Quanta Services, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Quanta provides specialty contracting and infrastructure services across electric power, pipeline and industrial, and communications markets. Results are reported in Electric Power Infrastructure Services and Pipeline and Industrial Infrastructure Services. Figures below are in U.S. dollars.
Financial performance
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Revenue | $2.764 billion | $2.807 billion | Down 1.5% |
| Gross profit / margin | $332.2 million / 12.0% | $364.0 million / 13.0% | Down 8.7% |
| Operating income / margin | $80.7 million / 2.9% | $119.5 million / 4.3% | Down 32.4% |
| Net income attributable to common stock | $38.7 million | $120.5 million | Down 67.9% |
| Diluted EPS | $0.26 | $0.82 | Down $0.56 |
| Cash provided by (used in) operations | $227.5 million | ($82.8 million) | Improved $310.3 million |
Revenue mix shifted: Electric Power revenue rose 6.2% to $1.767 billion, while Pipeline and Industrial revenue fell 12.8% to $997.1 million. Segment operating income was $128.8 million for Electric Power and $31.3 million for Pipeline and Industrial, versus $161.6 million and $40.7 million, respectively, in Q1 2019. The filing attributes much of the year-over-year earnings decline to strong execution and completion of a Canadian electric transmission project in Q1 2019, plus $60.3 million of previously deferred earnings recognized that quarter.
Q1 2020 included a $24.1 million favorable aggregate impact from changes in estimates on projects in progress at year-end 2019. This was partly offset by an $11.6 million unfavorable estimate change on a Canadian pipeline project. The prior-year quarter included a $25.5 million favorable adjustment on a completed Canadian transmission project.
Cash, debt and liquidity
- Cash and cash equivalents were $377.2 million at March 31, 2020, up from $164.8 million at year-end 2019. Cash flow from operations benefited from lower working-capital needs and $82.0 million of insurance proceeds related to pipeline claims.
- Capital expenditures were $68.1 million; investing cash outflow was $89.1 million. Financing cash inflow was $73.9 million, including $303.4 million of net credit-facility borrowings, partly offset by $200.0 million of share repurchases.
- Total debt obligations were $1.659 billion, including $1.635 billion under the senior secured credit facility; approximately $1.23 billion was term debt and $410.1 million revolving borrowings. Approximate debt net of cash was $1.28 billion.
- The $2.14 billion revolving facility had $1.35 billion of availability after $410.1 million of revolving loans and $373.9 million of letters of credit. Quanta reported compliance with its financial covenants. The facility matures October 2022.
- Management said cash, borrowing capacity and expected operating cash flow should fund 2020 obligations and essential spending. Planned 2020 capital expenditures were reduced by $50 million to approximately $250 million.
Outlook, management commentary and risks
- COVID-19 and energy markets: The pandemic and low commodity prices were already disrupting operations, customer activity and permitting. Management expected a materially negative effect on Q2 2020 results, with some Pipeline and Industrial impacts continuing at least through year-end. The ultimate duration and financial impact were uncertain; no consolidated earnings guidance was provided.
- Project and backlog outlook: Remaining performance obligations were $5.37 billion, up 1.3% from December 31, 2019; total backlog, a non-GAAP measure including estimated MSA and other orders, was $14.73 billion, down 1.8%. Management expected 2020 large pipeline transmission revenue of about $500 million, compared with $1.2 billion in 2019, subject to project timing and opportunities.
- Latin America: Quanta planned an orderly exit. For 2020, it expected Latin American revenue of $20–$40 million and operating losses of $25–$30 million, with near-term exit costs possible.
- Asset valuations: No goodwill or intangible-asset impairment was recorded in Q1, but management emphasized uncertainty from COVID-19 and energy-market conditions and said further deterioration could increase impairment risk.
- Legal contingency: In the Peru project dispute, Quanta reported a net receivable position of approximately $120 million after bond proceeds and prior charges. An adverse arbitration outcome could cause an additional significant loss; the company could not estimate a reasonably possible loss range.
- Other exposures: The filing discusses project execution and fixed-price contract risk, weather and permitting delays, customer credit and collection risk, labor availability and multiemployer pension exposure, insurance limits, performance bonds, and legal claims. Outstanding performance bonds were estimated at $2.8 billion, with $1.0 billion of estimated costs to complete bonded projects.
Most important facts for investors to verify
- Whether pandemic-related restrictions, weaker energy markets and deferred maintenance translate into further revenue, margin or cash-flow deterioration.
- Progress and collectability of the approximately $120 million Peru dispute receivable, and potential exposure from other significant legal matters.
- Execution of the $500 million large-pipeline revenue expectation and conversion of backlog, particularly estimated MSA orders that may be changed or terminated.
- Debt, liquidity and covenant headroom as the credit facility approaches its October 2022 maturity; note that the $250 million precautionary March borrowing was repaid in April 2020.
- Potential impairment, credit-loss or insurance-reserve changes as economic conditions and customer credit quality evolve.