn, with 78.1% expected to be recognized within 12 months; broader backlog includes estimated MSA and short-term non-fixed-price work and is not fully committed.
Outlook, risks and unusual items
- Management expressed a positive long-term outlook, describing favorable demand trends in both segments and a generally multi-year up-cycle. It expected strong electric-power backlog and continued execution of significant pipeline projects through the remainder of 2018. The filing does not provide specific revenue or earnings guidance.
- Management estimated 2018 capital expenditures of $290m–$310m; $222.7m had been spent through September 30. It estimated a 2018 effective tax rate of approximately 28.3%.
- Risks include permitting and regulatory delays, project timing and cancellations, weather, fixed-price project execution and productivity, skilled-labor availability, energy-market cyclicality and commodity prices, customer credit and collections, foreign exchange, and acquisition integration.
- Two notable project issues included a Texas processing-facility project with engineering/production delays and liquidated damages, and a northeastern pipeline borehole collapse. Quanta recorded an $11.3m insurance receivable for the latter; recovery and total mitigation costs remain uncertain.
- Contingencies include a disputed Louisiana project liquidated-damages claim with a possible loss up to $22m, and a California wage-and-hour matter with possible exposure up to approximately $11.1m plus fees if Quanta is unsuccessful and staffing agencies cannot fund damages. Management did not believe a material loss was probable in the latter matter.
- Outstanding performance bonds were estimated at $3.1bn, with estimated cost to complete the bonded projects of $791m. These are contingent obligations, not reported debt. Certain equipment leases have guaranteed residual values up to $668.2m.
- In October 2018, after quarter-end, Quanta amended its credit facility, increasing revolving commitments to $1.99bn and adding a $600m term loan, both maturing in October 2022. It used the term-loan proceeds to repay revolver borrowings; the transaction changed the mix of debt and increased available revolving capacity.
- Quanta repurchased $217.7m of shares in the first nine months and authorized an additional $500m repurchase program. In October it repurchased another $86.3m of shares and completed the earlier program.
Key facts for investors to verify
- Whether project execution and estimate revisions—especially the Canadian transmission project and pipeline projects—are sustainable and whether the identified cost overruns or recoveries change.
- Whether working-capital demands, contract assets and receivables convert to cash as expected; contract assets increased to $680.0m from $497.3m at year-end.
- Whether Oil and Gas segment margins recover as large pipeline work progresses, and how much backlog converts to revenue. MSA-based estimates are subject to change or cancellation.
- Debt, interest expense and covenant headroom after the October facility amendment, alongside planned capital spending and share repurchases.
- Resolution of the disclosed legal claims, borehole insurance recovery, contingent acquisition payments, and any additional tax or multiemployer pension obligations.