Quanta Services, Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. Quanta provides specialty infrastructure contracting services across electric power, pipeline and industrial, and communications markets. Its two reportable segments are Electric Power Infrastructure Services and Pipeline and Industrial Infrastructure Services.
Key financial results
| Metric | Q2 2019 | Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Revenue | $2.839B | $2.656B | $5.646B | $5.074B |
| Gross profit / margin | $319.5M / 11.3% | $333.4M / 12.5% | $683.5M / 12.1% | $634.4M / 12.5% |
| Operating income / margin | $78.6M / 2.8% | $123.0M / 4.6% | $198.1M / 3.5% | $198.3M / 3.9% |
| Net income attributable to common stock | $27.3M | $74.4M | $147.8M | $112.0M |
| Diluted EPS | $0.19 | $0.48 | $1.01 | $0.72 |
| Operating cash flow | $(108.7)M | $156.5M | $(191.4)M | $182.5M |
Q2 revenue grew 6.9%, while common-stock net income fell 63%. For the first half, revenue rose 11.3% and common-stock net income rose 32%. First-half net income included $60.3M of previously deferred earnings recognized when a Canadian transmission project entered commercial operation; this materially contributed to the year-over-year improvement.
Cash and cash equivalents were $73.4M at June 30, 2019, versus $78.7M at year-end 2018. Working capital was $1.85B. Total debt obligations were approximately $1.57B, including $1.54B under the senior secured credit facility; $677.1M of facility commitments remained available after outstanding letters of credit. The facility matures October 31, 2022. The company reported covenant compliance. Q2 weighted-average facility interest rate was 3.88%.
Material changes and operating performance
- Peru telecommunications project: Termination drove a $79.2M Q2 charge, including a $48.8M revenue reversal and $30.4M increase in costs. The charge reduced Q2 gross margin by about 260 basis points. Quanta also corrected $14.5M of prior-period project-estimate errors, which it assessed as immaterial to prior financial statements.
- Segment trends: Q2 Electric Power revenue increased 10.5% to $1.73B, but segment operating income declined 36.4% to $92.9M, primarily due to the Peru charge and Canadian project transition costs. Pipeline and Industrial revenue increased 1.7% to $1.10B and operating income rose 59.6% to $69.9M, reflecting improved execution and margins; results included a $13.6M loss on a Texas processing-facility project.
- Working capital and collections: Operating cash flow was negative in the first half, reflecting a $112M bond payment related to Peru, higher working-capital needs, and slower billing and collection cycles. DSO rose to 91 days from 74 days a year earlier. Contract assets increased to $683.7M from $576.9M at year-end, partly due to customer billing-process changes.
- Debt and investment: Credit-facility borrowings increased from $1.07B at year-end 2018 to $1.54B. First-half investing cash outflow was $215.3M, including $141.4M of capital expenditures, $55.3M for acquisitions and $37.9M for investments.
- Lease accounting: Adoption of the new lease standard added $301.1M of operating lease assets and liabilities at January 1, 2019; the company reported no material effect on income, cash flows or covenant compliance.
Outlook, risks and contingencies
- Management described a positive long-term outlook and said both segments were generally in a multi-year up-cycle. It expected Electric Power backlog to remain strong through the remainder of 2019. The filing does not provide a clear numeric full-year revenue or earnings forecast; it estimated 2019 capital expenditures of approximately $275M, with $141.4M spent by June 30.
- Remaining performance obligations were $4.65B, with 76.8% expected to be recognized in the following 12 months. Total backlog, a non-GAAP measure that includes estimated MSA and other orders, was $12.77B. Much of the MSA work is not contractually committed and may be canceled, so backlog is not assured revenue.
- In Peru, PRONATEL terminated contracts, exercised $112M of advance-payment and performance bonds, and alleged approximately $45M of liquidated damages. Quanta is pursuing arbitration and reported a net project receivable position of about $120M after the charge. It could not estimate a reasonably possible additional loss; an adverse outcome could materially affect results and cash flow.
- PG&E’s bankruptcy creates collection uncertainty. Of approximately $157M in billed and unbilled receivables at the bankruptcy filing, $48M remained unpaid at June 30. Quanta received $109M during Q2 and classified approximately $41M of remaining pre-petition receivables as non-current, while expressing an expectation of collection.
- A separate underground pipeline borehole incident generated an insurance receivable of $71.9M against approximately $120M of claims being pursued. Coverage amount and final recovery remain uncertain; unrecovered costs could require material additional charges.
- Other exposures include continued rework and start-up delays on the Texas processing-facility project; a disputed Louisiana project claim; customer, contract-estimate, weather, permitting and commodity-cycle risks; variable-rate debt; and potential additional contributions to certain underfunded multiemployer pension plans. Goodwill sensitivity analysis identified two Pipeline and Industrial reporting units that could fall below carrying value if fair values declined 10%.
- Management identified no material changes to previously disclosed risk factors. It reported disclosure controls effective as of June 30, 2019 and no material quarterly change in internal control over financial reporting.
Most important facts for investors to verify
- Progress and recoveries in the Peru arbitration, including the status of the $120M net receivable and potential further claims or losses.
- Collection of PG&E’s remaining approximately $41M pre-petition receivable and the treatment of new post-petition work.
- Cash conversion, DSO, contract-asset growth, and whether customer billing delays and working-capital demands improve.
- Execution and final cost/recovery outcomes for the Texas processing-facility and pipeline borehole matters.
- Debt trajectory, interest expense, covenant headroom, and remaining liquidity after letters of credit and planned capital spending.
- Realization and cancellation risk within the $12.77B backlog, and delivery against the $275M capital-expenditure estimate.