QUANTA SERVICES, INC. The following discussion and analysis of the financial condition and results of
operations of
Overview
We are a leading provider of specialty contracting services, delivering
comprehensive infrastructure solutions for the utility, renewable energy,
communications, pipeline and energy industries in
Beginning with the three months ended
Current Quarter Financial Results and Significant Operational Trends and Events
Key consolidated financial results for the three months ended
•Revenues increased 46.7%, or
•Operating income increased 3.3%, or
•Net income attributable to common stock decreased 5.7%, or
•Diluted earnings per share decreased 8.1%, or
•EBITDA (a non-GAAP financial measure) increased 52.3%, or
•Net cash provided by operating activities decreased by 32%, or
•Remaining performance obligations increased 16.1%, or
•Total backlog (a non-GAAP financial measure) increased 6.1%, or
For a reconciliation of EBITDA and adjusted EBITDA to net income attributable to common stock, the most comparable GAAP financial measure, and a reconciliation of backlog to remaining performance obligations, the most comparable GAAP financial measure, see Non-GAAP Financial Measures below.
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As described below, during the three months ended
Electric Power Infrastructure Solutions Segment
•Revenues increased by 27.6% to
•Operating income increased by 32.3% to
•Revenues increased primarily due to increased spending by our utility customers
on grid modernization and hardening, resulting in increased demand for our
electric power services, as well as approximately
•Operating income and operating margin increased in the three months ended
Renewable Energy Infrastructure Solutions Segment
•Revenues increased by 128.0% to
•Operating income increased by 54.4% to
•Revenues increased primarily due to a
•The increase in operating income was primarily due to higher revenues
associated with the acquisition of
Underground Utility and Infrastructure Solutions Segment
•Revenues increased by 47.8% to
•Operating income increased by 446.6% to
•Revenues increased primarily due to higher demand from our gas utility and industrial customers, as well as an increase in revenues associated with larger pipeline projects.
•Operating income and operating margin increased in the three months ended
See Business Environment, Results of Operations and Liquidity and Capital Resources below for additional information and discussion related to consolidated and segment results.
Business Environment
We believe there are long-term growth opportunities across our industries, and we continue to have a positive long-term outlook. Although not without risks and challenges, including those discussed in Cautionary Statement About Forward-Looking Statements and Information, Item 1A. Risk Factors of Part II of this Quarterly Report and Item 1A. Risk Factors of Part I of our 2021 Annual Report, we believe, with our full-service operations, broad geographic reach, financial position and technical expertise, we are well positioned to capitalize on opportunities and trends in our industries.
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Electric Power Infrastructure Solutions. Utilities are continuing to invest
significant capital in their electric power delivery systems, particularly
transmission, substation and distribution infrastructure, through multi-year,
multi-billion dollar grid modernization and reliability programs, which have
provided, and are expected to continue to provide, demand for our services.
While the COVID-19 pandemic resulted in a short-term overall decline in
electricity usage in 2020, primarily related to commercial and industrial users,
demand recovered and continued to increase in 2021, and we expect demand for
electricity in
A number of utilities also continue to implement system upgrades and hardening
programs in response to recurring severe weather events, such as hurricanes and
wildfires. For example, utilities along the Eastern and Gulf Coasts of
With respect to our communications service offerings, which are focused on the
North American market, consumer and commercial demand for communication and
data-intensive, high-bandwidth wireline and wireless services and applications
is driving significant investment in infrastructure and the deployment of new
technologies. In particular, communications providers are in the early stages of
developing new fifth generation wireless services (5G), which are intended to
facilitate bandwidth-intensive services at high speeds for consumers and
commercial applications. Additionally, recent legislative and regulatory
initiatives, including the
Renewable Energy Infrastructure Solutions. We believe the transition to a
carbon-neutral economy, which is being driven by consumer and investor
preferences, increasing electrification trends, supportive public policy actions
and declining levelized costs of renewable energy, will require sizeable
long-term investment in renewable generation and related infrastructure,
including meaningful repowering and modernization of existing assets. To that
end, renewable energy developers are expected to continue to increase
investments in wind and solar projects, as well as energy storage projects.
Utilities have increased the percentage of renewable electricity bought through
power purchase agreements (PPAs) with renewable energy developers, and we
believe are in the early stages of investing directly in renewable generation
facilities, which could expand significantly over time as they pursue clean
energy strategies and emissions-reduction initiatives. Also, a growing number of
corporate enterprises, particularly technology companies, are entering into PPAs
with renewable energy developers to source renewable electricity to power their
facilities and achieve their own carbon-reduction initiatives. We believe
increased battery storage can support increased renewable energy development by
providing shorter-term storage of electricity from renewable energy generation,
particularly from solar facilities, which helps to manage the amount and timing
of intermittent power placed on the grid from renewable generation. Though
current battery storage capacity is much smaller than the amount of wind and
solar capacity installed in
We believe these dynamics will generate significant demand for our renewable energy infrastructure services, including our generation construction services and engineering expertise in utility-scale solar, wind and battery storage projects, as well as our services related to the development and construction of related infrastructure, including high-voltage electric transmission and substation infrastructure, that are necessary to interconnect and transmit electricity from new renewable energy generation facilities into the existing electric power grid and enhance grid reliability. While in the short term and in any given period the demand for certain renewable energy services could fluctuate due to, among other things, supply chain and other logistical difficulties that could delay projects, the availability of production tax credits, permitting delays, or sourcing restrictions, tariffs, duties, taxes and other assessments on materials and components necessary for certain projects (e.g., solar panels), we believe
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we are well positioned, through our acquisition of
Underground Utility and Infrastructure Solutions. Within this segment, we have
focused on specialty services and industries that we believe are driven by
regulated utility spending, regulation, replacement and rehabilitation of aging
infrastructure and safety and environmental initiatives, including gas utility
services, pipeline integrity and transmission services and downstream industrial
services. We believe demand for our gas utility distribution services will
increase as a result of customer desire to upgrade and replace aging
infrastructure and increasing regulatory requirements. In particular, natural
gas utilities have implemented multi-decade modernization programs to replace
aging cast iron, bare steel and plastic system infrastructure with modern
materials for safety, reliability and environmental purposes. We believe there
are also growth opportunities for our pipeline integrity, rehabilitation and
replacement services, as regulatory measures have increased the frequency and
stringency of pipeline integrity testing requirements that require our customers
to test, inspect, repair, maintain and replace pipeline infrastructure to ensure
that it operates in a safe, reliable and environmentally conscious manner.
Further, permitting challenges associated with construction of new pipelines can
make existing pipeline infrastructure more valuable, motivating owners to extend
the useful life of existing pipeline assets through integrity initiatives.
Additionally, we believe there are significant long-term opportunities for our
downstream industrial services, including our high-pressure and critical-path
turnaround services, as well as our capabilities with respect to instrumentation
and electrical services, piping, fabrication and storage tanks services, and
other industrial services, and that processing facilities located along the
Certain of these services were impacted in 2020 and 2021 by the COVID-19
pandemic and broader economic challenges and uncertainties in the energy market.
For example, demand for our midstream and industrial services operations
declined substantially in 2020 and 2021 as customers reduced and deferred
regularly scheduled maintenance and capital projects due to lack of demand for
refined products and economic uncertainty. Demand for these services has
improved in the first part of 2022 as customers are moving forward with their
deferred maintenance and capital spending, and to the extent energy market
conditions remain accommodating and the global economy continues to recover, we
believe the outlook for these services will continue to improve throughout 2022.
Additionally, in any given period, downstream processing facilities can be
negatively impacted due to severe weather events, such as hurricanes, tropical
storms and floods. Furthermore, the broader oil and gas industry is cyclical and
subject to price and production volume volatility, which can impact demand for
certain of our ancillary and pipeline services. particularly in markets where
the price of oil is influential, such as
Lastly, we believe there are additional longer-term opportunities that may arise
in this segment. For example, we believe natural gas, due to its expected
abundant supply and attractive price over the long-term, will remain a fuel of
choice for both primary power generation and backup power generation for
renewable power plants in
COVID-19 Pandemic and Impact. The effects of the COVID-19 pandemic continue to
significantly impact certain aspects and geographies of the global economy due
to, among other things, workforce and travel restrictions and supply chain,
production and other logistical disruptions. While we have continued to operate
substantially all of our activities as a provider of essential services, during
the course of the pandemic our operations and financial results have been
adversely impacted by reduced customer spending and demand for certain of our
services (including as described above), as well as governmental responses to
the COVID-19 pandemic, including shut-down orders and limitations on work site
practices implemented by governments, certain of which in
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requirements and guidance has lessened during the first part of 2022, we expect that requirements in certain jurisdictions and with respect to certain customers will remain in place and additional requirements could arise in the future to the extent the COVID-19 pandemic continues or worsens.
The broader and longer-term implications of the COVID-19 pandemic on our results of operations and overall financial performance and position remain highly uncertain and variable, and we expect continued operational challenges for portions of our operations in the future. The future impact that the pandemic, or any resulting market disruption and volatility, will have on our business, cash flows, liquidity, financial condition and results of operations will depend on future developments, including, among others, the duration and severity of the pandemic; the actions taken by governmental authorities, customers, suppliers and other third parties in response to the pandemic and the consequences of those actions; our workforce availability; and the timing and extent to which normal economic and operating conditions resume and continue.
Regulatory Challenges and Opportunities. The regulatory environment creates both
challenges and opportunities for our business, and in recent years our margins
have been impacted by regulatory and permitting delays, as well as private legal
challenges related to regulatory requirements, particularly with respect to
large transmission and large pipeline projects. As a result, regulatory and
environmental permitting processes continue to create uncertainty for projects
and negatively impact customer spending. However, we believe that there are also
several existing, pending or proposed legislative or regulatory actions that may
alleviate certain regulatory and permitting issues and positively impact
long-term demand, particularly in connection with electric power infrastructure
and renewable energy spending. For example, regulatory changes affecting siting
and right-of-way processes could potentially accelerate construction for
transmission projects, and state and federal reliability standards are creating
incentives for both electrical and pipeline system investment and maintenance.
Additionally, as described above, we consider renewable energy, including solar
and wind generation and battery storage facilities, to be an ongoing
opportunity; however, demand for our services depends on policy and economic
incentives designed to support and encourage such projects and any tariffs,
duties, taxes, assessments, or other limitations on the availability or sourcing
of materials or components for such projects can increase costs for customers
and create variability of project timing. For example, we are monitoring the
Labor Resource Availability and Cost. We continue to address the longer-term need for additional labor resources in our markets, as our customers continue to seek additional specialized labor resources to offset an aging utility workforce and longer-term labor availability issues, increasing pressure to reduce costs and improve reliability, and increasing duration and complexity of their capital programs. We believe these trends will continue, possibly to such a degree that demand for labor resources will outpace supply. Furthermore, the increased demand for our services based on the dynamics described above can create shortages of qualified labor in our markets. Our ability to capitalize on available opportunities is limited by our ability to employ, train and retain the necessary skilled personnel, and therefore we are taking proactive steps to develop our workforce, including through strategic relationships with universities, the military and unions and the expansion and development of our training facility and postsecondary educational institution. Although we believe these initiatives will help address workforce needs, meeting our customers' demand for labor resources could prove challenging.
Additionally, we monitor our labor markets and expect labor costs to continue to increase based on increased demand for our services. Our labor costs are passed through in certain of our contracts, and the portion of our workforce that is represented by labor unions typically operate under multi-year collective bargaining agreements, which provide some visibility into future labor costs. While we do not currently believe this environment will materially impact our profitability and would expect to be able to adjust contract pricing with certain customers to the extent wages and other labor costs increase, whether due to renegotiation of collective bargaining agreements or market conditions, meaningful increases in our labor costs could have a material adverse effect on our business, financial condition, results of operations or cash flows to the extent we cannot do so. Furthermore, increased labor costs could impact our customers' decision-making with respect to the viability or timing of certain projects.
Materials and Equipment Procurement. We continue to monitor supply chain and
other logistical challenges, global trade relationships (e.g., tariffs, duties,
taxes, sourcing restrictions) and other general market and political conditions
(e.g., inflation) with respect to availability and costs of certain materials
and equipment necessary for the performance of our business and for materials
necessary for our customers' projects, including, among other things, steel,
copper, aluminum, and components for renewable energy projects. Increased costs
and delays can impact project construction schedules and the performance of our
services. For example, we believe some participants in the renewable energy
market are experiencing supply chain challenges, resulting in delays and
shortages of, and increased costs for, materials necessary for the construction
of certain renewable energy projects in the near term, including as a result of
sourcing restrictions related to solar panels manufactured in
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delay our customers' ongoing projects or impact their future project schedules, which in turn could impact the timing of or demand for our renewable energy services. While these delays are not anticipated to result in exposure to liquidated damages or commodity risks, such delays could cause customers to cancel projects as higher than expected costs impact project profitability projections.
Additionally, based on, among other things, the significant worldwide shortage of semiconductors, vehicle manufacturers are experiencing production delays with respect to new vehicles for our fleet (both on-road and specialty vehicles) and vehicle parts (e.g., tires), all of which we utilize in our operations, and certain of our vehicle delivery orders scheduled for delivery in 2022 have been delayed or cancelled. While we believe we have taken steps to secure delivery of a sufficient amount of vehicles in the near term and do not anticipate any significant disruptions with respect to our fleet, to the extent the production issues become worse than expected or become longer-term in nature, our operations could be negatively impacted. In addition, as a result of the recent inflationary pressure, including with respect to the cost of materials, equipment and fuel, our results of operations could be materially impacted to the extent we are not able to pass such costs through to our customers.
Acquisitions and Investments. We believe potential acquisition and investment opportunities exist in our industries and adjacent industries, primarily due to the highly fragmented and evolving nature of those industries and inability of many companies to expand due to capital or liquidity constraints. While the desirability of certain of these opportunities could be impacted by the recent inflationary pressure in the short term, we continue to evaluate opportunities that are expected to, among other things, broaden our customer base, expand our geographic area of operations and grow and diversify our portfolio of services.
Significant Factors Impacting Results
Our revenues, profit, margins and other results of operations can be influenced by a variety of factors in any given period, including those described in Business Environment above and Item 1A. Risk Factors of Part I of our 2021 Annual Report, and those factors have caused fluctuations in our results in the past and are expected to cause fluctuations in our results in the future. Additional information with respect to certain of those factors is provided below.
Seasonality. Typically, our revenues are lowest in the first quarter of the year
because cold, snowy or wet conditions can create challenging working
environments that are more costly for our customers or cause delays on projects.
In addition, infrastructure projects often do not begin in a meaningful way
until our customers finalize their capital budgets, which typically occurs
during the first quarter. Second quarter revenues are typically higher than
those in the first quarter, as some projects begin, but continued cold and wet
weather can often impact productivity. Third quarter revenues are typically the
highest of the year, as a greater number of projects are underway and operating
conditions, including weather, are normally more accommodating. Generally,
revenues during the fourth quarter are lower than the third quarter but higher
than the second quarter, as many projects are completed and customers often seek
to spend their capital budgets before year end. However, the holiday season and
inclement weather can sometimes cause delays during the fourth quarter, reducing
revenues and increasing costs. These seasonal impacts are typical for our
Weather, natural disasters and emergencies. The results of our business in a given period can be impacted by adverse weather conditions, severe weather events, natural disasters or other emergencies, which include, among other things, heavy or prolonged snowfall or rainfall, hurricanes, tropical storms, tornadoes, floods, blizzards, extreme temperatures, wildfires, post-wildfire floods and debris flows, pandemics (including the ongoing COVID-19 pandemic, as described above) and earthquakes. These conditions and events can negatively impact our financial results due to, among other things, the termination, deferral or delay of projects, reduced productivity and exposure to significant liabilities. However, severe weather events can also increase our emergency restoration services, which typically yield higher margins due in part to higher equipment utilization and absorption of fixed costs, and in 2020 and 2021 we had record levels of emergency restoration services.
Demand for services. We perform the majority of our services under existing contracts, including master service agreements (MSAs) and similar agreements pursuant to which our customers are not committed to specific volumes of our services. Therefore our volume of business can be positively or negatively affected by fluctuations in the amount of work our customers assign us in a given period, which may vary by geographic region. For example, to the extent our customers accelerate grid modernization or hardening programs or face deadlines to meet regulatory requirements for rehabilitation, reliability or efficiency, our volume of work could increase under existing agreements. Also, as described above in Business Environment, we have experienced reductions in demand for certain services as a result of uncertainties and challenges in the energy market and overall economy caused by the COVID-19 pandemic. Examples of other items that may cause demand for our services to fluctuate materially from quarter to quarter include: the financial condition of our customers, their capital
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spending and their access to capital; economic and political conditions on a
regional, national or global scale, including availability of renewable energy
tax credits; interest rates; governmental regulations affecting the sourcing and
costs of materials and equipment; other changes in
Revenue mix and impact on margins. The mix of revenues based on the types of
services we provide in a given period will impact margins, as certain industries
and services provide higher-margin opportunities. Our larger or more complex
projects typically include, among others, transmission projects with higher
voltage capacities; pipeline projects with larger-diameter throughput
capacities; large-scale renewable generation projects, which we expect to
increase subsequent to our acquisition of
Project variability and performance. Margins for a single project may fluctuate period to period due to changes in the volume or type of work performed, the pricing structure under the project contract or job productivity. Additionally, our productivity and performance on a project can vary period to period based on a number of factors, including unexpected project difficulties or site conditions (including in connection with difficult geographic characteristics); project location, including locations with challenging operating conditions; whether the work is on an open or encumbered right of way; inclement weather or severe weather events; environmental restrictions or regulatory delays; protests, other political activity or legal challenges related to a project; the performance of third parties; and the impact of the COVID-19 pandemic. Moreover, we currently generate a significant portion of our revenues under fixed price contracts, and fixed price contracts are more common in connection with our larger and more complex projects that typically involve greater performance risk. Under these contracts, we assume risks related to project estimates and execution, and project revenues can vary, sometimes substantially, from our original projections due to a variety of factors, including the additional complexity, timing uncertainty or extended bidding, regulatory and permitting processes associated with these projects. These variations can result in a reduction in expected profit or the incurrence of losses on a project or the issuance of change orders or assertion of contract claims against customers. See Revenue Recognition - Contract Estimates and Changes in Estimates in Note 4 of the Notes to Condensed Consolidated Financial Statements in Item 1. Financial Statements of Part I of this Quarterly Report for further information regarding changes in estimated contract revenues and/or project costs, including any significant project gains or losses in connection with fixed price contracts that have impacted our results, and determinations with respect to the recognition of change orders and claims as contract price adjustments.
Subcontract work and provision of materials. Work that is subcontracted to other service providers generally yields lower margins, and therefore an increase in subcontract work in a given period can decrease margins. In recent years, we have subcontracted approximately 20% of our work to other service providers. Our customers are usually responsible for supplying the materials for their projects. However, under some contracts, including contracts for projects where we provide engineering, procurement and construction (EPC) services, we agree to procure all or part of the required materials. Margins may be lower on projects where we furnish a significant amount of materials, as our markup on materials is generally lower than our markup on labor costs, and in a given period an increase in the percentage of work with greater materials procurement requirements may decrease our overall margins. Furthermore, as discussed further in Business Environment, fluctuations in the price or availability of materials and equipment we or our customers utilize could impact demand for our services or costs to complete projects.
Foreign currency risk. Our financial performance is reported on a
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Results of Operations
A discussion of the changes in our consolidated and segment results of
operations between the three months ended
The following table sets forth selected statements of operations data, such data as a percentage of revenues for the periods indicated, as well as the dollar and percentage change from the prior period (dollars in thousands):
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