QUANTA SERVICES, INC. annual report, FY2020

Quanta Services, Inc. — 2020 Form 10-K Summary

Business context and reporting period. This annual report covers the fiscal year ended December 31, 2020. Quanta provides specialty contracting, engineering, construction, repair and maintenance services for electric power, gas utility, communications, pipeline and energy infrastructure markets. Its two reportable segments are Electric Power Infrastructure Solutions and Underground Utility and Infrastructure Solutions. The company reported that 14.1% of 2020 revenue came from foreign operations, primarily Canada and Australia.

Financial performance and liquidity

Metric	2020	2019
Revenue	$11.20 billion	$12.11 billion
Gross profit / margin	$1.66 billion / 14.8%	$1.60 billion / 13.2%
Operating income / margin	$611.4 million / 5.5%	$554.9 million / 4.6%
Net income attributable to common stock	$445.6 million	$402.0 million
Diluted EPS	$3.07	$2.73
Net cash from operating activities	$1.12 billion	$526.6 million
Capital expenditures	$260.1 million	$261.8 million
Cash and cash equivalents at year-end	$184.6 million	$164.8 million

• Revenue fell 7.5%, while operating income rose 10.2% and net income attributable to common stock rose 10.8%. Higher gross profit and lower interest expense helped profitability; the effective tax rate also declined to 20.9% from 28.9%, including favorable tax items.
• Operating cash flow increased 111.9%. The filing attributes the increase partly to lower working-capital requirements, higher earnings, $108.9 million of deferred employer payroll taxes, and $82.0 million of insurance proceeds received in 2020.
• Year-end long-term debt was approximately $1.18 billion, compared with $1.36 billion in 2019. Quanta had $148.5 million in revolving borrowings and $2.01 billion of remaining senior-credit-facility availability; including cash, reported available liquidity was approximately $2.20 billion.
• Working capital indicators included accounts receivable of $2.72 billion, contract assets of $453.8 million and contract liabilities of $528.9 million at year-end. Fourth-quarter days sales outstanding was 83 days, versus 81 days a year earlier.
• Non-GAAP adjusted EBITDA was $1.05 billion, up from $941.8 million. The company cautions that EBITDA and adjusted EBITDA are non-GAAP measures and may not be comparable with similarly titled measures of other companies.

Material changes and segment trends

• Electric Power Infrastructure Solutions: Revenue rose 9.1% to $7.77 billion; segment operating income increased 39.8% to $826.3 million, and operating margin improved to 10.6% from 8.3%. Growth reflected utility demand, higher emergency-restoration work, communications activity and acquisitions.
• Underground Utility and Infrastructure Solutions: Revenue declined 31.3% to $3.43 billion; operating income fell 48.8% to $170.1 million, with margin down to 5.0% from 6.7%. Larger pipeline-project revenue fell approximately $830 million amid a late-cycle market, project delays and permitting constraints. COVID-19 and weak demand for refined products also delayed industrial work and maintenance.
• Quanta acquired seven businesses during 2020 for aggregate consideration of approximately $411 million, including cash, shares and contingent consideration. Acquisitions contributed approximately $405 million to revenue during the year.
• Remaining performance obligations declined 24.8% to $3.99 billion, mainly due to fewer larger pipeline projects. Total backlog, a non-GAAP measure that includes estimated MSA and other work, edged up 0.8% to $15.13 billion. Much of MSA backlog is not a committed work volume and may be cancellable on short notice.

Outlook, risks, contingencies and unusual items

• Management described a positive long-term outlook, citing utility grid modernization, reliability and hardening programs; renewables interconnections; electrification; communications and 5G deployment; and gas-utility modernization and pipeline-integrity work. It also noted that project timing, permitting and labor availability could constrain execution.
• For 2021, Quanta expected capital expenditures of approximately $325 million and an effective tax rate of approximately 26.5%–27.0%. The filing did not provide clear numerical 2021 revenue, earnings or EPS guidance.
• Management expected COVID-19-related challenges to continue in 2021, especially for midstream and industrial services, as customers deferred maintenance and capital projects. Effects remained uncertain and could include project delays, reduced customer spending, collection risk and further impairments.
• Quanta substantially completed its exit from Latin American operations in 2020. Those operations recorded a $74.0 million operating loss in 2020; additional exit costs could occur. The 2019 Peru telecommunications-project termination had resulted in a $79.2 million charge and approximately $112 million of bond proceeds paid to the customer. Quanta reported an approximately $120 million receivable related to the dispute and sought recovery through arbitration; the outcome and any additional loss were uncertain.
• Other notable items included $18.0 million of investment impairments during 2020 and $8.3 million of asset impairment charges. No goodwill impairment was recorded, but three Underground Utility reporting units would have fallen below carrying value under a 10% fair-value decline, according to the filing.
• Quanta issued $1.00 billion of 2.900% senior notes due 2030 and used the proceeds, together with cash, to prepay $1.21 billion of term loans. Its revolving-credit commitments increased to $2.51 billion and maturity was extended to September 2025. The company reported compliance with its financial covenants at year-end.
• Material exposures include fixed-price project cost overruns, customer claims and collections, surety bonds and letters of credit, multiemployer pension obligations, workplace and operational hazards, and insurance availability. Wildfire coverage had declined, potentially leaving exposure insufficient for losses. Outstanding performance bonds were estimated at $3.7 billion.
• Other disclosed legal matters include a pipeline-project dispute involving approximately $59 million in alleged warranty damages, a separate claim for $22 million in withheld amounts, and litigation arising from an explosion assumed in the Hallen acquisition. Outcomes and potential additional losses were uncertain; the filing states that a reasonably possible loss range could not be estimated for certain matters.
• Audit and controls: the independent auditor gave unqualified opinions on the financial statements and internal control over financial reporting. The 2020 control assessment excluded seven recently acquired businesses, representing approximately 2.9% of consolidated assets and 1.2% of revenue.

Most important facts for investors to verify

• Whether the rebound in operating cash flow is sustainable, given working-capital effects, deferred payroll taxes and insurance proceeds.
• Whether utility and electric-power growth can offset weakness in pipeline and industrial markets, and whether the projected 2021 capital spending and tax-rate assumptions hold.
• The quality and realizability of backlog and remaining performance obligations, particularly the portion based on MSAs without committed minimum volumes.
• Progress, collections and ultimate recovery prospects for the Peru dispute receivable, along with exposure to other project claims and legal proceedings.
• Potential future goodwill or investment impairments in energy-exposed businesses, and the adequacy and availability of insurance for wildfire and other operational risks.
• Debt service, covenant headroom and capital allocation after the notes issuance, share repurchases and dividends; also monitor the $108.9 million payroll-tax deferral due in 2021 and 2022.