Quanta Services, Inc. — Q3 2011 Form 10-Q
Business context and reporting period. Quanta provides infrastructure contracting services across electric power, natural gas and pipelines, telecommunications, and fiber-optic licensing. This unaudited filing covers the quarter and nine months ended September 30, 2011; comparisons are with the corresponding 2010 periods unless noted. Results are seasonal and interim results may not indicate full-year performance.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $1,250.8 million | $1,206.0 million | $3,110.7 million | $2,824.8 million |
| Gross profit / margin | $194.7 million / 15.6% | $190.0 million / 15.8% | $419.7 million / 13.5% | $475.2 million / 16.8% |
| Operating income / margin | $94.0 million / 7.5% | $94.6 million / 7.8% | $124.8 million / 4.0% | $201.7 million / 7.1% |
| Net income attributable to common stock | $52.0 million | $62.8 million | $66.2 million | $119.5 million |
| Diluted EPS | $0.25 | $0.30 | $0.31 | $0.57 |
| Cash from operating activities | $40.8 million | $(54.7) million | $92.8 million | $(21.3) million |
- Segment performance: Q3 electric power revenue rose 54.5% to $822.7 million and operating income was $101.8 million. Telecommunications revenue rose 50.3% to $140.7 million, with operating income of $15.9 million. Natural gas and pipeline revenue fell 53.0% to $259.0 million and the segment recorded a $3.9 million operating loss. Fiber-optic licensing revenue was $28.4 million, with $14.2 million operating income.
- Balance sheet and liquidity: At September 30, cash and cash equivalents were $257.8 million, down from $539.2 million at year-end 2010. Current assets were $1,576.9 million and current liabilities $651.7 million; reported working capital was $925.2 million. Total liabilities were $1,161.0 million. Notes payable were $0.1 million; there were no revolving-credit borrowings.
- Credit facility: In August, Quanta replaced its prior facility with a $700 million secured revolver maturing August 2016. Letters of credit used $190.3 million, leaving $509.7 million available. The company reported covenant compliance at quarter-end.
- Capital allocation: Nine-month investing cash outflow was $216.8 million, including $132.8 million of capital expenditures, a $35 million investment in Howard Midstream Energy Partners, and acquisition spending. Financing cash outflow was $153.5 million, including $149.5 million of share repurchases.
Material changes and unusual items
- Nine-month revenue increased 10.1%, primarily on electric-power growth and acquisitions, but operating income fell 38.1% and common-stock net income fell 44.6%. Natural-gas and pipeline revenue declined 35.7%; the segment’s nine-month operating loss was $42.1 million, compared with $97.4 million of operating income a year earlier.
- Management attributed the gas-segment decline to delayed or fewer transmission projects, poor overhead absorption, and first-quarter project cost overruns linked to adverse weather and regulatory restrictions. Q3 electric-power emergency-restoration revenue increased following Hurricane Irene.
- Four businesses were acquired in Q3 for reported aggregate consideration of $81.6 million, including cash, stock, and repayment of debt. The acquired companies contributed approximately $12 million of revenue for the three and nine months ended September 30. A further acquisition, Utilimap, closed October 5 for cash, stock, and debt repayment.
- Reported Q3 tax rate was 40.2%, versus 33.1% in 2010; the prior-year rate benefited from $9.4 million of tax benefits related to statute expirations. Nine-month rates were 40.6% and 36.7%, respectively.
- Backlog was $7.17 billion at September 30, up from $6.32 billion at December 31, 2010; $3.44 billion was estimated for realization within 12 months. Backlog includes master-service-agreement estimates and is not assured work: contracts may be cancellable, delayed, or renewed on different terms.
Outlook, risks, and contingencies
- Management expected activity and customer spending to increase into 2012, while noting regulatory obstacles and uncertainty about project timing. It expected 2011 capital expenditures of $180–$200 million, including $30–$35 million for fiber-optic network expansion, substantially funded from cash and operations. No specific revenue or earnings guidance was provided.
- Management cited long-term transmission, renewable-energy, shale-related pipeline, broadband, and wireless-network opportunities. It also expected near- and long-term margin improvement, but cautioned that customer spending, competition, project mix, weather, execution, and regulatory delays could constrain results.
- Material execution and demand risks include fixed-price contract losses, project delays or cancellations, collection of receivables and change orders, customer capital constraints, skilled-labor availability, acquisitions and integration, and seasonal or severe-weather effects.
- Significant exposures include $1.7 billion of outstanding performance bonds (with estimated cost to complete of $566 million), $190.3 million of letters of credit, $206.2 million of accrued gross insurance claims, and $119.1 million of maximum guaranteed equipment-lease residual value. Several multiemployer pension plans were in critical status; possible future contributions were not estimable.
- Two disclosed California fire matters could result in material uninsured losses. In the Witch Creek matter, Quanta could not estimate potential losses exceeding insurance coverage. In the Amador County matter, the USDA had demanded $8.5 million in fire-suppression costs and verbally indicated it would seek about $51.3 million in additional restoration and other damages; Quanta had recorded an $8.5 million liability and corresponding insurance receivable. The company warned an adverse uninsured outcome could materially affect results and cash flows.
- Unrecognized tax benefits totaled $58.5 million; up to $15.5 million could decrease within 12 months due to statute expirations. Management said no material risk-factor changes had occurred since the 2010 Form 10-K and reported disclosure controls effective at September 30.
Most important facts for investors to verify
- Whether gas and pipeline projects resume on schedule and the segment returns to profitability after its 2011 losses.
- Whether electric-power growth and backlog convert to revenue and cash flow at sustainable margins, and how much backlog is cancellable or dependent on estimated renewals.
- Receivable quality and cash conversion: accounts receivable rose to $1,008.9 million, including $184.1 million of unbilled receivables; cash fell substantially year to date.
- Actual acquisition contributions, integration costs, and returns on recent acquisitions and the HEP investment.
- Potential uninsured exposure in the California fire matters, alongside bond, insurance, lease-guarantee, and multiemployer-plan obligations.
- Capital allocation and liquidity after buybacks and planned capital expenditures, including availability under the revolver and compliance with its covenants.