Quanta Services, Inc. — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. Quanta provides specialty contracting and infrastructure services, principally for electric power and oil and gas markets in the U.S., Canada and Australia. Amounts below are in U.S. dollars; financial statement amounts are unaudited.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $1.872 billion | $1.838 billion | $3.734 billion | $3.574 billion |
| Gross profit / margin | $227.5 million / 12.2% | $264.2 million / 14.4% | $465.4 million / 12.5% | $520.3 million / 14.6% |
| Operating income / margin | $68.9 million / 3.7% | $120.8 million / 6.6% | $153.0 million / 4.1% | $200.1 million / 5.6% |
| Net income attributable to common stock | $46.1 million | $81.1 million | $99.6 million | $135.5 million |
| EPS, continuing operations / total | $0.15 / $0.22 | $0.33 / $0.37 | $0.37 / $0.46 | $0.55 / $0.62 |
| Operating cash flow, continuing operations | $106.1 million | $15.9 million | $285.8 million | $(57.4) million |
Revenue increased 1.9% in Q2 and 4.5% year to date. Oil and Gas revenue grew 11.0% in Q2 and 23.3% year to date, while Electric Power revenue declined 2.4% and 3.1%, respectively. Acquisitions contributed an estimated $70 million to Q2 and $220 million to first-half revenue; currency translation reduced revenue by approximately $46 million and $111 million, respectively. Lower gross and operating margins reflected project execution losses, weather and cost pressures.
- Cash and liquidity: Cash was $65.4 million at June 30, down from $190.5 million at December 31, 2014. Working capital was $1.14 billion. The $1.325 billion revolving credit facility had $204.3 million drawn, $324.7 million in letters of credit and guarantees, and $796.0 million available. Quanta reported compliance with all facility covenants.
- Debt: Total debt obligations were $216.9 million, including $204.3 million of facility borrowings, versus $76.3 million at year-end 2014. The facility matures in October 2018.
- Cash uses: First-half capital expenditures were $121.0 million; investing cash outflow was $184.0 million and financing cash outflow was $225.4 million. The latter included $354.3 million of share repurchases, partly offset by net facility borrowings.
- Backlog: Total backlog was $9.15 billion at June 30, versus $9.24 billion at December 31; estimated 12-month backlog was $4.92 billion versus $5.22 billion. Backlog includes estimates under master service agreements and is not a GAAP measure.
Material changes and unusual items
- Q2 gross profit fell 13.9% year over year. Management attributed the decline primarily to about $32 million of aggregate losses on three projects, driven by performance and site conditions. For the first half, management cited about $48 million of aggregate losses on those projects, as well as adverse weather.
- Electric Power Q2 revenue and operating income declined; Oil and Gas Q2 revenue increased but operating income fell 35.3%, with lower oil prices, project losses and rainfall affecting performance. First-half Oil and Gas operating income rose from the prior-year period, which included a $38.8 million arbitration-related charge.
- The fiber optic licensing business was classified as discontinued operations. Quanta completed its sale to Crown Castle on August 4, 2015, after quarter-end, for approximately $1 billion cash, with estimated after-tax net proceeds of $830 million and an expected third-quarter after-tax gain of about $175 million. Quanta retained certain pre-closing tax and insured-claim liabilities.
- First-half operating cash flow improved from the prior-year use of cash, helped by a $65 million Sunrise Powerlink arbitration settlement received in January 2015, lower tax payments and different working-capital timing. DSO increased to 85 days from 78 days a year earlier.
- Quanta repurchased $354.3 million of stock in the first half. It completed the prior $500 million authorization in July and announced a new authorization of up to $1.25 billion through February 2017.
Outlook, risks and contingencies
Management expected 2015 capital expenditures for continuing operations of $225 million to $255 million, funded substantially from cash, operating cash flow and facility borrowings. It described electric infrastructure demand and backlog as strong, while noting regulatory and permitting delays, particularly for large transmission projects. Management expected many delayed projects to progress over a multiyear period. Lower oil prices had weakened demand in some oil and gas markets; prolonged weakness could further reduce customer spending. No specific revenue or earnings guidance is provided in the filing text.
- Key operating risks include project delays or cancellations, fixed-price contract cost overruns, adverse weather, labor availability, customer credit and collection risk, foreign exchange movements, and cyclical customer spending. Most master service agreements do not guarantee service volumes and may generally be terminated on 30 to 90 days’ notice.
- Outstanding performance bonds were approximately $2.7 billion, with estimated cost to complete the bonded projects of $744 million. The company also disclosed $469.4 million of maximum guaranteed residual values on certain equipment leases.
- Quanta disputed its Central States multi-employer pension plan withdrawal liability. The disclosed reasonable possible loss range was up to $55.4 million; the ultimate amount remained uncertain and could exceed the recognized liability.
- The SEC had inquired into certain activities in foreign jurisdictions, including South Africa and the UAE. The filing said the SEC had not alleged violations and Quanta was cooperating.
- Other disclosed matters include a wage-and-hour class action with plaintiffs seeking approximately $16 million in damages plus $5 million in attorneys’ fees, and ordinary-course litigation and self-insurance exposures. Management did not expect the disclosed legal proceedings, apart from the specific uncertainties described, to materially affect the company.
Important facts for investors to verify
- Track whether the project cost overruns are contained and confirm the scope and reconciliation of the project-loss figures: consolidated discussion cites about $48 million for the first half, while segment discussions cite approximately $47 million for Electric Power projects and $7 million for an Oil and Gas project.
- Monitor post-sale cash deployment, including the expected $830 million net proceeds, the anticipated gain, capital spending and the new $1.25 billion repurchase authorization.
- Assess whether backlog converts to revenue as estimated, particularly given the decline in 12-month backlog and the cancellable nature of many master service agreements.
- Follow oil-price effects on customer spending, project delays, segment margins, receivable collections and DSO.
- Review the Central States pension liability, SEC inquiry, retained sale-related liabilities, and the company’s available borrowing capacity after letters of credit and guarantees.