Quanta Services, Inc. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. Quanta provides specialty infrastructure contracting services across electric power, communications, gas, pipeline and energy markets. It reports Electric Power Infrastructure Solutions and Underground Utility and Infrastructure Solutions segments.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $3.00 billion | $2.51 billion | $5.70 billion | $5.27 billion |
| Gross profit / margin | $447.7 million / 14.9% | $355.3 million / 14.2% | $820.6 million / 14.4% | $687.5 million / 13.0% |
| Operating income / margin | $161.7 million / 5.4% | $112.9 million / 4.5% | $275.4 million / 4.8% | $193.7 million / 3.7% |
| Net income attributable to common stock | $117.0 million | $73.9 million | $206.8 million | $112.6 million |
| Diluted EPS | $0.81 | $0.52 | $1.43 | $0.78 |
| Cash from operations | $188.9 million | $497.5 million | $314.6 million | $725.0 million |
Q2 revenue rose 19.7%, operating income 43.2%, and diluted EPS 55.8% year over year. For the first half, revenue increased 8.2% and common-stock net income increased 83.6%. Six-month results included an $18.4 million tax benefit from equity awards vesting above grant-date fair value; the lower effective tax rate also contributed to earnings growth.
Segments: Q2 Electric Power revenue rose 19.8% to $2.15 billion and operating margin improved to 11.0% from 10.3%. Underground Utility revenue rose 19.4% to $852.0 million, but margin declined to 2.8% from 3.0%. For the first half, Electric Power revenue grew 18.2%; Underground Utility revenue fell 12.6%, with operating income down 37.7%.
Cash, debt and liquidity
- Cash and cash equivalents were $212.5 million at June 30, 2021, versus $184.6 million at year-end 2020.
- Total debt obligations were approximately $1.365 billion, including $1.0 billion of 2.9% senior notes due 2030 and $323.3 million outstanding under the revolving credit facility. The company reported compliance with credit-facility covenants.
- Available revolving commitments were $1.89 billion; cash plus available commitments totaled approximately $2.10 billion.
- Six-month operating cash flow fell to $314.6 million from $725.0 million. Higher working-capital needs, including ramp-up and billing timing on two large Canadian transmission projects, weighed on cash generation. The prior-year period benefited from $82.0 million of insurance proceeds and deferred tax payments.
- Six-month capital expenditures were $158.4 million. Management expected full-year 2021 capital expenditures of approximately $325 million.
Material changes and unusual items
- Electric Power growth reflected utility demand, larger transmission projects, acquisitions, emergency restoration work and favorable currency movements. The prior-year comparison also benefited from the exit of loss-making Latin American operations, substantially completed by year-end 2020.
- Underground Utility results remained pressured by fewer large pipeline projects, weaker energy-market demand and deferred industrial maintenance. Q2 included a $23.6 million credit-loss provision tied to Limetree Bay entities and a $2.3 million impairment on equipment planned for sale.
- Operating cash flow and contract assets were affected by working-capital investment in Canadian transmission projects. Contract assets increased to $669.3 million from $453.8 million at year-end; management attributed the increase primarily to project ramp-up and billing timing.
- Management reported favorable aggregate contract-estimate changes, contributing 12.8% of Q2 gross profit and 10.8% of first-half gross profit. These estimates can reverse if project costs, scope or recoveries change. The first quarter included a $14.8 million adverse estimate change on a U.S. communications project.
- Remaining performance obligations were $4.43 billion, up from $3.99 billion at year-end. Total backlog, a non-GAAP measure, was $16.98 billion, up from $15.13 billion. Much of backlog relates to MSAs, which generally do not commit customers to specific work volumes and may be terminable on short notice.
Outlook, risks and contingencies
Management described its long-term outlook as positive, citing grid modernization, reliability and resiliency work, renewables interconnection, electrification, broadband deployment and regulated gas-utility spending. It expected continued operational challenges in parts of the business during the second half of 2021, particularly from pandemic effects and weak midstream and industrial demand. No specific revenue or EPS guidance was provided in the supplied filing text.
- Key execution risks include fixed-price project estimates, labor and equipment availability and cost, subcontractor performance, weather, permitting and project delays. Inflation and supply constraints could affect costs or schedules.
- COVID-19 and challenged energy markets continued to affect customer spending, industrial maintenance and certain international operations. Wildfire exposure and the availability and cost of insurance were also identified as risks.
- The company had $181.4 million of recognized revenue tied to negotiated change orders and claims at quarter-end, mainly associated with delays on a Canadian electric transmission project. Collection and final recovery remain uncertain.
- In July, Limetree Refining filed for bankruptcy. Quanta reported $30.0 million in billed and unbilled receivables from the refining entity and $1.5 million from an affiliate; further credit losses may be recorded.
- Major legal uncertainties include Peru project arbitrations: Quanta’s subsidiary seeks approximately $190 million in the ICC arbitration, while the counterparty asserts liquidated damages of approximately $41 million. Quanta also reported a contract receivable of approximately $120 million related to the dispute and cannot estimate any reasonably possible additional loss.
- Other matters include the Maurepas project dispute, with a claimed approximately $59 million for alleged warranty defects plus liquidated damages, and a wage-and-hour case with a trial-court liability determination of approximately $9.5 million plus a motion seeking approximately $37 million in attorneys’ fees. Outcomes remain uncertain.
Investor verification priorities
- Track whether operating cash flow recovers as Canadian project billing and collection timing normalizes, and monitor contract assets and DSO.
- Assess sustainability of margin improvement, including reliance on favorable contract-estimate changes, tax benefits, currency effects and improved transmission-project utilization.
- Monitor Limetree receivable recovery and potential additional credit-loss provisions.
- Follow the Canadian transmission change-order claims and Peru arbitration outcomes, including potential cash recovery or additional losses.
- Evaluate backlog quality and conversion: a substantial portion is estimated MSA work without committed customer volumes.
- Monitor debt, revolving-credit availability, capital spending and material contingent obligations, including performance bonds and equipment residual-value guarantees.