Quanta Services, Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Quanta provides specialty infrastructure contracting services across electric power, pipeline and industrial, and communications markets. Amounts below are in U.S. dollars; financial statement figures are unaudited.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $3.020B | $3.353B | $8.290B | $8.999B |
| Gross profit | $507.5M | $473.4M | $1.195B | $1.157B |
| Gross margin | 16.8% | 14.1% | 14.4% | 12.9% |
| Operating income | $242.2M | $209.4M | $435.9M | $407.5M |
| Operating margin | 8.0% | 6.2% | 5.3% | 4.5% |
| Net income attributable to common stock | $162.9M | $136.1M | $275.5M | $283.9M |
| Diluted EPS | $1.13 | $0.92 | $1.90 | $1.93 |
| Operating cash flow | $114.9M | $91.2M | $839.9M | $(100.2)M |
- Segments, Q3: Electric Power revenue rose 12.3% to $2.108B and operating income increased 52.8% to $268.4M (12.7% margin). Pipeline and Industrial revenue fell 38.2% to $912.5M and operating income decreased 42.4% to $76.2M (8.4% margin).
- Liquidity and debt: September 30 cash and cash equivalents were $216.9M. Debt was approximately $1.212B, implying roughly $995M of net debt. The amended $2.51B revolving facility had $1.95B of availability after borrowings and letters of credit; the company reported covenant compliance.
- Balance sheet: Total assets were $8.325B, total liabilities $4.170B, and total equity $4.156B. Current assets were $3.677B and current liabilities $2.178B.
Changes versus comparable periods
- Q3 revenue declined 9.9%, while operating income rose 15.7%, net income attributable to common stock rose 19.7%, and diluted EPS increased 22.8%. Higher gross and operating margins reflected stronger Electric Power results and contract estimate gains, despite lower consolidated revenue.
- Nine-month revenue decreased 7.9%; operating income increased 7.0%, but common-stock net income declined 2.9% and diluted EPS fell from $1.93 to $1.90. The comparison was affected by $60.3M of deferred Canadian transmission project earnings recognized in 2019 and 2020 investment impairments.
- Nine-month operating cash flow improved to $839.9M from cash used of $100.2M. The comparison reflects working-capital timing, $112M of Peru bond payments in 2019, $82M of insurance proceeds in 2020, and deferred payroll taxes under the CARES Act.
- Remaining performance obligations were $4.44B, down from $5.30B at year-end 2019. Total backlog, a non-GAAP measure, was $15.07B versus $15.00B. Management cautions that much of MSA backlog is not contractually committed to specific service volumes.
Outlook, commentary, risks and unusual items
- Management expected 2020 capital expenditures of approximately $250M, $50M below its original estimate. It anticipated sufficient liquidity for operating needs and obligations but said COVID-19’s duration and financial effects could not be predicted.
- Management described long-term opportunities in grid modernization, renewables, utility infrastructure and communications, including 5G. Near-term Pipeline and Industrial demand was pressured by COVID-19, low commodity prices, reduced customer spending and deferred refinery maintenance. Larger pipeline project revenue was expected to be significantly below the $500M level initially anticipated for 2020.
- Quanta was pursuing an orderly exit from Latin America. For full-year 2020, it expected regional revenue of $10M–$15M and operating losses of $55M–$60M. More than 80% of projects active at the beginning of the year had been completed by September 30.
- Q3 gross profit benefited by $48.7M from aggregate changes in contract estimates; $32.9M of the net favorable impact on prior-period work related to larger pipeline projects. Latin American estimate changes reduced prior-period gross profit by $12.1M in Q3 and $28.6M for the nine months. Canadian weather-related pipeline project costs remained a risk.
- During 2020, Quanta issued $1.00B of 2.900% senior notes due 2030 and used proceeds plus cash to repay $1.21B of term loans. The revolving facility was increased to $2.51B and extended to September 2025; collateral liens and subsidiary guarantees were released.
- Material contingencies include the Peru project arbitration and approximately $120M of recorded contract receivable, including amounts collected by PRONATEL under bonds. Quanta said it could not estimate a reasonably possible additional loss. Other matters include the Maurepas dispute, the Benton wage-and-hour case, and assumed Hallen liabilities relating to a fatal 2014 explosion; outcomes and potential exposures remain uncertain.
- Other risks include customer credit and collection, fixed-price contract estimates, permitting and project delays, labor availability, insurance and wildfire exposure, multiemployer pension obligations, and possible future goodwill, intangible-asset or investment impairments. No goodwill or intangible-asset impairment was recorded in Q3; $18.0M of investment impairments had been recognized in the first half of 2020.
Important facts for investors to verify
- Whether Electric Power strength can offset continuing weakness in Pipeline and Industrial, and whether contract estimate gains recur.
- Actual cash conversion and working-capital trends, including the effects of deferred payroll taxes and unusual insurance proceeds.
- Backlog quality, customer commitments, project timing and conversion to revenue, particularly for MSAs and larger pipeline work.
- COVID-19, energy-market and Latin America exit impacts, including whether remaining projects incur additional losses.
- Potential cash and earnings exposure from the Peru arbitration and other litigation, bonds, insurance claims and pension obligations.
- Debt, letters-of-credit capacity, covenant headroom and capital allocation, including any stock repurchases or dividends.