01—Abstract
Summary
Summary of the 10-K filed March 31, 1999. Cited figures are marked; the original filing is the authoritative source.
Quanta Services, Inc. (NYSE: PWR) reported its first full year as a public company in its FY1998 Form 10-K, filed March 31, 1999.
The company was formed in February 1998 through the combination of four specialty electric and telecommunications contracting businesses and has pursued an aggressive roll-up acquisition strategy since. Historical revenues rose to $309.2 milliona in 1998 from $76.2 million in 1997, and net income rose to $15.2 million ($0.84 diluted EPS) from $2.5 million. On a pro forma basis including all companies acquired before year-end, combined 1998 revenues were $423.6 million, split roughly 45% electric utility, 38% telecommunications, 10% transportation/lighting, and 7% commercial and industrial.
Much of the historical growth reflects acquisitions rather than organic expansion, so the pro forma figures are the better guide to scale. The balance sheet expanded sharply, with total assets reaching $335.0 millionb and goodwill of $150.9 million, which is now a significant share of equity ($170.3 million). Gross margin compressed to 19.4% from 22.7%, mainly because 1997 included high-margin storm work at PAR, and SG&A rose to 8.5% of revenue.
Goodwill amortization of about $3.8 millionc per year will weigh on reported earnings. Leverage increased through $56.0 million drawn on a $175.0 million revolving credit facility, plus $49.4 million of 6 7/8% convertible subordinated notes issued to an Enron affiliate. Cash was modest at $3.2 million, and operating cash flow of $8.3 million was small relative to the $109.1 million invested, largely in acquisitions.
The post-year-end period was notably active. A January 1999 secondary offering of 4.6 million shares at $23.25d raised about $101.3 million, and Quanta continued acquiring companies through March 1999. Investors should weigh the strong growth and fragmented-industry opportunity against risks including integration of many independently run businesses, dependence on acquisitions and access to capital, goodwill recoverability, labor shortages, a 43% unionized workforce, fixed-price contract exposure, and the Year 2000 readiness of acquired businesses.
02—Key points
Key Highlights
- Historical revenue grew to $309.2 million in 1998 from $76.2 million in 1997, while pro forma combined revenue for all acquired companies reached $423.6 million.
- Net income rose to $15.2 million, or $0.84 diluted EPS, versus $2.5 million in 1997; income from operations was $30.9 million.
- Gross margin declined to 19.4% from 22.7%, mainly due to lower storm and emergency work versus 1997 and lower-margin acquired businesses.
- Total assets grew to $335.0 million, including $150.9 million of goodwill that will be amortized over 40 years (about $3.8 million per year pro forma).
- Debt rose to about $60.2 million long-term plus $49.4 million of convertible notes, with $56.0 million drawn on a $175.0 million credit facility.
- A January 1999 secondary offering of 4.6 million shares at $23.25 generated about $101.3 million in net proceeds to fund further acquisitions and repay debt.
- Acquisition program: 20 businesses acquired from the IPO through March 15, 1999, for $185.6 million in cash and notes plus 7.6 million shares.
03—Questions
Frequently Asked Questions
How much of Quanta's 1998 growth came from acquisitions versus organic growth?
Most of the growth was acquisition-driven. Historical revenue increase of $233.0 million included $93.6 million from businesses purchased in 1998 and $131.4 million from the Founding Companies acquired at the February 1998 IPO. Management cites a 25.6% compound annual internal growth rate for acquired businesses between 1996 and 1998, but that figure is on a pro forma combined basis and is not separately reported in the financial statements.
Why did gross margin fall in 1998?
Gross margin fell from 22.7% to 19.4%. Management attributed this mainly to a larger share of high-margin storm and emergency work performed by PAR in 1997 compared with 1998, and to acquired Founding and Purchased Companies that earned lower margins than PAR and the Pooled Company did in 1997.
What are the main financing risks for investors?
Quanta relies on its acquisition program, which it funds with cash, stock, and debt. The $175.0 million revolving credit facility requires lender consent for acquisitions above a certain cash level and restricts dividends. The 6 7/8% convertible notes held by Enron affiliates carry similar covenants. Cash on hand was only $3.2 million at year-end, and operating cash flow of $8.3 million was far below cash used in investing activities of $109.1 million. Future stock issuances could dilute existing holders.
Does Quanta pay dividends, and what is the stock's recent trading context?
No. Quanta intends to retain earnings to fund growth and does not plan to pay cash dividends in the near term, and its credit facility and notes restrict dividends without lender consent. The stock listed on the NYSE in February 1998 at $9.00 per share, traded between $11.00 and $23.00 during 1998, and closed at $25.44 on March 15, 1999. The 135 record holders of common stock and 46 holders of Limited Vote Common Stock were noted.
What operational risks could affect future results?
Key risks include integrating many independently run acquired businesses onto common systems, the ability to keep acquiring companies at reasonable prices, goodwill recoverability, shortages of skilled electricians and linemen, and a workforce about 43% unionized. Many contracts are fixed price, so cost overruns could reduce margins. Some acquired businesses also had Year 2000 systems that were not yet compliant, with replacements planned by year-end 1999 at an estimated cost of $350,000.
04—Continue