01—Abstract
Summary
Summary of the 10-K filed March 30, 2000. Cited figures are marked; the original filing is the authoritative source.
Quanta Services (NYSE: PWR) reported a breakout fiscal 1999, with revenues rising 190% to $925.7 milliona (up from $319.3 million in 1998) and net income attributable to common stock climbing to $53.7 million, or $1.00 diluted EPS.
Much of that growth was acquisition-driven: the company bought 40 businesses in 1999 and has integrated 52 since its February 1998 IPO. Pro forma for all acquisitions, 1999 revenue was $1.15 billionb, and operating units owned at year-end grew internally at 21.7%, with a 24.7% compound annual rate from 1996 to 1999. Gross margin improved to 23.2% from 19.4%, though goodwill amortization and merger charges weighed on operating income, and the effective tax rate rose to 47.6%.
The balance sheet expanded sharply, with total assets reaching $1.16 billionc and goodwill of $625 million, roughly 54% of assets. Financing came largely from a January 1999 follow-on equity offering (net $101.1 million), a $186 million Series A preferred investment from UtiliCorp United, and a $350 million credit facility. Year-end debt totaled roughly $200 million, including $138.6 million drawn on the credit facility, and cash from operations was modest at $46.3 million against $368.3 million of investing outflows.
Subsequent to year-end, Quanta closed a $150 milliond senior secured notes placement at a weighted average rate of 8.52%, which reduced borrowings under the credit facility. Investors should weigh the strong growth and customer concentration against key risks. Ten customers accounted for 28% of revenue, most contracts can be canceled on 30 to 90 days' notice, a significant share of revenue comes from fixed-price contracts, and about 33% of the workforce is unionized.
The company also adopted a shareholder rights plan on March 8, 2000, and announced a 3-for-2 stock split payable April 7, 2000. Both the UtiliCorp relationship and the proposed preferred-to-common exchange at the May 2000 annual meeting bear watching for dilution and governance effects.
02—Key points
Key Highlights
- Revenue grew 189.9% to $925.7 million in 1999, with pro forma combined revenue of $1.15 billion and 21.7% pro forma internal growth.
- Gross margin expanded to 23.2% from 19.4%, driven by a shift toward higher-margin cable and telecommunications work and better electric power asset utilization.
- Net income rose to $53.9 million (diluted EPS $1.00, or $1.13 before merger charges), up from $16.2 million in 1998.
- Growth was largely acquisition-driven: 40 businesses acquired in 1999 for $323.6 million in cash and notes plus 15.0 million shares, bringing goodwill to $624.8 million.
- UtiliCorp United invested $186 million in Series A preferred stock in September 1999, and Enron has a strategic alliance and convertible notes.
- Post-year-end, a $150 million senior secured notes placement at 8.52% reduced credit facility borrowings, leaving $305.4 million of availability as of March 27, 2000.
- Key risks include customer concentration (top 10 customers were 28% of revenue), short-notice contract cancellation, fixed-price exposure, and goodwill amortization of about $16 million per year pro forma.
03—Questions
Frequently Asked Questions
What drove Quanta's revenue growth in 1999?
Revenue rose to $925.7 million, mostly from acquisitions. Platform companies acquired in 1999 contributed $403.5 million, and companies acquired in 1998 had a full year of contribution. Organic growth at operating units owned at year-end was 21.7% on a pro forma basis, supported by demand for bandwidth, outsourcing, deregulation, and industry convergence.
How strong is the balance sheet, and how is growth being financed?
Total assets were $1.16 billion against $757 million of stockholders' equity, so leverage is moderate. Long-term debt was about $200 million at year-end, including $138.6 million under the $350 million credit facility and $49.4 million of 6 7/8% convertible notes. Goodwill is a large share of assets at $625 million, and operating cash flow of $46.3 million was well below the $368.3 million used in investing activities, so acquisitions depend heavily on equity, preferred stock, and debt.
What are the most significant risks to the investment case?
The main risks are customer concentration (the top 10 customers were 28% of revenue), contracts that can be canceled on 30 to 90 days' notice, reliance on fixed-price contracts that can produce cost overruns, labor shortages and union exposure (33% of employees), and acquisition integration. Goodwill amortization also reduces earnings, and the company discloses that the environment for telecom and cable spending could change with technology.
What are the implications of the UtiliCorp relationship and the proposed preferred stock exchange?
UtiliCorp holds 1.86 million Series A preferred shares convertible into 9.3 million common shares at $20.00, and it has board representation (two directors). The company is asking shareholders to approve an exchange of up to 5.28 million common shares for up to 1.58 million additional preferred shares, and to reduce the preferred stated amount to $53.99. The company says this will not give UtiliCorp more voting power, but it increases the potential for dilution and concentrates influence with a single strategic holder.
What corporate and capital actions were announced around the filing date?
On March 8, 2000, the board approved a 3-for-2 stock split payable April 7, 2000, and adopted a shareholder rights plan with an initial exercise price of $153.33. The rights become exercisable if a party (other than UtiliCorp) acquires 15% or more of the common shares, or if UtiliCorp exceeds 49.9%. The company also closed the $150 million senior notes placement in March 2000 and completed additional acquisitions after year-end for about $39 million in cash and 1.6 million shares.
04—Continue