Quanta Services, Inc. — Q3 2012 Form 10-Q
Business context and period. Quanta provides infrastructure contracting and fiber-optic licensing services across electric power, natural gas and pipelines, telecommunications, and fiber-optic licensing. This unaudited report covers the three and nine months ended September 30, 2012, compared with the same periods in 2011. Results are seasonal and interim performance may not indicate full-year results.
Financial performance
Amounts below are in millions, except per-share data and margins.
| Metric | Q3 2012 | Q3 2011 | 9M 2012 | 9M 2011 |
|---|---|---|---|---|
| Revenue | $1,685.2 | $1,250.8 | $4,627.1 | $3,110.7 |
| Gross profit / margin | $280.4 / 16.6% | $194.7 / 15.6% | $711.4 / 15.4% | $419.7 / 13.5% |
| Operating income / margin | $145.7 / 8.6% | $94.0 / 7.5% | $336.3 / 7.3% | $124.8 / 4.0% |
| Net income attributable to common stock | $96.4 | $52.0 | $207.6 | $66.2 |
| Diluted EPS | $0.45 | $0.25 | $0.98 | $0.31 |
| Operating cash flow | $(59.8) | $40.8 | $(29.7) | $92.8 |
| Capital expenditures | $71.1 | $43.1 | $160.4 | $132.8 |
Liquidity, debt and backlog
- At September 30, cash and equivalents were $128.2 million, working capital was $1.21 billion, and current assets were $2.14 billion against current liabilities of $925.4 million.
- Credit-facility borrowings were $125.0 million; $179.3 million of letters of credit were outstanding, leaving $395.7 million available for borrowing or additional letters of credit. Quanta reported compliance with its credit covenants.
- Total backlog was $7.27 billion, versus $7.24 billion at December 31, 2011; $4.17 billion was expected to be realized within 12 months. Backlog includes estimates under master service agreements that may be terminable and do not necessarily guarantee work volumes.
Material changes versus prior periods
- Q3 revenue increased 34.7%; nine-month revenue increased 48.7%. Management attributed growth to greater customer capital spending and larger or more numerous transmission projects, with additional contributions from acquired businesses (approximately $61.9 million in Q3 and $162.0 million for nine months, as described in MD&A).
- Electric Power remained the largest segment. Natural Gas and Pipeline operating income improved to $23.2 million in Q3 from a $4.0 million loss, and to $27.5 million for nine months from a $42.3 million loss in 2011. The prior-year period included weather-, delay- and regulatory-related pipeline project losses.
- Margins improved company-wide, reflecting performance improvements, a higher contribution from certain transmission work, and better absorption of overhead. Nine-month SG&A declined to 7.5% of revenue from 8.8%.
- Despite higher earnings, operating cash flow was negative for the first nine months, mainly because larger and more numerous projects increased receivables and contract assets. Cash declined $187.1 million from year-end 2011.
- Four acquisitions completed in 2012 added electric-power, engineering, geotechnical and pipeline-related capabilities. Acquisition consideration was approximately $105.8 million, including stock and cash; goodwill rose to $1.67 billion.
Outlook, risks and unusual items
- Management expected growth opportunities across its markets to continue, and described electric transmission, shale-related gathering and pipeline work, pipeline integrity services, stimulus-funded broadband, and wireless backhaul as opportunities. It expected strong electric-power backlog into 2013–2014 and anticipated improved 2012 natural-gas and pipeline results versus 2011.
- Management forecast 2012 capital expenditures of $215–$225 million, including approximately $45 million for fiber-optic network expansion. The filing provides no clear numerical revenue or EPS guidance.
- Key uncertainties include project timing and cancellation, adverse weather, regulatory and permitting delays, customer capital constraints, fixed-price execution risk, labor availability, commodity-price effects on pipeline activity, and the collectability of receivables. Management noted a challenging but gradually improving economic environment.
- Unapproved or negotiated contract change orders and claims included in contract price adjustments totaled approximately $206.6 million, versus $77.3 million at year-end 2011. One customer represented $192.7 million, or 11.4%, of billed and accrued receivables, primarily tied to one contract with customer acceptance of change orders still ongoing.
- After quarter-end, PAR and Quanta reached a November 5, 2012 settlement related to the 2007 Witch Creek fire litigation. The filing describes a $33.8 million payment by PAR, of which $26.3 million was to be funded by an insurer under a previously recorded liability and recovery receivable; an insurer reserved rights to seek reimbursement.
- The Amador County wildfire matter includes a USDA demand of about $8.5 million and potential additional damages previously identified at approximately $51.3 million, with further amounts unspecified. Quanta recorded an $8.5 million liability and insurance recovery, but said it could not estimate potential loss beyond coverage; an adverse uninsured outcome could be material.
- In an international pipeline arbitration, Quanta subsidiary Mears claims approximately $16.5 million while the counterparty seeks approximately $79.5 million. Hearings concluded in Q3; no decision had been reached at filing.
- A multi-employer pension plan disputed the withdrawal date underlying a partial withdrawal liability. Quanta had recorded $32.6 million in 2011; the plan estimated $39.7 million based on a 2012 withdrawal, and the final assessment remained uncertain.
- Other exposures include $2.05 billion of performance bonds, $189.0 million of gross insurance-claim accruals, and a maximum $198.1 million guaranteed residual value on certain equipment leases. These are contingent or estimated exposures, not equivalent to funded debt.
- Disclosure controls and procedures were reported effective as of September 30, 2012; the filing reported no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether strong reported revenue and margin growth converts into operating cash flow as receivables and costs in excess of billings rise.
- Customer acceptance, collectability and ultimate realization of the $206.6 million of contract change orders and claims, especially the concentrated $192.7 million receivable.
- Progress and profitability of major transmission and pipeline projects, backlog conversion, and the extent to which growth reflects acquisitions rather than underlying demand.
- Final outcomes and insurance recoveries for the fire litigation, pipeline arbitration, and disputed multi-employer pension withdrawal liability.
- Whether the $215–$225 million capital-spending plan and ongoing acquisition and investment activity remain supportable with negative year-to-date operating cash flow and available credit-facility capacity.