Quanta Services, Inc. — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. Amounts are in U.S. dollars; financial statement figures below are in millions unless noted.
Business context
Quanta provides specialty contracting and infrastructure services, primarily to the electric power and oil and gas industries in the United States, Canada and Australia. Its reportable segments are Electric Power Infrastructure Services and Oil and Gas Infrastructure Services. The fiber optic licensing business was sold on August 4, 2015 and is presented as discontinued operations for all periods shown.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $1,939.4 | $2,146.0 | $5,673.2 | $5,719.6 |
| Gross profit / margin | $235.2 / 12.1% | $336.9 / 15.7% | $700.6 / 12.3% | $857.2 / 15.0% |
| Operating income / margin | $80.9 / 4.2% | $131.3 / 6.1% | $233.9 / 4.1% | $331.4 / 5.8% |
| Continuing-operations net income | $45.7 | $93.3 | $133.6 | $222.8 |
| Net income attributable to common stock | $216.4 | $94.6 | $316.0 | $230.1 |
| EPS attributable to common stock | $1.15 | $0.43 | $1.53 | $1.05 |
| Operating cash flow, continuing operations | $108.9 | $50.3 | $394.7 | $(7.0) |
- Q3 revenue declined 9.6% year over year; nine-month revenue declined 0.8%. Electric Power revenue fell 15.3% in Q3 and 7.4% year to date, while Oil and Gas revenue rose 0.9% and 13.8%, respectively.
- Margins weakened substantially. Management attributed the decline mainly to fewer high-margin large transmission projects, project delays, underused resources, competitive pricing pressure and, in the first nine months, approximately $53 million of losses on three projects.
- Reported net income includes the fiber business sale gain. The sale generated a $271.8 million pretax gain and approximately $171 million after tax in Q3. Continuing-operations income attributable to common stock was $43.2 million in Q3 and $122.9 million for the nine months, versus $87.9 million and $208.8 million in 2014.
Cash, debt and liquidity
- At September 30, cash and cash equivalents were $49.2 million, down from $190.5 million at year-end 2014. Working capital was $1.02 billion.
- Total debt obligations were $350.6 million, including $339.2 million under the revolving credit facility; approximate net debt after cash was $301 million. The $1.325 billion facility matures in October 2018. After borrowings and letters of credit, $667.3 million remained available. Quanta reported covenant compliance.
- Nine-month continuing-operations cash flow was $394.7 million, compared with $7.0 million used in 2014. The comparison benefited from a $65 million Sunrise Powerlink settlement receipt and lower tax and incentive compensation payments.
- Continuing-operations investing used $254.9 million over nine months, including $169.0 million of capital expenditures and $102.0 million for acquisitions. Management expected 2015 capital expenditures of $210–$220 million.
- Financing activities used $1.26 billion over nine months, including $1.53 billion of share repurchases, partly offset by $282.3 million of net credit-facility borrowings. The company paid $750 million under an accelerated share repurchase arrangement, initially receiving 25.7 million shares; final settlement was scheduled for Q2 2016.
Material developments, outlook and risks
- The fiber licensing sale brought approximately $1 billion in cash proceeds, or an estimated $848 million after tax. Management expected to pay approximately $147 million of cash taxes related to the gain in Q4 2015. Quanta retained responsibility for certain pre-sale taxes and insured claims.
- Total backlog was $9.65 billion at September 30, up from $9.24 billion at December 31, 2014; estimated 12-month backlog was $5.47 billion. Backlog includes estimates for master service agreements and may change with cancellations, delays, customer requirements and other factors.
- Management cited regulatory and permitting delays affecting large electric transmission and mainline pipeline work, as well as lower oil prices weighing on some oil and gas markets. It expected many delayed projects to proceed over the longer term, while acknowledging uncertainty in timing and continued near-term margin pressure. No specific revenue or earnings forecast is stated in the provided filing text.
- Foreign currency translation reduced revenue by approximately $177 million in the first nine months and contributed to a $141.6 million other comprehensive loss for the period. Lower international revenues also reflected project timing and customer spending conditions.
- Key exposures include contract execution and cost estimates, receivable collection and unbilled work, weather and seasonality, customer project cancellations, commodity prices, foreign exchange, self-insurance and multi-employer pension obligations. Central States Plan withdrawal liability had a stated reasonably possible loss range up to $55.4 million; the final amount remained uncertain and could exceed the recognized liability.
- Other notable matters include a continuing SEC inquiry concerning activities in certain foreign jurisdictions; the company said the SEC had not alleged violations and that it was cooperating. In a California wage-and-hour class action, plaintiffs sought about $16 million in damages and $5 million in attorneys’ fees; management did not expect a material adverse effect.
- Management reported disclosure controls and procedures were effective as of September 30, 2015, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much of reported earnings growth came from the one-time fiber sale gain versus continuing operations.
- Whether delayed large transmission and pipeline projects resume as expected, and whether segment margins recover from Q3 and year-to-date levels.
- Progress on the accelerated share repurchase settlement, remaining repurchase authorization, and the effect of buybacks and borrowing on liquidity and leverage.
- Final exposure under the Central States Plan withdrawal dispute and other material legal, tax, insurance and indemnity matters.
- Backlog conversion, customer cancellation rights, collections of retainage and unbilled receivables, and the completion and cost outlook for the projects with recorded losses.