Quanta Services, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Quanta provides specialty infrastructure contracting services across electric power, pipeline and industrial, and communications markets. Results were affected by COVID-19, lower energy-market activity, and the comparison with significant Peru-project charges in 2019.
Key financial results
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $2.506B | $2.839B | $5.270B | $5.646B |
| Gross profit / margin | $355.3M / 14.2% | $319.5M / 11.3% | $687.5M / 13.0% | $683.5M / 12.1% |
| Operating income / margin | $112.9M / 4.5% | $78.6M / 2.8% | $193.7M / 3.7% | $198.1M / 3.5% |
| Net income attributable to common stock | $73.9M | $27.3M | $112.6M | $147.8M |
| Diluted EPS | $0.52 | $0.19 | $0.78 | $1.01 |
| Cash from operating activities | $497.5M | $(108.7)M | $725.0M | $(191.4)M |
Q2 revenue declined 11.7%; six-month revenue declined 6.7%. Q2 operating income and diluted EPS improved year over year, substantially reflecting the absence of the $79.2M Peru-project charge recorded in Q2 2019. Six-month net income also compares with $60.3M of previously deferred Canadian transmission-project earnings recognized in Q1 2019.
- Segment trends: Q2 Electric Power revenue rose 3.4% to $1.793B and operating income rose 97.9% to $183.9M. Pipeline and Industrial revenue fell 35.4% to $713.3M and operating income fell 69.6% to $21.3M. For the first half, the segments’ revenues changed +4.8% and -23.9%, respectively.
- Cash generation: Q2 operating cash flow benefited from improved billings and collections, working-capital movements and lower revenue-related working-capital needs. First-half cash flow also included $82M of insurance proceeds and deferred tax payments; the $58M income-tax deferral was paid in July.
- Margins and costs: Q2 gross margin improved as electric-power execution strengthened and the prior-year Peru charge did not recur. Pipeline and industrial profitability weakened with lower activity and fixed-cost absorption. Lower interest expense helped results.
Balance sheet and liquidity
- At June 30, cash and cash equivalents were $530.7M, versus $164.8M at year-end 2019. Current assets were $3.645B and current liabilities $2.093B.
- Total debt obligations were $1.386B, including $1.362B under the senior secured credit facility; long-term debt, net of current maturities, was $1.316B. The facility matures October 2022. Quanta reported compliance with its financial covenants.
- Unused revolving-facility commitments were $1.608B; cash plus unused commitments totaled $2.138B. Outstanding letters of credit were $374.7M. DSO was 82 days, compared with 91 days a year earlier.
- Capital expenditures were $116.3M in the first half. Full-year 2020 capex was expected to be approximately $250M, about 17% below the original estimate.
Outlook, commentary and significant items
- Management described a positive long-term outlook but said near-term effects of the pandemic and economic disruption remained uncertain. It expected continued operational challenges through the rest of 2020 and cited reduced industrial maintenance demand, customer capital spending, permitting delays and worksite restrictions.
- Management expected 2020 larger pipeline transmission revenue of $350M–$400M, compared with $1.2B in 2019. It expected western U.S. fire-hardening revenue to rise in the second half versus the first half, but remain below the second half of 2019.
- Latin American operations were being exited in an orderly manner. For full-year 2020, Quanta expected those operations to generate $20M–$30M of revenue and an operating loss of $40M–$45M.
- Q2 impairments included $9.3M on an Australian cost-method investment and $5.5M on non-integral equity investments; first-half impairment charges for these investments totaled $18.0M. Management said it had not identified a goodwill or intangible-asset impairment, but would continue monitoring energy and pandemic effects.
- Quanta’s 50%-owned LUMA joint venture was selected for a 15-year Puerto Rico transmission and distribution system operations and maintenance agreement, following an expected one-year transition. Management expected the investment to contribute positively to operating income and cash flow and be accretive to 2020 diluted EPS.
- After quarter-end, sponsors announced they would no longer proceed with an approximately 600-mile eastern U.S. natural-gas pipeline project on which a Quanta subsidiary was a joint-venture contractor. Quanta excluded the related remaining performance obligation and backlog from June 30 figures; the joint venture had not received a termination notice as of the filing.
- Remaining performance obligations were $5.185B, down from $5.302B at year-end; total backlog, a non-GAAP measure, was $13.928B, down from $15.005B. Management cautioned that much backlog comes from MSAs, which generally do not guarantee specific work volumes and may be terminable on short notice.
- Quanta received an $8.9M legal settlement in Q2. It repurchased $200M of stock in Q1 and had $86.8M remaining under its existing authorization at June 30. In August, the board authorized an additional $500M repurchase program.
Risks and contingencies
- Peru dispute: Quanta reported an approximately $120M contract receivable related to the terminated telecommunications project, including about $87M collected by the Peruvian agency under advance-payment bonds. Arbitration is ongoing; Quanta could not estimate a reasonably possible additional loss, and an adverse outcome could materially affect results and cash flows.
- Other litigation: The Maurepas project dispute includes Quanta’s claim for $22M withheld and a customer claim alleging about $59M of warranty damages; the company could not estimate additional reasonably possible loss. A California wage-and-hour matter had approximately $8.8M of trial-court liability determined for significantly all claims, which Quanta contests; additional fees and costs were unresolved.
- Hallen acquisition liability: Assumed claims relate to a 2014 New York gas explosion. Quanta had not accrued a probable and estimable loss; insurance and negotiated remedies may not cover all exposure.
- Other exposures include self-insured casualty claims, multiemployer pension-plan obligations, customer credit and collection risk, performance bonds and guarantees. Outstanding performance bonds were estimated at $3.0B, with $1.1B of estimated cost to complete bonded projects.
- Variable-rate debt, foreign exchange, project execution and fixed-price contract estimates, severe weather and wildfire exposure, labor availability, and changing pandemic conditions are material business risks. Management noted that wildfire insurance availability and coverage have decreased.
Important facts for investors to verify
- Whether pipeline and industrial demand, project cancellations and the stated $350M–$400M pipeline-transmission outlook develop as management expected.
- Cash-flow quality: the contribution from working capital, insurance proceeds and tax-payment deferrals, and the subsequent cash impact of normalizing those items.
- Recovery and timing of the Peru receivable and outcomes of the Peru, Maurepas, California wage-and-hour and Hallen matters.
- Progress and economics of the LUMA transition and long-term agreement, including whether anticipated accretion is realized.
- Backlog conversion and cancellation risk, covenant headroom and refinancing needs ahead of the October 2022 debt maturity, and the potential effect of repurchases on liquidity.