10-QPeriod: Q3 FY2002

QUANTA SERVICES, INC. Quarterly Report for Q3 Ended Sep 30, 2002

Filed November 14, 2002For Securities:PWR

Summary

Quanta Services, Inc. (PWR) reported a significant decline in financial performance for the nine months ended September 30, 2002, compared to the same period in 2001. Revenues decreased by 13.7% to $1.32 billion, largely due to a downturn in the telecommunications and cable television sectors, customer financial difficulties, and bankruptcies. This revenue decline, coupled with increased pricing pressures and lower asset utilization, led to a substantial drop in gross profit margin from 21.6% to 13.5%. The company also recorded significant non-cash charges, including a goodwill impairment of $166.6 million during the nine months, in addition to a $445.4 million goodwill impairment charge recognized as a cumulative effect of adopting SFAS No. 142. These impairments, combined with increased selling, general, and administrative expenses (including a substantial increase in bad debt expense), resulted in a net loss of $620.7 million for the nine months, a stark contrast to the net income of $72.3 million in the prior year. Liquidity remains a concern, with cash and cash equivalents at $15.4 million, though the company has availability under its credit facility.

Key Highlights

  • 1Revenues declined 13.7% year-over-year to $1.32 billion for the nine months ended September 30, 2002, driven by weakness in the telecommunications and cable sectors.
  • 2Gross profit margin contracted significantly, falling from 21.6% to 13.5% due to lower volumes, increased pricing pressures, and lower asset utilization.
  • 3The company recorded substantial non-cash goodwill impairment charges totaling $612 million ($445.4 million as a cumulative effect of accounting change and $166.6 million as an operating expense) during the nine months, severely impacting net income.
  • 4Selling, general, and administrative expenses increased by 21.1% for the nine months, heavily influenced by a significant rise in bad debt expense (from $17.8 million to $34.3 million).
  • 5The company reported a net loss of $620.7 million for the nine months ended September 30, 2002, a sharp reversal from a net income of $72.3 million in the comparable period of 2001.
  • 6Cash and cash equivalents stood at $15.4 million as of September 30, 2002, with $81.8 million in borrowing availability under its credit facility.
  • 7Significant customer financial difficulties and bankruptcies, particularly in the telecommunications industry, are highlighted as key risk factors affecting collectibility of receivables.

Frequently Asked Questions

The primary reason for the substantial net loss of $620.7 million is the recognition of significant non-cash goodwill impairment charges totaling $612 million. This includes a $445.4 million charge recorded as a cumulative effect of adopting SFAS No. 142 and an additional $166.6 million interim impairment charge recognized as an operating expense. These charges, combined with a decline in revenues and gross profit, contributed to the net loss.

Customer financial difficulties and bankruptcies, particularly within the telecommunications industry, have significantly impacted Quanta Services. This has led to a decrease in capital spending by customers, an inability for some customers to raise capital, and a substantial increase in bad debt expense. The company has increased its allowance for doubtful accounts and reclassified certain receivables to non-current assets due to uncertainty of collection within twelve months.

As of September 30, 2002, Quanta Services had $15.4 million in cash and cash equivalents. The company has availability under its credit facility, with approximately $81.8 million of borrowing availability. The company anticipates that its cash flow from operations and credit facility will be sufficient to meet its working capital needs, debt service requirements, and planned capital expenditures for at least the next 12 months, although further market deterioration could impact this.

Effective January 1, 2002, Quanta adopted SFAS No. 142, which changed the accounting for goodwill and other intangible assets. Under this standard, goodwill amortization ceased. The adoption required an impairment test, resulting in a $445.4 million goodwill impairment charge recognized as a cumulative effect of a change in accounting principle in the nine months ended September 30, 2002. Additionally, an interim goodwill impairment charge of $166.6 million was recognized during the same period as an operating expense due to market deterioration.