Quanta Services, Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019; unaudited. Quanta provides specialty infrastructure contracting services through Electric Power Infrastructure Services and Pipeline and Industrial Infrastructure Services.
Financial performance
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Revenue | $3.353B | $2.985B | $8.999B | $8.059B |
| Gross profit / margin | $473.4M / 14.1% | $425.8M / 14.3% | $1.157B / 12.9% | $1.060B / 13.2% |
| Operating income / margin | $209.4M / 6.2% | $192.6M / 6.5% | $407.5M / 4.5% | $390.8M / 4.8% |
| Net income attributable to common stock | $136.1M | $124.6M | $283.9M | $236.5M |
| Diluted EPS | $0.92 | $0.81 | $1.93 | $1.52 |
| Operating cash flow | $91.2M | $39.1M | $(100.2)M | $221.6M |
Q3 revenue rose 12.3%; nine-month revenue rose 11.7%. Nine-month interest expense increased to $48.1M from $25.2M. Other income was $66.2M for nine months, principally reflecting recognition of $60.3M in previously deferred earnings on a Canadian transmission project. Cash dividends declared were $0.04 per share in each of the first three quarters of 2019; none were declared in the comparable 2018 periods.
Liquidity, debt and cash flow
At September 30, cash and equivalents were $80.0M, working capital was $1.94B, and total debt obligations were approximately $1.89B, versus $1.07B at year-end 2018. The revolving facility had $1.18B of availability after $1.87B of borrowings and $346.5M of letters of credit. The company reported compliance with its credit covenants; the facility matures October 31, 2022. Nine-month investing cash use was $607.1M, including $385.2M for acquisitions and $207.6M of capital expenditures. Financing provided $708.7M, primarily from net borrowings.
Changes, unusual items and outlook
- Pipeline and Industrial segment revenue increased 12.8% for nine months and operating income increased 62.1%, reflecting improved execution and margins. Electric Power revenue rose 10.9%, but segment operating income declined 7.7%.
- A terminated Peru telecommunications project resulted in a $79.2M nine-month charge, including a $48.8M revenue reversal. Quanta paid $112M following exercise of advance-payment and performance bonds and reported a net project receivable of about $120M; recovery remains uncertain.
- Working capital absorbed cash: nine-month operating cash flow was negative, with increased receivables and contract assets, extended billing and collection cycles, and the Peru bond payments among the cited factors. DSO was 91 days, versus 78 days a year earlier.
- Acquisitions completed in the first nine months had aggregate consideration of approximately $396.8M, primarily cash. The company also adopted lease accounting, recording $301.1M of operating lease assets and liabilities at adoption; management said the effect on earnings and cash flows was not material.
- Remaining performance obligations were $4.40B, with 65.5% expected to be recognized in the next 12 months. Total estimated backlog was $13.28B, but much includes MSA estimates and customers generally may terminate contracts on notice.
- Management expressed a positive long-term outlook and said both segments were generally in a multi-year up-cycle. It expected 2019 capital expenditures of approximately $265M. No specific revenue or earnings guidance was provided in the supplied filing text.
- Other key exposures include PG&E bankruptcy-related receivables (about $43M of pre-petition receivables classified as non-current), an $81.5M recorded receivable tied to a separate pipeline insurance claim, disputed Peru and Maurepas project claims, and contingent liabilities from the Hallen acquisition. Performance bonds outstanding were estimated at $2.7B.
Important facts for investors to verify
- Progress and expected recoveries in the Peru arbitration, including the recorded receivable and possible additional loss.
- Collection of PG&E pre-petition receivables and the status of the bankruptcy proceedings.
- Conversion of receivables and contract assets to cash, given higher DSO and negative nine-month operating cash flow.
- Execution, margins and cost estimates on large projects, including the California transmission and processing-facility projects.
- Debt reduction, interest costs, covenant headroom, and realization of the stated backlog and capital-spending outlook.