Quanta Services, Inc. — FY 2009 Form 10-K
Reporting period: Fiscal year ended December 31, 2009. This is an annual filing; quarterly figures below are unaudited. Quanta provides specialty contracting and infrastructure services across electric power, natural gas and pipelines, telecommunications, and fiber-optic licensing.
Financial results and liquidity
| Metric | FY 2009 | FY 2008 |
|---|---|---|
| Revenue | $3.318 billion | $3.780 billion |
| Gross profit / margin | $593.5 million / 17.9% | $634.9 million / 16.8% |
| Operating income / margin | $242.1 million / 7.3% | $289.2 million / 7.6% |
| Net income attributable to common stock | $162.2 million | $157.6 million |
| Diluted earnings per share | $0.81 | $0.87 |
| Cash from operating activities | $376.9 million | $242.5 million |
| Capital expenditures | $165.0 million | $185.6 million |
- Revenue fell 12.2%, primarily as customers reduced or delayed spending and 2009 had substantially less storm-restoration work than 2008. Gross margin improved, reflecting mix and stronger telecommunications margins; operating margin edged down as lower revenue pressured fixed-cost absorption.
- Net income increased despite lower operating income, helped by a lower effective tax rate: 30.0% versus 41.0%. The 2009 tax provision included $23.7 million of benefits from releases of uncertain-tax-position reserves.
- At year-end, cash and cash equivalents were $699.6 million, working capital was $1.087 billion, and total assets were $4.117 billion. Current liabilities were $495.7 million.
- Debt included $143.8 million principal amount of 3.75% convertible notes due 2026 (carrying value $126.6 million, net of discount) and $3.4 million of current notes payable. The $475 million revolving facility had no revolver borrowings; $188.3 million of letters of credit left $286.7 million available. Quanta reported covenant compliance.
- Operating cash flow rose mainly from collecting receivables and retainage outstanding at 2008 year-end and lower working-capital needs. Investing activities used $119.7 million; financing activities provided $1.5 million.
Segments and material changes
- Electric Power: revenue was $2.068 billion, down 10.2%; operating income was $226.1 million, down 8.7%. Reduced distribution work and lower storm response were partly offset by transmission projects.
- Natural Gas and Pipeline: revenue was $784.7 million, down 10.8%; operating income was $62.7 million, down 17.7%. Price Gregory contributed $245.1 million of fourth-quarter revenue after its October 1 acquisition, offsetting declines elsewhere.
- Telecommunications: revenue was $378.4 million, down 29.5%; operating income was $25.3 million, down 39.5%, chiefly due to lower fiber-build spending and weaker fixed-cost absorption.
- Fiber Optic Licensing: revenue increased 40.0% to $87.3 million and operating income increased 34.7% to $44.1 million, supported by network expansion. This segment continued to generate significantly higher margins than the contracting segments.
- Backlog at year-end was $5.649 billion, up from $5.193 billion; $2.471 billion was estimated for completion within 12 months, versus $2.577 billion a year earlier. Backlog includes work under master service agreements that may not guarantee volumes and contracts that can be canceled.
- Price Gregory was acquired for approximately $327.6 million of consideration, including $231.8 million in Quanta shares and $95.8 million in cash. Quanta also completed three smaller acquisitions. Acquisition accounting added $86.4 million of goodwill in 2009.
Fourth-quarter comparison: Revenue was $985.4 million versus $921.5 million in Q4 2008; gross profit was $190.9 million versus $166.7 million. Net income attributable to common stock was $43.9 million versus $46.5 million, and diluted EPS was $0.21 versus $0.24.
Outlook, risks and unusual items
- Management expected Q1 2010 to be challenging, while expressing hope that economic conditions and demand could improve in the second half of 2010. This was an expectation, not quantified earnings guidance.
- Management planned approximately $215 million of 2010 capital expenditures, including about $70 million for fiber-network expansion, largely associated with customer arrangements. Funding was expected primarily from cash on hand and internal cash flow.
- Longer-term opportunities cited include electric transmission upgrades, smart-grid and renewable-energy infrastructure, gas transmission and pipeline integrity, and broadband and wireless-network deployment. Timing depends on customer spending, financing, permitting, legislation, and government-program implementation.
- Key risks include economic and customer-capital constraints, commodity-price sensitivity in pipeline services, competitive pricing, weather and project execution, fixed-price contract cost overruns, labor availability, and acquisition integration. Revenue recognition on fixed-price work depends on cost-to-complete estimates; $26.1 million of change orders or claims were included as contract price adjustments and remained under negotiation.
- Quanta is substantially self-insured above deductibles, which increased to as much as $5 million per occurrence for most renewed policies. Insurance-claim accruals were $153.6 million gross at year-end, with $33.7 million of related insurance receivables.
- Other exposures include $732.5 million of performance bonds outstanding, $188.3 million of letters of credit, and a $133.4 million maximum guarantee of residual values on leased equipment. Management did not expect material claims under these arrangements, but outcomes are uncertain. Two multi-employer pension plans were reported in critical status; contributions to such plans were $84.0 million in 2009.
- Quanta revised its 2008 balance sheet for previously identified deferred-tax-account errors, increasing reported 2008 assets by $3.9 million and equity by $11.2 million. Management and its auditor concluded the affected prior periods were not materially misstated.
- Management and PwC concluded internal control over financial reporting was effective as of year-end; the assessment excluded four 2009 acquisitions, representing about 11% of year-end assets and 8% of annual revenue. PwC issued an unqualified opinion on the financial statements and internal controls.
Important facts for investors to verify
- Whether the expected recovery in customer spending occurred, particularly in telecommunications, distribution work, and natural-gas-related activity.
- Whether backlog converts to revenue and profit, given cancellation rights and the absence of guaranteed work volumes under many agreements.
- Price Gregory integration, realized synergies, and the acquired business’s margins and cash generation beyond its partial-year contribution.
- Cash-flow sustainability: 2009 operating cash flow benefited from collections and working-capital movements while activity declined.
- Exposure from negotiated contract claims, self-insurance, multi-employer pension plans, bonds, leases, and convertible-note terms, including potential dilution or cash settlement.
- Execution and returns on planned 2010 capital spending, especially the fiber-network expansion.