10-QPeriod: Q2 FY2001

QUANTA SERVICES, INC. Quarterly Report for Q2 Ended Jun 30, 2001

Filed August 14, 2001For Securities:PWR

Summary

Quanta Services, Inc. (PWR) reported its financial results for the second quarter ending June 30, 2001. The company demonstrated revenue growth, with a 18.8% increase year-over-year for the quarter and a 35.0% increase for the first six months of the year. This growth was largely driven by recent acquisitions and increased business in the electric power and gas sectors, partially offset by a decline in telecommunications and cable television revenues. However, profitability experienced a significant decline. Net income attributable to common stock dropped by 46.3% for the quarter and 9.2% for the six-month period compared to the prior year. This decline was primarily due to increased selling, general, and administrative expenses, which included a substantial allowance for doubtful accounts related to financially distressed telecommunications customers and costs associated with restructuring and abandoned acquisition negotiations. Additionally, gross margins compressed due to lower margins in the telecommunications segment and adverse weather conditions early in the year. Investors should note the continued aggressive acquisition strategy, significant debt levels, and the impact of industry-specific headwinds on profitability.

Key Highlights

  • 1Total revenues increased by 18.8% to $503.3 million for the three months ended June 30, 2001, and by 35.0% to $1.02 billion for the six months ended June 30, 2001.
  • 2Gross profit increased by 12.3% to $110.8 million for the quarter and 28.2% to $219.7 million for the six months, but gross margin as a percentage of revenue declined.
  • 3Selling, general, and administrative (SG&A) expenses saw a significant increase of 80.5% for the quarter and 61.5% for the six months, largely due to a $16.2 million allowance for doubtful accounts and $3.2 million in restructuring charges.
  • 4Net income attributable to common stock decreased by 46.3% to $16.5 million for the quarter and by 9.2% to $45.5 million for the six months.
  • 5The company's cash and cash equivalents decreased from $17.3 million at the end of 2000 to $2.8 million at the end of the quarter.
  • 6Quanta Services acquired six companies in the first six months of 2001 for approximately $78.1 million in cash and 1.0 million shares of common stock.
  • 7The company maintains a $350 million credit facility, with $120.0 million borrowed and $31.5 million in outstanding letters of credit as of June 30, 2001, leaving significant availability.

Frequently Asked Questions

The substantial increase in SG&A expenses was primarily driven by two major factors: a $16.2 million charge to establish allowances for accounts receivable risk due to the deteriorating financial health of certain telecommunications customers, and $3.2 million in charges related to workforce realignment and the discontinuation of acquisition negotiations for telecommunications contractors. The costs associated with integrating recently acquired companies also contributed to the rise.

The decrease in net income, despite revenue growth, is primarily attributed to two key areas. Firstly, a significant increase in Selling, General, and Administrative (SG&A) expenses, as detailed above, heavily impacted profitability. Secondly, gross margins compressed, decreasing from 23.3% to 22.0% for the quarter. This compression was caused by lower margins on work performed for telecommunications customers and, to a lesser extent, adverse weather conditions impacting the first quarter, which offset higher margins from utility customers.

While cash and cash equivalents decreased to $2.8 million at June 30, 2001, the company relies on its $350 million credit facility for liquidity. As of June 30, 2001, $120.0 million was borrowed, with $31.5 million in outstanding letters of credit, leaving approximately $198.5 million in borrowing availability. The company anticipates that its operating cash flow and this credit facility will be sufficient to meet its working capital, debt service, and capital expenditure needs for the next 12 months. They also mention potential for seeking additional financing if needed for acquisitions.

The company is currently analyzing the provisions of SFAS 141 (Business Combinations) and SFAS 142 (Goodwill and Other Intangible Assets). SFAS 141 mandates the purchase method for all business combinations initiated after June 30, 2001. SFAS 142 will eliminate goodwill amortization and require annual impairment testing, effective for goodwill acquired after June 30, 2001. The company has not yet determined the specific impact these standards will have on its consolidated financial statements, though SFAS 142's provisions will generally apply starting January 1, 2002, except for acquisitions made after June 30, 2001.