Quanta Services, Inc. — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013; unaudited. Quanta provides specialty contracting and infrastructure services, principally in electric power and natural gas and oil pipelines, and licenses fiber-optic capacity.
Financial performance and position
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $1.645 billion | $1.532 billion | $4.705 billion | $4.247 billion |
| Gross profit / margin | $273.1 million / 16.6% | $252.0 million / 16.4% | $752.6 million / 16.0% | $651.0 million / 15.3% |
| Operating income / margin | $141.1 million / 8.6% | $127.1 million / 8.3% | $377.5 million / 8.0% | $304.3 million / 7.2% |
| Net income attributable to common stock | $92.9 million | $96.4 million | $235.2 million | $207.6 million |
| Diluted EPS | $0.43 | $0.45 | $1.10 | $0.98 |
| Operating cash flow from continuing operations | $83.2 million | $(46.5) million | $245.1 million | $(8.4) million |
| Capital expenditures | $51.1 million | $67.9 million | $213.2 million | $148.6 million |
- At September 30, cash and cash equivalents were $309.2 million, versus $394.7 million at year-end 2012; working capital was approximately $1.17 billion.
- Quanta had no revolving credit borrowings, $226.4 million of letters of credit outstanding, and $473.6 million of availability under its then-current $700 million facility. It reported compliance with facility covenants. Balance-sheet current maturities of long-term debt were $2.6 million.
- Total assets were $5.495 billion and total liabilities were $1.471 billion. Accounts receivable were $1.435 billion; costs and estimated earnings in excess of billings were $232.3 million.
- Total backlog was $8.088 billion at September 30, including $4.365 billion expected to be realized within 12 months, up from total backlog of $6.987 billion at December 31, 2012. Backlog is an estimate, not a GAAP measure or assurance of future revenue.
Material changes versus prior period
- Q3 revenue rose 7.4%; nine-month revenue rose 10.8%. Growth reflected pipeline work associated with North American shale development and increased electric transmission and distribution activity. 2013 acquisitions contributed approximately $83.5 million of revenue and $4.3 million of pretax continuing income through September 30.
- Natural Gas and Pipeline revenue increased 40.1% in Q3 and 19.1% year to date; its operating margin improved to 9.0% and 6.8%, respectively, from 5.9% and 2.6%. Management cited improved execution, more favorable project conditions, and higher activity; adverse-weather cost problems had weighed on 2012 results.
- Electric Power revenue declined 3.7% in Q3, as lower emergency-restoration and renewable-project activity more than offset other growth. Its operating margin fell to 11.7% from 12.6%. For the nine-month period, revenue rose 8.2%, but margin declined to 11.5% from 12.0%, including pressure from lower-margin major transmission projects and reduced restoration work.
- Q3 net income attributable to common stock decreased despite higher continuing-operations income, partly because Q3 2012 included $12.8 million of after-tax income from discontinued operations. The sold domestic telecommunications-services businesses contributed $20.3 million of after-tax income in the first nine months of 2012; 2013 continuing results exclude them.
- Operating cash flow improved substantially year over year, which management attributed to collections and lower working-capital requirements. Investing cash use increased to $316.4 million for the first nine months, including $124.7 million for acquisitions and $213.2 million for capital expenditures.
Outlook, risks, and unusual items
- Management described growth opportunities across its markets and expected electric-power backlog to remain strong through the rest of 2013 and into 2014. It was encouraged by shale-related gathering work and possible mainline pipeline activity in late 2013 and 2014. These are expectations, not quantified revenue or EPS guidance.
- Management expected 2013 capital expenditures of $260–$270 million, including $45–$50 million for fiber-optic network expansion, with the remainder funded substantially from operating cash flow, cash on hand, and facility borrowings.
- Key operating risks include weather and seasonality, project delays or cancellations, regulatory and permitting hurdles, fixed-price execution risk, customer payment and change-order collection, skilled-labor availability, commodity-market effects on pipeline investment, and foreign-currency exposure. Most master service agreements may be terminated on 30–90 days’ notice.
- Sunrise Powerlink is a significant collection contingency: approximately $165 million of recognized change-order revenue was associated with disputed additional work. The parties agreed to arbitration after failing to agree on the final amount due; the receivable was reclassified to other assets because resolution was not expected within 12 months. The filing states management believed its claim was collectible and did not expect resolution to materially adversely affect consolidated results, but the outcome remains uncertain. The customer represented about 10% of consolidated net position at September 30.
- A separate arbitration involving National Gas Company of Trinidad and Tobago includes Quanta’s subsidiary claim of approximately $16.5 million and a counterclaim of approximately $79.5 million; no decision had been issued. An adverse result could cause a significant uninsured loss. A USDA wildfire claim was settled within available insurance during 2013.
- Other exposures include a Central States multi-employer pension withdrawal liability recorded at $32.6 million, with the ultimate amount uncertain and potentially materially higher; $164.9 million in gross accrued insurance claims; $2.35 billion in performance bonds outstanding; and a $278.4 million maximum guaranteed residual value under equipment leases. Management did not expect significant bond or residual-value payments, but cannot assure none will arise.
- After quarter-end, Quanta completed three acquisitions for approximately $180.8 million in cash and 2,747,412 shares valued at approximately $69.3 million. On October 30, it replaced the existing facility with a $1.325 billion secured revolving facility, expandable to $1.625 billion, maturing in 2018.
Important facts for investors to verify
- Track Sunrise Powerlink arbitration progress, recovery timing, and any effect on the recognized receivable or earnings.
- Assess whether pipeline-segment margin gains and the larger backlog translate into executed, profitable work, given cancellation, timing, and project-performance risks.
- Reconcile the $260–$270 million capital-spending outlook and post-quarter acquisitions with cash generation, liquidity, and the expanded credit facility.
- Monitor customer concentration, receivable collection, retainage, and unbilled balances; two customers represented approximately 13% and 10% of consolidated net position.
- Review the final Central States pension withdrawal liability and the outcomes of the Trinidad arbitration and other disclosed contingencies.