Business context and reporting period
Quanta Services, Inc. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2017. It provides specialty contracting and infrastructure services across electric power, oil and gas, and communications markets. Its reportable segments are Electric Power Infrastructure Services and Oil and Gas Infrastructure Services.
Financial performance and liquidity
| Metric | Q2 2017 | Q2 2016 | H1 2017 | H1 2016 |
|---|---|---|---|---|
| Revenue | $2,200.4m | $1,792.4m | $4,378.5m | $3,506.2m |
| Gross profit / margin | $302.2m / 13.7% | $200.2m / 11.2% | $568.4m / 13.0% | $403.5m / 11.5% |
| Operating income / margin | $109.8m / 5.0% | $35.5m / 2.0% | $184.9m / 4.2% | $72.8m / 2.1% |
| Net income attributable to common stock | $63.8m | $16.6m | $112.1m | $37.1m |
| Diluted EPS | $0.41 | $0.11 | $0.72 | $0.23 |
| Operating cash flow | $4.9m | $67.8m | $1.1m | $273.6m |
Revenue increased 22.8% in Q2 and 24.9% in H1. Higher revenue and project mix lifted margins; comparisons also benefited from Alaska power-plant losses recorded in 2016 ($30.5m in Q2 and $51.8m in H1). Oil and gas revenue grew particularly strongly, driven by larger pipeline projects.
At June 30, 2017, cash was $99.6m, working capital was $1.33bn, and total assets were $5.75bn. Long-term debt and notes payable, net of current maturities, were $483.6m; total debt obligations were $485.0m. The $1.81bn revolving facility had $480.7m drawn, $324.7m of letters of credit and guarantees outstanding, and $1.00bn available. The company reported compliance with its credit covenants. H1 capital expenditures were $105.3m, and management expected full-year 2017 capital expenditures of $210m–$225m.
Operating cash flow fell sharply year over year, primarily because larger ongoing projects increased working-capital needs; receivables and costs in excess of billings were major uses of cash. DSO was 80 days versus 74 days at June 30, 2016. The company expects project cash flows to support debt reduction during the rest of 2017.
Material changes and operating trends
- Q2 Electric Power revenue rose 12.2% to $1.30bn; segment operating income increased to $113.0m from $75.9m. H1 revenue rose 7.4% to $2.52bn.
- Q2 Oil and Gas revenue rose 42.0% to $899.6m; segment operating income was $67.8m versus $11.9m. H1 revenue rose 60.2% to $1.86bn and operating income to $106.6m from $17.7m.
- At June 30, total backlog was $9.18bn, down from $9.75bn at year-end 2016; 12-month backlog was $5.34bn versus $5.85bn. Oil and Gas 12-month backlog was reduced by about $100m following cancellation of a pipeline project; Quanta received a termination fee.
- Foreign currency movements reduced Q2 revenue by approximately $18m year over year; H1 foreign exchange effects increased revenue by approximately $2m. Foreign operations represented 26.9% of H1 revenue.
- H1 income tax provision was $62.8m, with a 35.8% effective rate versus 42.8% in 2016. The reduction reflected, in part, a $5.0m tax benefit from the adoption of share-based payment accounting guidance.
Outlook, risks, contingencies and unusual items
Management described a positive long-term outlook and said both segments were generally entering a renewed multiyear up-cycle. It cited utility grid upgrades, transmission and renewable-power needs, communications investment, larger pipeline work, pipeline integrity services, and expanded industrial services as opportunities. It gave no specific revenue, earnings or EPS guidance in this filing.
On July 20, 2017, after quarter-end, Quanta acquired Stronghold for $360m in cash and 2,693,680 shares valued at about $90m, with up to approximately $100m of contingent consideration. Quanta subsequently borrowed $360m under its credit facility to fund the cash payment. The acquisition expands Oil and Gas services into specialized downstream and midstream energy work.
- Q2 operating results included $24.6m of favorable contract-estimate changes, primarily risk mitigation and released cost contingencies on two pipeline projects nearing completion. A separate pipeline project’s previously recognized $16.5m estimated loss was reduced by $5.0m in Q2 after performance improved.
- Key risks include fixed-price project execution and cost estimates, weather and permitting delays, customer spending and energy prices, competition and skilled-labor availability, foreign exchange, and collection of large receivables. One electric-power customer represented 13% of net receivables; a second oil-and-gas customer represented 10% and also 10% of Q2 and H1 revenue.
- Quanta disclosed a reasonably possible loss of up to approximately $16.5m in the Benton wage-and-hour litigation, while stating it did not believe a material loss was probable. Disputed Central States multiemployer pension withdrawal liability was estimated at $40.1m–$55.4m; Quanta had paid $20.7m toward the assessment and said the ultimate liability could be materially higher than the expense recognized.
- Other exposures include $238.1m accrued for insurance claims, approximately $3.5bn of performance bonds outstanding (with estimated cost to complete of $840m), and a $588.4m maximum guaranteed residual value on equipment leases. Management said it did not expect significant payments on the lease guarantee or material bond claims, but could not assure that outcomes.
- Management noted that the new lease accounting standard, expected to be adopted in 2019, is anticipated to materially affect the balance sheet. The new revenue standard was expected to be adopted in 2018; management did not then expect a material effect on results, financial position or cash flows.
Important facts for investors to verify
- Whether strong pipeline revenue and margins persist, and how much reported profitability depends on favorable contract-estimate revisions and project mix.
- Conversion of backlog to revenue and cash, including the effects of cancellations, permitting delays, and master service agreements that can generally be terminated on 30–90 days’ notice.
- Working-capital recovery, receivable collections, DSO, and the expected timing of cash generation from large projects.
- Post-quarter Stronghold financing, integration, contingent consideration, and resulting leverage and liquidity.
- Developments in the Central States pension dispute, Benton litigation, customer concentration, and self-insurance and performance-bond exposures.