Quanta Services, Inc. — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016. Quanta provides specialty infrastructure contracting services, principally in electric power and oil and gas, through its Electric Power Infrastructure Services and Oil and Gas Infrastructure Services segments. Amounts below are in U.S. dollars; financial statement figures are unaudited.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $1,792.4 million | $1,872.3 million | $3,506.2 million | $3,733.7 million |
| Gross profit / margin | $200.2 million / 11.2% | $227.5 million / 12.2% | $403.5 million / 11.5% | $465.4 million / 12.5% |
| Operating income / margin | $35.5 million / 2.0% | $68.9 million / 3.7% | $72.8 million / 2.1% | $153.0 million / 4.1% |
| Continuing operations income attributable to common stock | $16.6 million | $32.0 million | $37.1 million | $79.7 million |
| Continuing operations EPS, basic and diluted | $0.11 | $0.15 | $0.23 | $0.37 |
| Net cash from continuing operating activities | $66.5 million | $106.1 million | $266.3 million | $285.8 million |
- Revenue declined 4.3% in Q2 and 6.1% year to date. Acquisitions partly offset lower activity; foreign exchange reduced revenue by about $14 million in Q2 and $46 million in the first half.
- Both segments had lower revenue and operating income. Electric Power segment revenue fell 5.2% in Q2 and 4.7% year to date; Oil and Gas revenue fell 2.6% and 8.7%, respectively. Segment operating margins also declined, particularly in Oil and Gas.
- Prior-year net income included discontinued fiber-optic licensing operations: $14.1 million in Q2 and $19.9 million for the first half of 2015. Quanta sold those operations in August 2015 for about $1 billion, with approximately $848 million in after-tax proceeds and a $171 million after-tax gain recognized in 2015.
Liquidity, debt and capital allocation
- At June 30, cash and cash equivalents were $162.3 million; working capital was $1.04 billion. Total debt obligations were $406.7 million, including $398.0 million drawn on the revolving credit facility.
- The $1.81 billion secured revolver matures in December 2020. After borrowings and outstanding letters of credit and guarantees, approximately $1.09 billion remained available. Quanta reported compliance with its credit covenants.
- First-half capital expenditures were $108.6 million. Management expected full-year 2016 capital expenditures of $200–$220 million, funded primarily from cash, operating cash flow and credit-facility borrowings.
- Operating cash flow declined year over year, partly reflecting weaker operating results and a $65 million arbitration settlement received in the first half of 2015. DSO improved to 74 days from 85 days a year earlier.
- Quanta completed the final settlement of its $750 million accelerated share repurchase in April, receiving 9.4 million additional shares. Approximately $50.1 million remained under the $1.25 billion repurchase authorization at June 30.
Material items, outlook and risks
- Alaska power-plant project: Revised cost estimates produced losses of $30.5 million in Q2 and $51.8 million in the first half. The $201 million contract was approximately 90% complete at June 30, with substantial completion expected near the end of Q3. Quanta cited engineering deficiencies, other contractors’ performance and a claimed force majeure disruption. It had not recognized anticipated claims or cost recovery; further losses remained possible but were not estimable.
- Management described continued regulatory and permitting delays affecting large electric transmission and pipeline projects, competitive pricing pressure, and low oil and gas prices weighing on some markets, including Canada, Australia and the Gulf of Mexico. It said Canadian operations had stabilized and cited longer-term infrastructure demand, while stressing uncertainty around project timing and commodity prices.
- Backlog was $9.76 billion at June 30, up from $9.39 billion at December 31, 2015; $5.71 billion was estimated for realization within 12 months. Backlog includes estimates for master service agreements, which generally do not commit customers to specific volumes and may often be terminated on 30–90 days’ notice.
- Other exposures include $317.3 million of letters of credit and bank guarantees, $2.7 billion of performance bonds (with estimated remaining cost to complete of $667 million), operating lease obligations of $270.8 million and a $538.7 million maximum residual-value guarantee on certain leased equipment.
- Quanta continued to dispute Central States multiemployer pension withdrawal liabilities. The estimated reasonably possible loss for the 2011 withdrawal matter was $40.1–$55.4 million; $13.7 million had been paid by June 30. Final liability remained uncertain. Unrecognized tax benefits were $57.9 million, and management said up to $25.9 million could decrease within 12 months through settlements or statute expirations.
- The SEC had made an inquiry into certain foreign activities, including South Africa and the UAE. The filing said the SEC had not alleged violations and that Quanta was cooperating. Management did not report material changes to previously disclosed risk factors.
Important facts for investors to verify
- Progress, final costs and any recoveries or additional losses on the Alaska project.
- Whether delayed large transmission and pipeline projects proceed as expected, and whether backlog converts to revenue on schedule.
- Margin and cash-flow trends, particularly in Oil and Gas, and the continuing effects of permitting delays, competition, commodity prices and foreign exchange.
- Credit-facility availability and covenant compliance, capital spending, and any further share repurchases or acquisitions.
- Resolution and potential financial impact of the Central States pension matters, tax examinations and SEC inquiry.