Quanta Services, Inc. — FY 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. The filing also reports fourth-quarter results. Quanta provides specialty infrastructure contracting services through Electric Power Infrastructure Services and Oil and Gas Infrastructure Services, primarily in the U.S. and Canada, with operations in Australia, Latin America and other markets.
Financial performance
| Metric | FY 2017 | FY 2016 |
|---|---|---|
| Revenue | $9.466 billion | $7.651 billion |
| Gross profit / margin | $1.242 billion / 13.1% | $1.014 billion / 13.3% |
| Operating income / margin | $378.8 million / 4.0% | $320.8 million / 4.2% |
| Net income attributable to common stock | $315.0 million | $198.4 million |
| Diluted EPS from continuing operations | $2.00 | $1.26 |
| Cash from operating activities | $372.5 million | $390.2 million |
- Revenue rose 23.7%. Electric Power revenue increased 15.4% to $5.600 billion; Oil and Gas revenue increased 38.1% to $3.867 billion.
- Segment operating income was $518.1 million for Electric Power (9.3% margin) and $184.1 million for Oil and Gas (4.8% margin). The Oil and Gas margin declined from 5.3% in 2016.
- Cash flow from operations declined despite higher earnings, primarily due to working-capital needs, including higher receivables from late-year emergency restoration work, and a $25.5 million Central States pension settlement payment.
- Investing activities used $575.8 million, including $361.2 million for acquisitions and $244.7 million in capital expenditures. Financing activities provided $227.8 million, including net credit-facility borrowings.
- Year-end cash was $138.3 million and working capital was $1.378 billion. Long-term debt, net of current maturities, was $670.7 million. The $1.81 billion revolving facility had $668.4 million drawn and $728.3 million available after letters of credit and guarantees; the company was in covenant compliance.
- Backlog was $11.178 billion, up from $9.750 billion; $6.446 billion was expected to be realized within 12 months. Backlog includes estimates under master service agreements and is not a GAAP measure or guaranteed revenue.
Material changes and notable items
- Revenue growth reflected higher midstream gas pipeline activity, Stronghold acquisition contributions, increased electric transmission spending, emergency restoration work following Hurricanes Harvey and Irma and winter storms, and approximately $53 million of favorable foreign-currency effects.
- Gross margin eased to 13.1% from 13.3%, while operating margin declined to 4.0% from 4.2%. Higher-margin restoration and pipeline work helped, but weather-related disruptions and other project costs weighed on results.
- Quanta recorded $58.1 million of asset impairments in 2017, including a $57.0 million goodwill impairment and $1.1 million intangible impairment, primarily in two Oil and Gas reporting units affected by weak activity and margins.
- Stronghold was acquired in July 2017 for $351.0 million cash and 2.694 million shares, with up to $100 million of contingent consideration. It contributed approximately $190 million of 2017 revenue. The company also completed two smaller acquisitions and reported two additional acquisitions completed in January 2018.
- The 2017 effective tax rate was 10.0%, including a $70.1 million provisional net benefit from the Tax Act and a separate $26.7 million benefit from entity restructuring and recapitalization efforts, among other items. The company expected an approximately 29% effective tax rate for 2018.
- Fourth-quarter 2017 revenue was $2.479 billion and net income attributable to common stock was $113.6 million; diluted continuing-operations EPS was $0.72. Fourth-quarter results included the impairments and one-time tax benefits.
Outlook, risks and contingencies
- Management described the long-term outlook as positive and said both segments were generally entering a renewed multi-year up-cycle. It expected strong Electric Power backlog during 2018 and anticipated executing a significant number of larger pipeline projects. No specific 2018 revenue or EPS guidance was provided in the text.
- Planned 2018 capital expenditures were approximately $275 million. Management said cash, expected operating cash flow and available facility capacity should fund operating needs, planned capital expenditures and potential growth in the foreseeable future.
- Key risks include project delays or cancellations, permitting and regulatory hurdles, adverse weather, fixed-price execution and cost-estimation exposure, customer payment and change-order disputes, labor availability and cost, competition, and cyclical oil and gas customer spending.
- Other material exposures include foreign-currency and variable-rate debt risk, potential additional multiemployer pension contributions or withdrawal liabilities, insurance and safety claims, environmental obligations, acquisition integration and goodwill impairment, and limits on bonding or credit availability.
- Quanta disclosed a disputed Louisiana project liquidated-damages claim with reasonably possible loss of up to $22 million. A class action relating to a former subsidiary could expose the company to up to approximately $11.1 million plus plaintiff attorneys’ fees and expenses if it is unsuccessful and staffing agencies cannot fund damages; management did not consider a material loss probable at the time.
- The company settled the principal Central States Plan withdrawal matter for $48.9 million, including a final $25.5 million cash payment in December 2017. A separate acquired-company withdrawal-liability matter remained in arbitration.
- New revenue-recognition guidance was to be adopted in 2018; management estimated a cumulative retained-earnings adjustment of less than $10 million and did not expect significant changes to the revenue-recognition pattern for its ongoing contract types.
Investor verification priorities
- Check the durability and conversion of the $11.178 billion backlog, especially master service agreement estimates and project cancellation or delay exposure.
- Track operating margins and execution on large pipeline and electric transmission projects, including the project with a $17.3 million 2017 loss and continuing warranty exposure on the completed Alaska power-plant project.
- Assess working-capital conversion, receivables, unbilled balances, retainage and cash-flow performance; 2017 operating cash flow fell despite higher earnings.
- Separate recurring earnings from tax-related benefits, and monitor the final Tax Act measurement-period adjustments and 2018 effective tax rate.
- Monitor acquisition performance, contingent consideration (fair value $65.7 million; aggregate maximum disclosed payout $139.5 million), and the impaired Oil and Gas reporting units.
- Review debt, facility availability, interest-rate sensitivity, bonding capacity, pension-plan exposure and the status of the disclosed legal matters.