NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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1.
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BUSINESS AND ORGANIZATION:
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Quanta Services, Inc. (Quanta) is a leading provider of specialty contracting services, offering infrastructure solutions primarily to the electric power, oil and gas and communications industries in the United States, Canada and Australia and select other international markets. Quanta reports its results under
two
reportable segments: (1) Electric Power Infrastructure Services and (2) Oil and Gas Infrastructure Services.
Electric Power Infrastructure Services Segment
The Electric Power Infrastructure Services segment provides comprehensive network solutions to customers in the electric power industry. Services performed by the Electric Power Infrastructure Services segment generally include the design, installation, upgrade, repair and maintenance of electric power transmission and distribution infrastructure and substation facilities along with other engineering and technical services. This segment also provides emergency restoration services, including the repair of infrastructure damaged by inclement weather, the energized installation, maintenance and upgrade of electric power infrastructure utilizing unique bare hand and hot stick methods and Quanta’s proprietary robotic arm technologies, and the installation of “smart grid” technologies on electric power networks. In addition, this segment designs, installs and maintains renewable energy generation facilities, consisting of solar, wind and certain types of natural gas generation facilities, and related switchyards and transmission infrastructure. To a lesser extent, the segment also provides comprehensive communications infrastructure services to wireline, fiber and wireless carrier customers within the communications industry; services in connection with the construction of electric power generation facilities; the design, installation, maintenance and repair of commercial and industrial wiring; and the installation of traffic networks and cable and control systems for light rail lines.
Oil and Gas Infrastructure Services Segment
The Oil and Gas Infrastructure Services segment provides comprehensive network solutions to customers involved in the development and transportation of natural gas, oil and other pipeline products. Services performed by the Oil and Gas Infrastructure Services segment generally include the design, installation, repair and maintenance of pipeline transmission and distribution systems, gathering systems, production systems, storage systems and compressor and pump stations, as well as related trenching, directional boring and mechanized welding services. In addition, this segment’s services include pipeline protection, integrity testing, rehabilitation and replacement, and fabrication of pipeline support systems and related structures and facilities. Quanta also serves the offshore and inland water energy markets, primarily providing services to oil and gas exploration platforms, including mechanical installation (or “hook-ups”), electrical and instrumentation, pre-commissioning and commissioning, coatings, fabrication and marine asset repair. To a lesser extent, this segment designs, installs and maintains fueling systems, as well as water and sewer infrastructure. Through a recent acquisition discussed below, Quanta expanded its service offerings in this segment to include high-pressure and critical-path turnaround services to the downstream and midstream energy markets and enhanced its capabilities with respect to instrumentation and electrical services, piping, fabrication and storage tank services.
Acquisitions
On July 20, 2017, Quanta acquired Stronghold, Ltd. and Stronghold Specialty, Ltd. (collectively Stronghold), a specialized services business located in the United States that provides high-pressure and critical-path solutions to the downstream and midstream energy markets. The results of the acquired business are generally included in Quanta’s Oil and Gas Infrastructure Services segment and have been included in Quanta’s consolidated financial statements beginning on the date of acquisition.
During the nine months ended September 30, 2017, Quanta also completed
two
other acquisitions, which included a communications infrastructure services contractor and an electrical and communications contractor, both located in the United States. The results of these acquired businesses are generally included in Quanta’s Electric Power Infrastructure Services segment and have been included in Quanta’s consolidated financial statements beginning on the respective dates of acquisition.
During
2016
, Quanta completed
five
acquisitions. The results have been included in Quanta’s consolidated financial statements beginning on the respective dates of acquisition. See further discussion regarding these acquisitions in Note 4
.
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation
The condensed consolidated financial statements of Quanta include the accounts of Quanta Services, Inc. and its wholly owned subsidiaries, which are also referred to as its operating units. The condensed consolidated financial statements also include the accounts of certain of Quanta’s investments in joint ventures, which are either consolidated or proportionately consolidated, as discussed in the following summary of significant accounting policies. Investments in affiliated entities in which Quanta does not have a controlling financial interest, but over which Quanta has significant influence, usually because Quanta holds a voting interest of between 20% and 50%, are accounted for using the equity method. All significant intercompany accounts and transactions have been eliminated in consolidation. Unless the context requires otherwise, references to Quanta include Quanta Services, Inc. and its consolidated subsidiaries.
Interim Condensed Consolidated Financial Information
These unaudited condensed consolidated financial statements have been prepared pursuant to the rules of the U.S. Securities and Exchange Commission (SEC). Certain information and footnote disclosures, normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States (US GAAP), have been condensed or omitted pursuant to those rules and regulations. Quanta believes that the disclosures made are adequate to make the information presented not misleading. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, necessary to fairly state the financial position, results of operations, comprehensive income and cash flows with respect to the interim condensed consolidated financial statements have been included. The results of operations and comprehensive income for the interim periods are not necessarily indicative of the results for the entire fiscal year. The results of Quanta have historically been subject to significant seasonal fluctuations.
Quanta recommends that these unaudited condensed consolidated financial statements be read in conjunction with the audited consolidated financial statements and notes thereto of Quanta and its consolidated subsidiaries included in Quanta’s Annual Report on Form 10-K for the year ended
December 31, 2016
, which was filed with the SEC on
March 1, 2017
.
Reclassifications
Quanta reclassified certain prior period amounts related to stock-based compensation on the condensed consolidated statements of cash flows to conform to the current period presentation under a recently adopted accounting update. Additionally, certain reclassifications have been made to the prior year’s condensed consolidated statements of operations to conform to classifications in the current year.
Use of Estimates and Assumptions
The preparation of financial statements in conformity with US GAAP requires the use of estimates and assumptions by management in determining the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities known to exist as of the date the financial statements are published, and the reported amounts of revenues and expenses recognized during the periods presented. Quanta reviews all significant estimates affecting its consolidated financial statements on a recurring basis and records the effect of any necessary adjustments prior to their publication. Judgments and estimates are based on Quanta’s beliefs and assumptions derived from information available at the time such judgments and estimates are made. Uncertainties with respect to such estimates and assumptions are inherent in the preparation of financial statements. Estimates are primarily used in Quanta’s assessment of the allowance for doubtful accounts, valuation of inventory, useful lives of assets, fair value assumptions in analyzing goodwill, other intangibles and long-lived asset impairments, equity and other investments, loan receivables, purchase price allocations, acquisition-related contingent consideration, liabilities for self-insured and other claims and guarantees, multiemployer pension plan withdrawal liabilities, revenue recognition for construction contracts inclusive of contractual change orders and claims, share-based compensation, operating results of reportable segments, as well as the provision for income taxes and the calculation of uncertain tax positions.
Cash and Cash Equivalents
Quanta had cash and cash equivalents of
$91.5 million
and
$112.2 million
as of
September 30, 2017
and
December 31, 2016
. Cash consisting of interest-bearing demand deposits is carried at cost, which approximates fair value. Quanta considers all highly liquid investments with an original maturity of three months or less at the time of purchase to be cash equivalents, which are carried at fair value. At
September 30, 2017
and
December 31, 2016
, cash equivalents were
$8.3 million
and
$8.8 million
, and consisted primarily of money market investments and money market mutual funds and are discussed further in
Fair Value
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
Measurements
below. As of
September 30, 2017
and
December 31, 2016
, cash and cash equivalents held in domestic bank accounts were
$25.0 million
and
$19.5 million
, and cash and cash equivalents held in foreign bank accounts were
$66.5 million
and
$92.7 million
. As of
September 30, 2017
and
December 31, 2016
, cash and cash equivalents held by Quanta’s investments in joint ventures, which are either consolidated or proportionately consolidated, were
$34.0 million
and
$11.5 million
, of which
$10.0 million
and
$10.0 million
related to domestic joint ventures. Cash and cash equivalents held by the joint ventures are available to support joint venture operations, but Quanta cannot utilize those assets to support its other operations. Quanta generally has no right to the joint ventures’ cash and cash equivalents other than participating in distributions and in the event of dissolution.
Current and Long-Term Accounts and Notes Receivable and Allowance for Doubtful Accounts
Quanta provides an allowance for doubtful accounts when collection of an account or note receivable is considered doubtful, and receivables are written off against the allowance when deemed uncollectible. Inherent in the assessment of the allowance for doubtful accounts are certain judgments and estimates regarding, among other factors, the customer’s access to capital, the customer’s willingness or ability to pay, general economic and market conditions, the ongoing relationship with the customer and uncertainties related to the resolution of disputed matters. Quanta considers accounts receivable delinquent after 30 days but does not generally include delinquent accounts in its analysis of the allowance for doubtful accounts unless the accounts receivable have been outstanding for at least 90 days. In addition to balances that have been outstanding for 90 days or more, Quanta also includes accounts receivable balances that relate to customers in bankruptcy or with other known difficulties in its analysis of the allowance for doubtful accounts. Material changes in customers’ business or cash flows, which may be impacted by negative economic and market conditions, could affect Quanta’s ability to collect amounts due from them. As of
September 30, 2017
and
December 31, 2016
, Quanta had allowances for doubtful accounts on current receivables of
$5.1 million
and
$2.8 million
. Long-term accounts receivable are included within other assets.
Should customers experience financial difficulties or file for bankruptcy, or should anticipated recoveries relating to receivables in existing bankruptcies or other workout situations fail to materialize, Quanta could experience reduced cash flows and losses in excess of current allowances provided.
The balances billed but not paid by customers pursuant to retainage provisions in certain contracts are generally due upon completion of the contracts and acceptance by the customer. Based on Quanta’s experience with similar contracts in recent years, the majority of the retainage balances at each balance sheet date are expected to be collected within the next twelve months. Current retainage balances as of
September 30, 2017
and
December 31, 2016
were
$298.4 million
and
$231.0 million
and were included in “Accounts receivable.” Retainage balances with settlement dates beyond the next twelve months were included in “Other assets, net,” and as of
September 30, 2017
and
December 31, 2016
were
$26.8 million
and
$5.2 million
.
Within accounts receivable, Quanta recognizes unbilled receivables in circumstances such as when revenues have been earned and recorded but the amount cannot be billed under the terms of the contract until a later date; costs have been incurred but are yet to be billed under cost-reimbursement type contracts; or amounts arise from routine lags in billing (for example, work completed one month but not billed until the next month). These balances do not include revenues accrued for work performed under fixed-price contracts as these amounts are recorded as costs and estimated earnings in excess of billings on uncompleted contracts. At
September 30, 2017
and
December 31, 2016
, the balances of unbilled receivables included in accounts receivable were
$393.0 million
and
$206.8 million
.
Goodwill and Other Intangibles
Quanta has recorded goodwill in connection with its historical acquisitions of companies. Upon acquisition, these companies were either combined into one of Quanta’s existing operating units or managed on a stand-alone basis as an individual operating unit. Goodwill recorded in connection with these acquisitions is subject to an annual assessment for impairment, which Quanta performs at the operating unit level for each operating unit that carries a balance of goodwill. Each of Quanta’s operating units is organized into one of
two
internal divisions: the Electric Power Infrastructure Services Division and the Oil and Gas Infrastructure Services Division. As most of the companies acquired by Quanta provide multiple types of services for multiple types of customers, these divisional designations are based on the predominant type of work performed by each operating unit at the point in time the divisional designation is made. Goodwill is required to be measured for impairment at the reporting unit level, which represents the operating segment level or one level below the operating segment level for which discrete financial information is available. Quanta has determined that its individual operating units represent its reporting units for the purpose of assessing goodwill impairments.
Quanta has the option to first assess qualitative factors to determine whether it is necessary to perform the two-step fair value-based impairment test described below. If Quanta believes that, as a result of its qualitative assessment, it is more likely
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
than not that the fair value of a reporting unit is less than its carrying amount, the quantitative impairment test is required. Quanta can choose to perform the qualitative assessment on none, some or all of its reporting units. Quanta can also bypass the qualitative assessment for any reporting unit in any period and proceed directly to step one of the impairment test, and then resume the qualitative assessment in any subsequent period. Qualitative indicators including deterioration in macroeconomic conditions, declining financial performance, or a sustained decrease in share price, among other things, may trigger the need for annual or interim impairment testing of goodwill associated with one or all of the reporting units.
Quanta’s goodwill impairment assessment is performed at year-end, or more frequently if events or circumstances arise which indicate that goodwill may be impaired. For instance, a decrease in Quanta’s market capitalization below book value, a significant change in business climate or loss of a significant customer, as well as the qualitative indicators referenced above, may trigger the need for interim impairment testing of goodwill for one or all of its reporting units. The first step of the two-step fair value based test involves comparing the fair value of each of Quanta’s reporting units with its carrying value, including goodwill. If the carrying value of the reporting unit exceeds its fair value, the second step is performed. The second step compares the carrying amount of the reporting unit’s goodwill to the implied fair value of its goodwill. If the implied fair value of goodwill is less than the carrying amount, an impairment loss would be recorded as a reduction to goodwill with a corresponding charge to operating expense.
Quanta determines the fair value of its reporting units using a weighted combination of the discounted cash flow, market multiple and market capitalization valuation approaches, with heavier weighting on the discounted cash flow method, as in management’s opinion, this method currently results in the most accurate calculation of a reporting unit’s fair value. Determining the fair value of a reporting unit requires judgment and the use of significant estimates and assumptions. Such estimates and assumptions include, among others, revenue growth rates, operating margins, discount rates, weighted average costs of capital and future market conditions. Quanta believes the estimates and assumptions used in its impairment assessments are reasonable and based on available market information, but variations in any of the assumptions could result in materially different calculations of fair value and determinations of whether or not an impairment is indicated.
Under the discounted cash flow method, Quanta determines fair value based on the estimated future cash flows of each reporting unit, discounted to present value using risk-adjusted industry discount rates, which reflect the overall level of inherent risk of a reporting unit and the rate of return an outside investor would expect to earn. Cash flow projections are derived from budgeted amounts and operating forecasts (typically a one-year model) plus an estimate of later period cash flows, all of which are evaluated by management. Subsequent period cash flows are developed for each reporting unit using growth rates that management believes are reasonably likely to occur, along with a terminal value derived from the reporting unit’s earnings before interest, taxes, depreciation and amortization (EBITDA). The EBITDA multiples for each reporting unit are based on trailing twelve-month comparable industry data.
Under the market multiple and market capitalization approaches, Quanta determines the estimated fair value of each of its reporting units by applying transaction multiples to each reporting unit’s projected EBITDA and then averaging that estimate with similar historical calculations using either a one, two or three year average. For the market capitalization approach, Quanta adds a reasonable control premium, which is estimated as the premium that would be received in a sale of the reporting unit in an orderly transaction between market participants.
For recently acquired reporting units, a step one impairment test may indicate an implied fair value that is substantially similar to the reporting unit’s carrying value. Such similarities in value are generally an indication that management’s estimates of future cash flows associated with the recently acquired reporting unit remain relatively consistent with the assumptions that were used to derive its initial fair value.
During the fourth quarter of
2016
, a two-step fair-value based goodwill impairment analysis was performed for each of Quanta’s reporting units, and no reporting units were evaluated solely on a qualitative basis. Step one of the analysis indicated that the implied fair value of each of Quanta’s reporting units, other than recently acquired reporting units and the reporting units that recorded goodwill impairment charges in 2015, was substantially in excess of its carrying value.
As discussed generally above, when evaluating the
2016
step one impairment test results, management considered many factors in determining whether or not an impairment of goodwill for any reporting unit was reasonably likely to occur in future periods, including future market conditions and the economic environment in which Quanta’s reporting units were operating. Additionally, management considered the sensitivity of its fair value estimates to changes in certain valuation assumptions. After taking into account a
10%
decrease in the fair value of each of Quanta’s reporting units,
two
reporting units within Quanta’s Oil and Gas Infrastructure Division had fair values below their respective carrying values. Quanta recorded asset impairment charges
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
for these reporting units in 2015. The fair values determined in
2016
for these reporting units were consistent with the fair values determined in 2015 and approximated their current carrying values, and therefore no impairment was required. Circumstances such as market declines, unfavorable economic conditions, loss of a major customer or other factors could increase the risk of impairment of goodwill for these reporting units in future periods.
If an operating unit experiences prolonged periods of declining revenues, operating margins or both, it may be at risk of failing step one of the goodwill impairment test. Certain operating units have experienced declines over the short-term due to challenging macroeconomic conditions in certain geographic areas and low oil and natural gas prices, which have negatively impacted customer spending and resulted in project cancellations and delays. Additionally, customer capital spending has been constrained as a result of an increasingly complex regulatory and permitting environment. Certain operating units within Quanta’s Oil and Gas Infrastructure Services Division that primarily operate within the midstream and smaller-scale transmission market have continued to be negatively impacted by these factors. Goodwill and intangible assets associated with these operating units were
$72.2 million
and
$11.5 million
at
September 30, 2017
. Quanta monitors these conditions and others to determine if it is necessary to perform step one of the fair-value based impairment test for one or more operating units prior to the annual impairment assessment.
No
interim impairment charges were recorded during the
nine
months ended
September 30, 2017
. Although Quanta is not aware of circumstances that would lead to a goodwill impairment at a reporting unit currently, circumstances such as a continued market decline, the loss of a major customer or other factors could impact the valuation of goodwill in the future.
Quanta’s intangible assets include customer relationships, backlog, trade names, non-compete agreements, patented rights and developed technology, all subject to amortization. The value of customer relationships is estimated as of the date a business is acquired based on the value-in-use concept utilizing the income approach, specifically the excess earnings method. This analysis consists of discounting to present value the projected cash flows attributable to the customer relationships, with consideration given to customer contract renewals and estimated customer attrition rates, the importance of existing customer relationships to Quanta’s business plan, income taxes and required rates of return. Quanta values backlog for acquired businesses as of the acquisition date based upon the contractual nature of the backlog within each service line, discounted to present value. The value of trade names is estimated using the relief-from-royalty method of the income approach. This approach is based on the assumption that in lieu of ownership, a company would be willing to pay a royalty for use of the trade name.
Quanta amortizes intangible assets based upon the estimated consumption of their economic benefits, or on a straight-line basis if the pattern of economic benefit cannot otherwise be reliably estimated. Intangible assets subject to amortization are reviewed for impairment and are tested for recoverability whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. For instance, a significant change in business climate or a loss of a significant customer, among other things, may trigger the need for interim impairment testing of intangible assets. An impairment loss would be recognized if the carrying amount of an intangible asset is not recoverable and its carrying amount exceeds its fair value.
Investments in Affiliates and Other Entities
In the normal course of business, Quanta enters into various types of investment arrangements, each having unique terms and conditions. These investments may include equity interests held by Quanta in business entities, including general or limited partnerships, contractual joint ventures, or other forms of equity or profit participation. These investments may also include Quanta’s participation in different financing structures, such as the extension of loans to project specific entities, the acquisition of convertible notes issued by project specific entities, or other strategic financing arrangements. Quanta also enters into strategic partnerships with customers and infrastructure investors to provide fully integrated infrastructure services on certain projects, including planning and feasibility analyses, engineering, design, procurement, construction and project operation and maintenance. These projects include public-private partnerships, private infrastructure projects and concessions, along with build, own, operate and transfer and build to suit arrangements. As part of this strategy, during the nine months ended September 30, 2017, Quanta formed a partnership with select investors that provides
$1.0 billion
of capital, including
$80.0 million
from Quanta, available to invest in certain of these infrastructure projects through July 1, 2024. Wholly owned subsidiaries of Quanta serve as the general partner of this partnership and as an independently operated registered investment adviser that manages the invested capital.
Quanta determines whether investments involve a variable interest entity (VIE) based on the characteristics of the subject entity. If the entity is determined to be a VIE, then management determines if Quanta is the primary beneficiary of the entity and whether or not consolidation of the VIE is required. The primary beneficiary consolidating the VIE must normally have both (i) the power to direct the activities that most significantly affect the VIE’s economic performance and (ii) the obligation to absorb significant losses of, or the right to receive significant benefits from, the VIE. When Quanta is deemed to be the primary beneficiary, the VIE is consolidated and the other party’s equity interest in the VIE is accounted for as a non-controlling interest. In cases where Quanta determines that it has an undivided interest in the assets, liabilities, revenues and profits of an unincorporated VIE (e.g., a general partnership interest), such amounts are consolidated on a basis proportional to Quanta’s ownership interest in the
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
unincorporated entity.
Investments in entities of which Quanta is not the primary beneficiary, but over which Quanta has the ability to exercise significant influence, are accounted for using the equity method of accounting. Quanta’s share of net income or losses from unconsolidated equity investments is reported as equity in earnings (losses) of unconsolidated affiliates, which is included in “Other income (expense)” in the condensed consolidated statements of operations. Equity investments are reviewed for impairment by assessing whether any decline in the fair value of the investment below the carrying value is other than temporary. In making this determination, factors such as the ability to recover the carrying amount of the investment and the inability of the investee to sustain an earnings capacity are evaluated in determining whether a loss in value should be recognized. Any impairment losses related to investments would be recognized in equity in earnings (losses) of unconsolidated affiliates. Equity method investments are carried at original cost and are included in “Other assets, net” in the condensed consolidated balance sheets and are adjusted for Quanta’s proportionate share of the investees’ income, losses and distributions.
Quanta has a minority ownership interest in a limited partnership that was selected during 2014 to build, own and operate a new electric transmission line and two substations in Alberta, Canada. The limited partnership contracted with a Quanta subsidiary to perform the engineering, procurement and construction (EPC) services for the project, and the Quanta subsidiary recognizes revenue and related cost of services as performance progresses on the project. However, due to Quanta’s ownership interest, a proportional amount of the EPC profit is deferred until the electric transmission line and related substations are constructed and ownership of the assets is deemed to be transferred to the third party customer. The profit deferral has been recorded as a decrease to the equity method investment included in “Other assets, net” in the accompanying condensed consolidated balance sheets and as a component of equity in earnings (losses) of unconsolidated affiliates, which is included in “Other income (expense)” in the condensed consolidated statements of operations. See Notes 8 and 10 for additional disclosures related to investments.
Revenue Recognition
Quanta provides its services pursuant to master service agreements, repair and maintenance contracts and fixed price and non-fixed price installation contracts. Pricing under these contracts may be competitive unit price, cost-plus/hourly (or time and materials basis) or fixed price (or lump sum basis), and the final terms and prices of these contracts are frequently negotiated with the customer. Under unit-based contracts, the utilization of an output-based measurement is appropriate for revenue recognition, and Quanta recognizes revenue as units are completed based on pricing established with the customer for each delivered unit, which best reflects the pattern in which the obligation to the customer is fulfilled. Under cost-plus/hourly and time and materials type contracts, Quanta recognizes revenue on an input basis, as labor hours are incurred and services are performed.
Revenues from fixed price contracts are recognized using the percentage-of-completion method, measured by the percentage of costs incurred to date to total estimated costs for each contract. Such contracts provide that the customer accept completion of progress to date and compensate Quanta for services rendered, which may be measured in terms of units installed, hours expended, costs incurred to date compared to total estimated contract costs or some other measure of progress. Contract costs include all direct materials, labor and subcontract costs and those indirect costs related to contract performance, such as indirect labor, supplies, tools, repairs and depreciation costs. Much of the material associated with Quanta’s work is owner-furnished and is therefore not included in contract revenues and costs. The cost estimation process is based on professional knowledge and experience of Quanta’s engineers, project managers and financial professionals. Changes in job performance, job conditions and final contract settlements are factors that influence management’s assessment of contract value and estimated costs, and as a result, the profit recognized.
Actual revenues and project costs can vary, sometimes substantially, from previous estimates due to changes in a variety of factors including unforeseen circumstances not included in Quanta’s cost estimates or covered by its contracts for which it cannot obtain adequate compensation, including concealed or unknown environmental conditions; changes in the cost of equipment, commodities, materials or labor; unanticipated costs or claims due to customer-caused delays, customer failure to provide required materials or equipment, errors in engineering, specifications or designs, project modifications, or contract termination and Quanta’s inability to obtain reimbursement for such costs or recover on such claims; weather conditions; and quality issues requiring rework or replacement. These factors, along with other risks inherent in performing fixed price contracts may cause actual revenues and gross profits for a project to differ from previous estimates and could result in reduced profitability or losses on projects. Changes in these factors may result in revisions to costs and income, and their effects are recognized in the period in which the revisions are determined. These factors are routinely evaluated on a project-by-project basis throughout the project term, and the impact of corresponding revisions in management’s estimates of contract value, contract cost and contract profit are recorded as necessary in the period in which the revisions are determined. Provisions for losses on uncompleted contracts are made in the period in which such losses are determined to be probable and the amount can be reasonably estimated.
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
Quanta’s operating results for the three and
nine
months ended
September 30, 2017
were impacted by less than
5%
as a result of aggregate changes in contract estimates related to projects that were in progress at the beginning of the respective periods. Quanta’s operating results for the three months ended
September 30, 2016
were positively impacted by
6.3%
as a result of aggregate changes in contract estimates related to projects that were in progress at
June 30, 2016
, primarily due to the aggregate positive impact of numerous individually immaterial changes in estimates, which was generally due to better than expected performance. Quanta’s operating results for the
nine
months ended
September 30, 2016
were impacted by less than
5%
as a result of aggregate changes in contract estimates related to projects that were in progress at
December 31, 2015
. However, operating results for the three and
nine
months ended
September 30, 2016
included losses of
$3.0 million
and
$54.8 million
on a power plant construction project in Alaska due to performance issues that increased the estimated costs of the project. This project was substantially completed during the fourth quarter of 2016. The losses on this project were partially offset by the aggregate positive impact of numerous individually immaterial changes in profitability generally due to better than expected performance on projects that were in progress at
December 31, 2015
.
The current asset “Costs and estimated earnings in excess of billings on uncompleted contracts” represents revenues recognized in excess of amounts billed for contracts accounted for under the percentage-of-completion method. The current liability “Billings in excess of costs and estimated earnings on uncompleted contracts” represents billings in excess of revenues recognized for contracts accounted for under the percentage-of-completion method.
Quanta may incur costs subject to change orders, whether approved or unapproved by the customer, and/or claims related to certain contracts. Quanta determines the probability that such costs will be recovered based upon evidence such as past practices with the customer, specific discussions or preliminary negotiations with the customer or verbal approvals. Quanta treats items as costs of contract performance in the period incurred if it is not probable that the costs will be recovered or will recognize revenue if it is probable that the contract price will be adjusted and can be reliably estimated.
As of
September 30, 2017
and
December 31, 2016
, Quanta recognized revenues of
$115.5 million
and
$137.8 million
related to change orders and/or claims that were in the process of being negotiated in the normal course of business.
These aggregate contract price adjustments represent management’s best estimate of additional contract revenues which have been earned and which management believes are probable of collection. The amounts ultimately realized by Quanta upon final acceptance by its customers could be higher or lower than such estimated amounts; however, such amounts cannot currently be estimated.
Income Taxes
Quanta follows the liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recorded for future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that are expected to be in effect when the underlying assets or liabilities are recovered or settled.
Quanta regularly evaluates valuation allowances established for deferred tax assets for which future realization is uncertain. The estimation of required valuation allowances includes estimates of future taxable income. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Quanta considers projected future taxable income and tax planning strategies in making this assessment. If actual future taxable income differs from these estimates, Quanta may not realize deferred tax assets to the extent estimated.
Quanta records reserves for income taxes related to certain tax positions in those instances where Quanta considers it more likely than not that additional taxes may be due in excess of amounts reflected on income tax returns filed. When recording reserves for expected tax consequences of uncertain positions, Quanta assumes that taxing authorities have full knowledge of the position and all relevant facts. Quanta continually reviews exposure to additional tax obligations, and as further information is known or events occur, changes in tax reserves may be recorded. To the extent interest and penalties may be assessed by taxing authorities on any underpayment of income tax, such amounts have been accrued and included in the provision for income taxes.
As of
September 30, 2017
, the total amount of unrecognized tax benefits relating to uncertain tax positions was
$31.8 million
,
a
decrease
from
December 31, 2016
of
$3.4 million
. This
decrease
in unrecognized tax benefits resulted primarily from a
$6.2 million
decrease in reserves for uncertain tax positions resulting from the expiration of statute of limitations periods, partially offset by tax positions to be taken for
2017
. Although the Internal Revenue Service completed its examination related to tax years 2010, 2011 and 2012 during the year ended
December 31, 2016
, certain subsidiaries remain under examination by various U.S. state, Canadian and other foreign tax authorities for multiple periods. Quanta believes it is reasonably possible that within the next 12 months unrecognized tax benefits may decrease by up to
$13.7 million
as a result of settlement of these examinations or as a
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
result of the expiration of certain statute of limitations periods.
U.S. federal and state and foreign income tax laws and regulations are voluminous and are often ambiguous. As such, Quanta is required to make many subjective assumptions and judgments regarding its tax positions that could materially affect amounts recognized in its future consolidated balance sheets, consolidated statements of operations and consolidated statements of comprehensive income.
Earnings Per Share
Basic and diluted earnings per share attributable to common stock are computed using the weighted average number of common shares outstanding during the periods. Exchangeable shares that were issued pursuant to certain of Quanta’s historical acquisitions (as further discussed in Note 8), which are exchangeable on a one-for-one basis with shares of Quanta common stock, have been included in the calculation of weighted average shares outstanding for basic and diluted earnings per share attributable to common stock for the portion of the periods that they were outstanding. Additionally, unvested stock-based awards that contain non-forfeitable rights to dividends or dividend equivalents (participating) have been included in the calculation of basic and diluted earnings per share attributable to common stock for the portion of the periods that they were outstanding. Diluted earnings per share attributable to common stock is computed using the weighted average number of common shares outstanding during the period adjusted for all potentially dilutive common stock equivalents, except in cases where the effect of the common stock equivalents would be antidilutive.
Self-Insurance
Quanta is insured for employer’s liability, workers’ compensation, auto liability and general liability claims. Under these programs, the deductible for employer’s liability is
$1.0 million
per occurrence, the deductible for workers’ compensation is
$5.0 million
per occurrence, and the deductibles for auto liability and general liability are
$10.0 million
per occurrence. Quanta is generally self-insured for all claims that do not exceed the amount of the applicable deductible. Quanta also has employee health care benefit plans for most employees not subject to collective bargaining agreements, of which the primary plan is subject to a deductible of
$0.4 million
per claimant per year.
Losses under all of these insurance programs are accrued based upon Quanta’s estimate of the ultimate liability for claims reported and an estimate of claims incurred but not reported, with assistance from third-party actuaries. These insurance liabilities are difficult to assess and estimate due to unknown factors, including the severity of an injury, the extent of damage, the determination of Quanta’s liability in proportion to other parties and the number of incidents not reported. The accruals are based upon known facts and historical trends, and management believes such accruals are adequate.
Collective Bargaining Agreements
Some of Quanta’s operating units are parties to various collective bargaining agreements with unions that represent certain of their employees. The collective bargaining agreements expire at various times and have typically been renegotiated and renewed on terms similar to those in the expiring agreements. The agreements require the operating units to pay specified wages, provide certain benefits to their union employees and contribute certain amounts to multiemployer pension plans and employee benefit trusts. Quanta’s multiemployer pension plan contribution rates generally are specified in the collective bargaining agreements (usually on an annual basis), and contributions are made to the plans on a “pay-as-you-go” basis based on its union employee payrolls. The location and number of union employees that Quanta employs at any given time and the plans in which they may participate vary depending on the projects Quanta has ongoing at that time and the need for union resources in connection with those projects. Therefore, Quanta is unable to accurately predict the union employee payroll and the amount of the resulting multiemployer pension plan contribution obligation for future periods.
Stock-Based Compensation
Quanta recognizes compensation expense for restricted stock, restricted stock units (RSUs) and performance units to be settled in common stock based on the fair value of the awards at the date of grant, net of estimated forfeitures. The fair value of these awards is generally determined based on the number of shares or units granted and the closing price of Quanta’s common stock on the date of grant; however, the fair value of performance units with market-based metrics is determined using a Monte Carlo simulation valuation methodology. An estimate of future forfeitures, based on historical data, is utilized to determine the period expense. Such estimates are subject to change and may impact the value that will ultimately be recognized as compensation expense. The resulting compensation expense for performance unit and time-based RSU awards is recognized on a straight-line basis over the requisite service period, which is generally the vesting period, and the resulting compensation expense for performance-based RSU awards is recognized using the graded vesting method over the requisite service period. The compensation
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
expense related to performance units can also vary from period to period based on changes in the total number of performance units that Quanta anticipates will vest. Payments made by Quanta to satisfy employee tax withholding obligations associated with awards settled in common stock are classified as financing cash flows.
Compensation expense associated with liability-based awards, such as RSUs that are expected to or may settle in cash, is recognized based on a remeasurement of the fair value of the award at the end of each reporting period. Upon settlement, the holders receive for each RSU an amount in cash equal to the fair market value on the settlement date of
one
share of Quanta common stock, as specified in the applicable award agreement. For additional information on Quanta’s restricted stock, RSU and performance unit awards, see Note 9.
Functional Currency and Translation of Financial Statements
The U.S. dollar is the functional currency for the majority of Quanta’s operations, which are primarily located within the United States. The functional currency for Quanta’s foreign operations, which are primarily located in Canada and Australia, is typically the currency of the country where the foreign operating unit is located and transacts the majority of its activities, including billings, financing, payroll and other expenditures. The treatment of foreign currency translation gains or losses is dependent upon management’s determination of the functional currency, and when preparing the consolidated financial statements, Quanta translates the financial statements of its foreign operating units from their functional currency into U.S. dollars. Statements of operations, comprehensive income and cash flows are translated at average monthly rates, while balance sheets are translated at month-end exchange rates. The translation of the balance sheet results in translation gains or losses, which are included as a separate component of equity under “Accumulated other comprehensive income (loss).” Gains and losses arising from transactions not denominated in functional currencies are included within “Other income (expense)” in the condensed consolidated statements of operations.
Comprehensive Income
Components of comprehensive income include all changes in equity during a period except those resulting from changes in Quanta’s capital-related accounts. Quanta records other comprehensive income (loss) for foreign currency translation adjustments related to its foreign operations and for other revenues, expenses, gains and losses that are included in comprehensive income but excluded from net income.
Litigation Costs and Reserves
Quanta records reserves when the likelihood of incurring a loss is probable and the amount of loss can be reasonably estimated. Costs incurred for litigation are expensed as incurred. Further details are presented in Note 10.
Fair Value Measurements
For disclosure purposes, qualifying assets and liabilities are categorized into three broad levels based on the priority of the inputs used to determine their fair values. The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). Certain assumptions and other information as they relate to these qualifying assets and liabilities are described below.
Contingent Consideration Liabilities.
As of
September 30, 2017
and
December 31, 2016
, financial instruments required to be measured at fair value on a recurring basis consisted primarily of Quanta’s acquisition-related contingent consideration liabilities, which represent the estimated fair value of future amounts payable to the former owners of acquired businesses. Payment of such consideration is contingent on the future financial performance of the acquired businesses, and the fair value of such consideration is estimated by management based on entity-specific assumptions that are evaluated on an ongoing basis. As of
September 30, 2017
and
December 31, 2016
, the fair value of these contingent consideration liabilities totaled
$70.9 million
and
$19.5 million
, all of which was included in “Insurance and other non-current liabilities” on Quanta’s condensed consolidated balance sheet and none of which was earned as of such dates.
The fair values of the contingent consideration liabilities as of
September 30, 2017
were determined using a Monte Carlo simulation valuation methodology based on probability-weighted financial performance projections and other inputs, including a discount rate and an expected volatility factor for each acquisition. The discount rates ranged from
1.1%
to
1.8%
depending on the settlement methods available and are generally based on a risk-free rate and/or Quanta’s cost of debt. The expected volatility factors ranged from
25.0%
to
29.6%
based on historical asset volatility of selected guideline public companies. The fair value determinations incorporate significant inputs not observable in the market. Accordingly, the level of inputs used for these fair value measurements is the lowest level (Level 3). Significant changes in any of these assumptions could result in a significantly higher or lower potential liability. Quanta expects a significant portion of these liabilities to be settled by late 2020 or early 2021.
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
The majority of Quanta’s contingent consideration liabilities are subject to a maximum payment amount, which aggregated to
$139.5 million
as of
September 30, 2017
. One contingent consideration liability is not subject to a maximum payout amount, and the fair value of that liability was
$1.0 million
as of
September 30, 2017
.
Quanta’s aggregate contingent consideration liabilities can change due to additional business acquisitions, payments to settle outstanding liabilities, changes in the fair value of amounts owed, and foreign currency translation gains or losses. During the three and
nine
months ended
September 30, 2017
, the acquisition of Stronghold increased Quanta’s contingent consideration liabilities by
$51.1 million
. During the three and
nine
months ended
September 30, 2016
, acquisitions increased Quanta’s contingent consideration liabilities by
$3.3 million
and
$18.7 million
. Quanta made
no
payments related to contingent consideration during the three and
nine
months ended
September 30, 2017
and
no
payments and a nominal payment during the three and
nine
months ended
September 30, 2016
. Fair value adjustments will be reflected in operating income on Quanta’s condensed consolidated statements of operations.
No
changes in the fair value of Quanta’s contingent consideration liabilities have occurred during the three and
nine
months ended
September 30, 2017
and
2016
.
Intangible Assets.
In connection with Quanta’s acquisitions, identifiable intangible assets acquired typically include goodwill, backlog, customer relationships, trade names, covenants not-to-compete, patented rights and developed technology. Quanta utilizes the fair value premise as the primary basis for its valuation procedures, which is a market-based approach to determine the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. Quanta periodically engages the services of an independent valuation firm when a new business is acquired to assist management with this valuation process, including assistance with the selection of appropriate valuation methodologies and the development of market-based valuation assumptions. Based on these considerations, management utilizes various valuation methods, including an income approach, a market approach and a cost approach, to determine the fair value of intangible assets acquired based on the appropriateness of each method in relation to the type of asset being valued. The assumptions used in these valuation methods are analyzed and compared, where possible, to available market data, such as industry-based weighted average costs of capital and discount rates, trade name royalty rates, public company valuation multiples and recent market acquisition multiples. In accordance with its annual impairment test during the quarter ended
December 31, 2016
, the carrying amounts of such assets, including goodwill, were compared to their fair values. The level of inputs used for these fair value measurements is the lowest level (Level 3). Quanta uses the assistance of third party specialists to develop valuation assumptions. Quanta believes that these valuation methods appropriately represent the methods that would be used by other market participants in determining fair value.
Investments and Financing Instruments.
Quanta also uses fair value measurements in connection with the valuation of its investments in private company equity interests and financing instruments. These valuations require significant management judgment due to the absence of quoted market prices, the inherent lack of liquidity and the long-term nature of such assets. Typically, the initial costs of these investments are considered to represent fair market value, as such amounts are negotiated between willing market participants. On a quarterly basis, Quanta performs an evaluation of its investments to determine if an other-than-temporary decline in the value of each investment has occurred and whether the recorded amount of each investment will be realizable. If an other-than-temporary decline in the value of an investment occurs, a fair value analysis would be performed to determine the degree to which the investment was impaired and a corresponding charge to earnings would be recorded during the period. These types of fair market value assessments are similar to other nonrecurring fair value measures used by Quanta, which include the use of significant judgment and available relevant market data. Such market data may include observations of the valuation of comparable companies, risk adjusted discount rates and an evaluation of the expected performance of the underlying portfolio asset, including historical and projected levels of profitability or cash flows. In addition, a variety of additional factors may be reviewed by management, including, but not limited to, contemporaneous financing and sales transactions with third parties, changes in market outlook and the third-party financing environment.
Other.
The carrying values of cash equivalents, accounts receivable and accounts payable and accrued expenses approximate fair value due to the short-term nature of these instruments. The carrying value of variable rate debt also approximates fair value. All of Quanta’s cash equivalents were categorized as Level 1 assets at
September 30, 2017
and
December 31, 2016
, as all values were based on unadjusted quoted prices for identical assets in an active market that Quanta has the ability to access.
|
|
3.
|
NEW ACCOUNTING PRONOUNCEMENTS:
|
Adoption of New Accounting Pronouncements
In
July 2015
, the FASB issued an update that requires
inventory
to be measured at the lower of either cost or net realizable value. When evidence exists that the net realizable value of inventory is lower than its cost, the difference will be recognized as a loss in earnings in the period in which it occurs. Quanta adopted this guidance effective
January 1, 2017
, and the adoption of the update did not have a significant impact on Quanta’s consolidated financial statements or related disclosures.
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
In
March 2016
, the FASB issued an update that amends the accounting for
share-based payments
in several key areas, including the treatment and cash flow presentation of tax effects related to the settlement of share-based payments and the accounting for forfeitures of share-based awards. The new guidance requires companies with share-based payments to record all related tax effects at settlement (or expiration) through income tax expense on the statement of operations rather than through additional paid-in capital (APIC) within equity. This update also requires excess tax benefits to be classified as an operating activity on the statement of cash flows rather than reclassified as a financing activity and requires cash paid by an employer when withholding shares for the employee portion of taxes to be presented as a financing activity. The update also allows companies to either account for forfeitures of share-based payments as they occur or to estimate forfeitures. This guidance is required to be applied prospectively except for the classification of cash related to tax withholding, which requires retrospective application. Quanta adopted this guidance effective
January 1, 2017
and will continue to estimate forfeitures of share-based payments. Quanta anticipates increased volatility of income tax expense after adoption of this guidance, and during the three and
nine
months ended
September 30, 2017
recorded income tax benefits of
$0.1 million
and
$5.1 million
related to the settlement of share-based awards. APIC was not adjusted for amounts recorded prior to 2017, and therefore Quanta’s retained earnings were not affected by the adoption of this guidance. Additionally,
$0.3 million
and
$7.5 million
were reclassified from operating activities to financing activities on the statements of cash flows for the three and
nine
months ended
September 30, 2016
associated with cash paid by Quanta to satisfy tax withholding obligations for share-settled awards. Further, the presentation of excess tax benefits on the statements of cash flows is now shown as cash flows from operating activities rather than in financing activities. The excess tax benefits reclassified to operating activities for the three and
nine
months ended
September 30, 2016
were
$0.5 million
and
$0.7 million
.
In
October 2016
, the FASB issued an update that amends the consolidation guidance related to how a reporting entity that is the single decision maker of a
VIE
should treat indirect interests in the VIE held through related parties that are under common control with the reporting entity when determining whether it is the primary beneficiary of a VIE. A reporting entity has an indirect interest in a VIE if it has a direct interest in a related party that, in turn, has a direct interest in the VIE. Quanta adopted this guidance on
January 1, 2017
, and the adoption of the update did not have a significant impact on its consolidated financial statements or related disclosures.
Accounting Standards Not Yet Adopted
In
May 2014
, the FASB issued an update that supersedes most current
revenue recognition
guidance, as well as some cost recognition guidance. The update requires that the recognition of revenue related to the transfer of goods or services to customers reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This update also requires new qualitative and quantitative disclosures about the nature, amount, timing and uncertainty of revenues and cash flows arising from customer contracts, including significant judgments and changes in judgments, information about contract balances and performance obligations, and assets recognized from costs incurred to obtain or fulfill a contract. The new guidance is effective for fiscal years beginning on or after
December 15, 2017
and can be applied on a full retrospective or modified retrospective basis, whereby the entity records a cumulative effect of initially applying this update at the date of initial application.
Quanta is currently evaluating the potential impact of this update on its consolidated financial statements and is planning to adopt the update using the modified retrospective transition method effective
January 1, 2018
, which will result in a cumulative-effect adjustment recorded in retained earnings. Quanta has evaluated the impact of this update on a sample of contracts expected to be representative of the population of contracts that will generate revenues in 2018 and based on the sample results does not expect the update to materially affect its results of operations, financial position or cash flows. Quanta has begun evaluating the impact of this update on the remainder of its contracts that are anticipated to generate revenues in 2018 and is in the process of implementing changes to its processes and controls to meet the reporting and disclosure requirements of this update.
In
January 2016
, the FASB issued an update that addresses certain aspects of recognition, measurement, presentation, and disclosure of
financial instruments
to provide users of financial statements with more decision-useful information. The new standard is effective for interim and annual periods beginning after
December 15, 2017
. Quanta is evaluating the impact of the new standard on its consolidated financial statements and will adopt the new standard by
January 1, 2018
.
In
February 2016
, the FASB issued an update that requires companies to recognize on the balance sheet the contractual right to use assets and liabilities corresponding to the rights and obligations created by
lease
contracts. The new standard is effective for interim and annual periods beginning after
December 15, 2018
. While Quanta continues to evaluate the effect of the standard on its consolidated financial statements, it is anticipated that the adoption of the standard will materially impact its statement of financial position.
In
June 2016
, the FASB issued an update that will change the way companies measure
credit losses
for most financial assets and certain other instruments that are not measured at fair value through net income. The update will require companies to use an
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
“expected loss” model for instruments measured at amortized cost and to record allowances for available-for-sale debt securities rather than reduce the carrying amounts. The update will also require disclosure of information regarding how a company developed its allowance, including changes in the factors that influenced management’s estimate of expected credit losses and the reasons for those changes. Companies will apply this standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. The new standard is effective for interim and annual reporting periods beginning after
December 15, 2019
. Quanta is currently evaluating the potential impact of this authoritative guidance on its consolidated financial statements and will adopt this guidance by
January 1, 2020
.
In
August 2016
, the FASB issued an update intended to standardize the classification of certain transactions on the statement of
cash flows
. These transactions include contingent consideration payments made after a business combination, proceeds from the settlement of corporate-owned life insurance policies and distributions received from equity method investments. The new standard is effective for interim and annual reporting periods beginning after
December 15, 2017
and requires application using a retrospective transition method. Quanta is currently evaluating the potential impact of this authoritative guidance on its consolidated financial statements and will adopt this guidance by
January 1, 2018
.
In
October 2016
, the FASB issued an update that will require a reporting entity to recognize the
tax
expense from the sale of an asset in the seller’s tax jurisdiction when the transfer occurs, even though the pre-tax effects of that transaction are eliminated in consolidation. Any deferred tax asset that arises in the buyer’s jurisdiction would also be recognized at the time of the transfer. The new guidance will not apply to intra-entity transfers of inventory. The income tax consequences from the sale of inventory from one member of a consolidated entity to another will continue to be deferred until the inventory is sold to a third party. The new standard is effective for interim and annual reporting periods beginning after
December 15, 2017
. The modified retrospective method will be required for transition to the new guidance, with a cumulative-effect adjustment recorded in retained earnings as of the beginning of the period of adoption. Quanta is currently evaluating the potential impact of this authoritative guidance on its consolidated financial statements and will adopt this guidance by
January 1, 2018
.
In
November 2016
, the FASB issued an update intended to standardize the classification of restricted cash and cash equivalents transactions on the statement of
cash flows
. The new standard is effective for interim and annual reporting periods beginning after
December 15, 2017
. The retrospective transition method will be required for this new guidance. Quanta is currently evaluating the impact of this authoritative guidance on its consolidated financial statements and will adopt this guidance by
January 1, 2018
.
In
January 2017
, the FASB issued an update intended to clarify whether transactions should be accounted for as acquisitions or disposals of assets or businesses. When substantially all of the fair value of the gross assets acquired or disposed of is concentrated in a single identifiable asset or group of similar identifiable assets, the asset or group is not a business. The update will require, among other things, that to be considered a business, a set of assets and activities must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create output. Additionally, the update will remove the evaluation of whether a market participant could replace missing elements in order to consider the set of assets and activities a business, will provide more stringent criteria for sets without outputs and will narrow the definition of output. The new standard is effective for interim and annual reporting periods beginning after
December 15, 2017
and the prospective transition method will be required for this new guidance. Quanta is currently evaluating the potential impact of this authoritative guidance on its consolidated financial statements and will adopt this guidance by
January 1, 2018
.
Also in
January 2017
, the FASB issued an update intended to simplify the subsequent measurement of
goodwill
by eliminating the second step in the current two-step goodwill impairment test. The update will require an entity to perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity will recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, if applicable. Additionally, the update will eliminate the requirement that a reporting unit with a zero or negative carrying amount perform a qualitative assessment and the second step of the two-step goodwill impairment test and will instead require disclosure of the amount of goodwill allocated to each reporting unit with a zero or negative carrying amount of net assets. This update is effective for interim and annual reporting periods beginning after
December 15, 2019
. The prospective transition method will be required for this new guidance. Quanta is currently evaluating the potential impact of this authoritative guidance on its consolidated financial statements and will adopt this guidance by
January 1, 2020
.
In
May 2017
, the FASB issued an update providing guidance about which changes to the terms or conditions of a
share-based payment
award require an entity to apply modification accounting. A modification should be accounted for unless the following characteristics of the award are unchanged: the fair value, the vesting conditions and the classification as an equity instrument or a liability instrument. The update is effective for interim and annual periods beginning after
December 15, 2017
and
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
is required to be applied prospectively. Quanta is evaluating the impact of the new accounting standard on its consolidated financial statements and will adopt the new standard by
January 1, 2018
.
In
August 2017
, the FASB issued an update which amends and simplifies existing guidance for presenting the economic effects of risk management activities in the financial statements. The update is effective for interim and annual periods beginning after
December 15, 2018
. The amended presentation and disclosure guidance is required only prospectively, but certain amendments, if applicable, could require a cumulative-effect adjustment. Quanta is evaluating the impact of this new standard on its consolidated financial statements and will adopt the new standard by
January 1, 2019
; however, as of
September 30, 2017
, Quanta had no
hedging
relationships outstanding.
On July 20, 2017, Quanta acquired Stronghold, a specialized services business located in the United States that provides high-pressure and critical-path solutions to the downstream and midstream energy markets. The aggregate consideration paid at closing for this acquisition was
$360.0 million
in cash and
2,693,680
shares of Quanta common stock, which had a fair value of approximately
$81.3 million
at the date of acquisition. Additionally, the acquisition includes the potential payment of up to
$100.0 million
of contingent consideration, payable if the acquired business achieves certain financial targets over a
three
-year period. Based on the estimated fair value of this contingent consideration, Quanta recorded a
$51.1 million
liability as of the date of acquisition. The results of the acquired business have generally been included in Quanta’s Oil and Gas Infrastructure Services segment and consolidated financial statements since the date of acquisition.
During the nine months ended September 30, 2017, Quanta also completed
two
other acquisitions, which included a communications infrastructure services contractor and an electrical and communications contractor, both located in the United States. The aggregate consideration for these acquisitions consisted of
$11.9 million
paid or payable in cash, subject to certain adjustments, and
288,666
shares of Quanta common stock, with a value of
$8.3 million
as of the respective acquisition dates. The results of the acquired businesses have generally been included in Quanta’s Electric Power Infrastructure Services segment and consolidated financial statements since the respective dates of acquisition.
During
2016
, Quanta completed
five
acquisitions. The results of
four
of the acquired companies are generally included in Quanta’s Electric Power Infrastructure Services segment. These companies included an electrical infrastructure services company located in Australia, a utility contracting company located in Canada, a full service medium- and high-voltage powerline contracting company located in the United States and a communications services company located in Canada. Quanta also acquired a pipeline service contractor located in the United States, the results of which are generally included in Quanta’s Oil and Gas Infrastructure Services segment. The aggregate consideration for these acquisitions consisted of
$75.9 million
paid or payable in cash, subject to certain adjustments,
70,840
shares of Quanta common stock valued at
$1.5 million
as of the settlement date of the applicable acquisition, and contingent consideration payments of up to
$39.5 million
, payable if financial targets are achieved by certain of the acquired businesses. Based on the estimated fair value of this contingent consideration, Quanta recorded a total of
$18.7 million
in liabilities as of the applicable dates of acquisition. The results of the acquired businesses have been included in Quanta’s consolidated financial statements since the respective dates of acquisition.
Quanta is in the process of finalizing its assessments of the fair values of the acquired assets and assumed liabilities related to businesses acquired subsequent to
September 30, 2016
, and further adjustments to the purchase price allocations may occur. As of
September 30, 2017
, the estimated fair values of the net assets acquired and the estimated contingent consideration liabilities were preliminary, with possible updates primarily related to certain tax estimates, property and equipment, other intangible assets and the fair value of contingent consideration. The aggregate purchase consideration of the businesses acquired subsequent to
September 30, 2016
through
September 30, 2017
was preliminarily allocated to acquired assets and assumed liabilities, which resulted in a preliminary allocation of
$97.4 million
to net tangible assets,
$103.8 million
to identifiable intangible assets and
$311.4 million
to goodwill.
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
The following table summarizes the aggregate consideration paid or payable as of
September 30, 2017
for the
2017
acquisitions and
2016
acquisitions and presents the allocation of these amounts to the net tangible and identifiable intangible assets based on their estimated fair values as of the respective acquisition dates, inclusive of any purchase price adjustments. This allocation requires a significant use of estimates and is based on information that was available to management at the time these consolidated financial statements were prepared (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
Stronghold
|
|
Other Acquisitions
|
|
All Acquisitions
|
Consideration:
|
|
|
|
|
|
Cash paid or payable
|
$
|
360,009
|
|
|
$
|
11,904
|
|
|
$
|
75,941
|
|
Value of Quanta common stock issued
|
81,337
|
|
|
8,267
|
|
|
1,508
|
|
Contingent consideration
|
51,084
|
|
|
—
|
|
|
18,683
|
|
Fair value of total consideration transferred or estimated to be transferred
|
$
|
492,430
|
|
|
$
|
20,171
|
|
|
$
|
96,132
|
|
|
|
|
|
|
|
Accounts receivable
|
$
|
77,478
|
|
|
$
|
7,157
|
|
|
$
|
14,414
|
|
Costs and estimated earnings in excess of billings on uncompleted contracts
|
22,496
|
|
|
193
|
|
|
1,237
|
|
Other current assets
|
20,914
|
|
|
170
|
|
|
8,582
|
|
Property and equipment
|
51,258
|
|
|
1,480
|
|
|
44,863
|
|
Other assets
|
1,513
|
|
|
12
|
|
|
2,553
|
|
Identifiable intangible assets
|
95,700
|
|
|
8,091
|
|
|
11,467
|
|
Current liabilities
|
(82,418
|
)
|
|
(2,798
|
)
|
|
(12,097
|
)
|
Deferred tax liabilities, net
|
—
|
|
|
—
|
|
|
(13,484
|
)
|
Other long-term liabilities
|
(48
|
)
|
|
—
|
|
|
(5,326
|
)
|
Total identifiable net assets
|
186,893
|
|
|
14,305
|
|
|
52,209
|
|
Goodwill
|
305,537
|
|
|
5,866
|
|
|
43,923
|
|
|
$
|
492,430
|
|
|
$
|
20,171
|
|
|
$
|
96,132
|
|
Goodwill represents the excess of the purchase price over the net amount of the fair values assigned to assets acquired and liabilities assumed. The
2017
and
2016
acquisitions strategically expanded Quanta’s Canadian, Australian and domestic electric power, oil and gas and communications service offerings, which Quanta believes contributes to the recognition of the goodwill. In connection with the
2017
acquisitions, as of the acquisition dates, goodwill of
$5.9 million
was recorded for the acquired businesses that were included within Quanta’s Electric Power Infrastructure Services Division, and goodwill of
$305.5 million
was recorded for Stronghold, which is included within Quanta’s Oil and Gas Infrastructure Services Division. In connection with the
2016
acquisitions, as of the acquisition dates and inclusive of purchase price adjustments, goodwill of
$23.6 million
was recorded for the acquired businesses included within Quanta’s Electric Power Infrastructure Services Division and goodwill of
$20.3 million
was recorded for the acquired business included within Quanta’s Oil and Gas Infrastructure Services Division. Goodwill of
$311.4 million
and
$2.0 million
related to the
2017
acquisitions and
2016
acquisitions is expected to be deductible for income tax purposes.
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
The following table summarizes the estimated fair values of identifiable intangible assets for the
2017
acquisitions as of the acquisition dates and the related weighted average amortization periods by type (in thousands, except for weighted average amortization periods, which are in years).
|
|
|
|
|
|
|
|
Estimated
|
|
Weighted Average
|
|
Fair Value at
|
|
Amortization Period in Years
|
|
Acquisition Dates
|
|
at Acquisition Dates
|
Customer relationships
|
$
|
76,213
|
|
|
6.8
|
Backlog
|
333
|
|
|
2.0
|
Trade names
|
18,815
|
|
|
15.0
|
Non-compete agreements
|
8,430
|
|
|
5.0
|
Total intangible assets subject to amortization acquired in 2017 acquisitions
|
$
|
103,791
|
|
|
8.1
|
The unaudited supplemental pro forma results of operations have been provided for illustrative purposes only and do not purport to be indicative of the actual results that would have been achieved by the combined companies for the periods presented or that may be achieved by the combined companies in the future. Future results may vary significantly from the results reflected in the following pro forma financial information because of future events and transactions, as well as other factors (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
September 30,
|
|
September 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Revenues
|
$
|
2,631,137
|
|
|
$
|
2,174,123
|
|
|
$
|
7,234,193
|
|
|
$
|
5,970,857
|
|
Gross profit
|
$
|
355,830
|
|
|
$
|
331,409
|
|
|
$
|
978,446
|
|
|
$
|
796,989
|
|
Selling, general and administrative expenses
|
$
|
205,025
|
|
|
$
|
184,014
|
|
|
$
|
614,819
|
|
|
$
|
541,328
|
|
Amortization of intangible assets
|
$
|
10,022
|
|
|
$
|
11,576
|
|
|
$
|
29,926
|
|
|
$
|
34,696
|
|
Net income from continuing operations
|
$
|
89,839
|
|
|
$
|
75,866
|
|
|
$
|
205,344
|
|
|
$
|
118,853
|
|
Net income from continuing operations attributable to common stock
|
$
|
89,303
|
|
|
$
|
75,456
|
|
|
$
|
204,112
|
|
|
$
|
117,913
|
|
|
|
|
|
|
|
|
|
Earnings per share from continuing operations:
|
|
|
|
|
|
|
|
Basic
|
$
|
0.56
|
|
|
$
|
0.48
|
|
|
$
|
1.29
|
|
|
$
|
0.73
|
|
Diluted
|
$
|
0.56
|
|
|
$
|
0.48
|
|
|
$
|
1.28
|
|
|
$
|
0.73
|
|
The pro forma combined results of operations for the three and
nine
months ended
September 30,
2017
and
2016
were prepared by adjusting the historical results of Quanta to include the historical results of the
2017
acquisitions as if they occurred January 1,
2016
and the historical results of the
2016
acquisitions as if they occurred January 1,
2015
. These pro forma combined historical results were adjusted for the following: a reduction of interest expense as a result of the repayment of outstanding indebtedness of the acquired businesses; a reduction of interest income or an increase in interest expense as a result of the cash consideration paid net of cash received; an increase in amortization expense due to the incremental intangible assets recorded; changes in depreciation expense within cost of services to adjust acquired property and equipment to the acquisition date fair value and to conform with Quanta’s accounting policies; an increase in the number of outstanding shares of Quanta common stock; and reclassifications to conform the acquired companies’ presentation to Quanta’s accounting policies. The pro forma results of operations do not include any adjustments to eliminate the impact of acquisition-related costs or any cost savings or other synergies that resulted or may result from the acquisitions. As noted above, the pro forma results of operations do not purport to be indicative of the actual results that would have been achieved by the combined company for the periods presented or that may be achieved by the combined company in the future.
Revenues of approximately
$87.2 million
and
a loss
from continuing operations before income taxes of approximately
$6.4 million
, which included
$3.2 million
of acquisition-related costs, were included in Quanta’s consolidated results of operations for the three months ended
September 30,
2017
related to the 2017 acquisitions. Revenues of approximately
$89.4 million
and
a loss
from continuing operations before income taxes of approximately
$8.2 million
, which included
$5.4 million
of acquisition-related
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
costs, were included in Quanta’s consolidated results of operations for the
nine
months ended
September 30,
2017
related to the 2017 acquisitions.
5. GOODWILL AND OTHER INTANGIBLE ASSETS:
A summary of changes in Quanta’s goodwill is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Electric Power Infrastructure Services
Division
|
|
Oil and Gas Infrastructure Services
Division
|
|
Total
|
Balance at December 31, 2016:
|
|
|
|
|
|
Goodwill
|
$
|
1,253,979
|
|
|
$
|
388,923
|
|
|
$
|
1,642,902
|
|
Accumulated impairment
|
—
|
|
|
(39,733
|
)
|
|
(39,733
|
)
|
|
1,253,979
|
|
|
349,190
|
|
|
1,603,169
|
|
|
|
|
|
|
|
Goodwill acquired during 2017
|
5,866
|
|
|
305,537
|
|
|
311,403
|
|
Purchase price allocation adjustments
|
(619
|
)
|
|
(659
|
)
|
|
(1,278
|
)
|
Foreign currency translation adjustments
|
14,767
|
|
|
8,984
|
|
|
23,751
|
|
|
|
|
|
|
|
Balance at September 30, 2017:
|
|
|
|
|
|
Goodwill
|
1,273,993
|
|
|
703,918
|
|
|
1,977,911
|
|
Accumulated impairment
|
—
|
|
|
(40,866
|
)
|
|
(40,866
|
)
|
|
$
|
1,273,993
|
|
|
$
|
663,052
|
|
|
$
|
1,937,045
|
|
Adjustments primarily represent changes in deferred tax liability estimates and would not have had a material impact on the consolidated financial statements in prior periods had these adjustments been booked at the respective acquisition dates.
Also, as described in Note 2, Quanta’s operating units are organized into one of Quanta’s
two
internal divisions, and accordingly the goodwill associated with the operating units has been aggregated on a divisional basis in the table above. These divisions are closely aligned with Quanta’s reportable segments, and operating units are assigned to a division based on the predominant type of work performed. From time to time, an operating unit may be reorganized between divisions if its predominant business evolves.
Quanta’s intangible assets subject to amortization and the remaining weighted average amortization periods related to such assets were as follows (in thousands except for weighted average amortization periods, which are in years):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
As of
|
|
As of
|
|
September 30, 2017
|
|
December 31, 2016
|
|
September 30, 2017
|
|
Intangible
Assets
|
|
Accumulated
Amortization
|
|
Intangible
Assets, Net
|
|
Intangible
Assets
|
|
Accumulated
Amortization
|
|
Intangible
Assets, Net
|
|
Remaining Weighted Average Amortization Period in Years
|
Customer relationships
|
$
|
328,087
|
|
|
$
|
(129,000
|
)
|
|
$
|
199,087
|
|
|
$
|
244,329
|
|
|
$
|
(110,640
|
)
|
|
$
|
133,689
|
|
|
7.6
|
Backlog
|
136,529
|
|
|
(135,807
|
)
|
|
722
|
|
|
133,592
|
|
|
(132,441
|
)
|
|
1,151
|
|
|
1.0
|
Trade names
|
74,833
|
|
|
(15,929
|
)
|
|
58,904
|
|
|
54,723
|
|
|
(12,855
|
)
|
|
41,868
|
|
|
16.4
|
Non-compete agreements
|
37,906
|
|
|
(26,967
|
)
|
|
10,939
|
|
|
29,212
|
|
|
(25,546
|
)
|
|
3,666
|
|
|
4.2
|
Patented rights and developed technology
|
22,542
|
|
|
(17,176
|
)
|
|
5,366
|
|
|
22,480
|
|
|
(15,831
|
)
|
|
6,649
|
|
|
3.6
|
Total intangible assets subject to amortization
|
$
|
599,897
|
|
|
$
|
(324,879
|
)
|
|
$
|
275,018
|
|
|
$
|
484,336
|
|
|
$
|
(297,313
|
)
|
|
$
|
187,023
|
|
|
9.2
|
Amortization expense for intangible assets was
$9.0 million
and
$8.1 million
for the three months ended
September 30, 2017
and
2016
and
$22.0 million
and
$23.7 million
for the
nine
months ended
September 30, 2017
and
2016
.
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
The estimated future aggregate amortization expense of intangible assets subject to amortization as of
September 30, 2017
is set forth below (in thousands):
|
|
|
|
|
For the Fiscal Year Ending December 31,
|
|
|
Remainder of 2017
|
$
|
10,142
|
|
2018
|
39,381
|
|
2019
|
37,229
|
|
2020
|
35,824
|
|
2021
|
33,478
|
|
Thereafter
|
118,964
|
|
Total
|
$
|
275,018
|
|
6. PER SHARE INFORMATION:
The amounts used to compute the basic and diluted earnings per share attributable to common stock for the three and
nine
months ended
September 30, 2017
and
2016
are illustrated below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
September 30,
|
|
September 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Amounts attributable to common stock:
|
|
|
|
|
|
|
|
|
|
Net income from continuing operations
|
$
|
89,313
|
|
|
$
|
73,137
|
|
|
$
|
201,417
|
|
|
$
|
110,195
|
|
Net income from discontinued operations
|
—
|
|
|
605
|
|
|
—
|
|
|
605
|
|
Net income attributable to common stock
|
$
|
89,313
|
|
|
$
|
73,742
|
|
|
$
|
201,417
|
|
|
$
|
110,800
|
|
|
|
|
|
|
|
|
|
Weighted average shares:
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding for basic earnings per share attributable to common stock
|
157,484
|
|
|
155,024
|
|
|
155,796
|
|
|
158,090
|
|
Effect of dilutive unvested non-participating stock-based awards
|
1,136
|
|
|
—
|
|
|
997
|
|
|
—
|
|
Weighted average shares outstanding for diluted earnings per share attributable to common stock
|
158,620
|
|
|
155,024
|
|
|
156,793
|
|
|
158,090
|
|
For purposes of calculating diluted earnings per share attributable to common stock, there were no adjustments required to derive Quanta’s net income attributable to common stock. Exchangeable shares that were issued pursuant to certain of Quanta’s historical acquisitions (as further discussed in Note 8), which are exchangeable on a one-for-one basis with shares of Quanta common stock, have been included in the calculation of weighted average shares outstanding for basic and diluted earnings per share attributable to common stock for the portion of the periods that they were outstanding. Additionally, unvested stock-based awards that contain non-forfeitable rights to dividends or dividend equivalents (participating) have been included in the calculation of basic and diluted earnings per share attributable to common stock for the portion of the periods that they were outstanding. Diluted earnings per share attributable to common stock is computed using the weighted average number of common shares outstanding during the period adjusted for all potentially dilutive common stock equivalents, except in cases where the effect of the common stock equivalents would be antidilutive.
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
7. DEBT OBLIGATIONS:
Quanta’s long-term debt obligations consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
December 31, 2016
|
Borrowings under credit facility
|
$
|
757,543
|
|
|
$
|
351,341
|
|
Other long-term debt, interest rates ranging from 2.4% to 4.3%
|
2,182
|
|
|
3,305
|
|
Capital leases, interest rates ranging from 2.5% to 5.5%
|
3,287
|
|
|
3,744
|
|
Total long-term debt obligations
|
763,012
|
|
|
358,390
|
|
Less — Current maturities of long-term debt
|
2,804
|
|
|
4,828
|
|
Total long-term debt obligations, net of current maturities
|
$
|
760,208
|
|
|
$
|
353,562
|
|
Quanta’s current maturities of long-term debt and short-term debt consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
December 31, 2016
|
Short-term debt
|
$
|
—
|
|
|
$
|
2,735
|
|
Current maturities of long-term debt
|
2,804
|
|
|
4,828
|
|
Current maturities of long-term debt and short-term debt
|
$
|
2,804
|
|
|
$
|
7,563
|
|
Credit Facility
On December 18, 2015, Quanta entered into an amended and restated credit agreement with various lenders that provides for a
$1.81 billion
senior secured revolving credit facility. As discussed further in Note 13, on
October 31, 2017
, Quanta and the lenders entered into an amendment to the credit facility which, among other things, extended the maturity date from December 18, 2020 to
October 31, 2022
and adjusted the interest rates applicable to certain borrowings. The entire amount available under the credit facility may be used by Quanta for revolving loans and letters of credit in U.S. dollars and certain alternative currencies. Up to
$600.0 million
of the credit facility may be used by certain subsidiaries of Quanta for revolving loans and letters of credit in certain alternative currencies. Up to
$100.0 million
of the credit facility may be used for swing line loans in U.S. dollars, up to
$50.0 million
of the credit facility may be used for swing line loans in Canadian dollars and up to
$30.0 million
of the facility may be used for swing line loans in Australian dollars. In addition, subject to the conditions specified in the credit agreement, Quanta has the option to increase the revolving commitments by up to
$400.0 million
from time to time upon receipt of additional commitments from new or existing lenders. Borrowings under the credit agreement are to be used to refinance existing indebtedness and for working capital, capital expenditures and other general corporate purposes.
As of
September 30, 2017
, Quanta had
$392.8 million
of outstanding letters of credit and bank guarantees,
$200.6 million
of which were denominated in U.S. dollars and
$192.2 million
of which were denominated in currencies other than the U.S. dollar, primarily in Australian or Canadian dollars. Quanta also had
$757.5 million
of outstanding revolving loans under the credit facility,
$697.4 million
of which were denominated in U.S. dollars and
$60.1 million
of which were denominated in Canadian dollars. The remaining
$659.7 million
was available for revolving loans or new letters of credit or bank guarantees. Borrowings under Quanta’s credit facility and the applicable interest rates during the three and
nine
months ended
September 30, 2017
and
2016
were as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
September 30,
|
|
September 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Maximum amount outstanding under the credit facility during the period
|
$
|
917,895
|
|
|
$
|
518,556
|
|
|
$
|
917,895
|
|
|
$
|
518,607
|
|
Average daily amount outstanding under the credit facility
|
$
|
760,418
|
|
|
$
|
469,276
|
|
|
$
|
564,178
|
|
|
$
|
455,267
|
|
Weighted-average interest rate
|
2.66
|
%
|
|
2.16
|
%
|
|
2.60
|
%
|
|
2.11
|
%
|
Under the current credit agreement, from December 18, 2015 through the filing of Quanta’s compliance certificate in mid-November of 2017, amounts borrowed in U.S. dollars bear interest, at Quanta’s option, at a rate equal to either (i) the Eurocurrency Rate (as defined in the credit agreement) plus
1.125%
to
2.125%
, as determined based on Quanta’s Consolidated Leverage Ratio (as described below), or (ii) the Base Rate (as described below) plus
0.125%
to
1.125%
, as determined based on Quanta’s
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
Consolidated Leverage Ratio. Amounts borrowed as revolving loans under the credit agreement in any currency other than U.S. dollars bear interest at a rate equal to the Eurocurrency Rate plus
1.125%
to
2.125%
, as determined based on Quanta’s Consolidated Leverage Ratio. Standby letters of credit issued under the credit agreement are subject to a letter of credit fee of
1.125%
to
2.125%
, based on Quanta’s Consolidated Leverage Ratio, and Performance Letters of Credit (as defined in the credit agreement) issued under the credit agreement in support of certain contractual obligations are subject to a letter of credit fee of
0.675%
to
1.275%
, based on Quanta’s Consolidated Leverage Ratio. See Note 13 regarding changes to Quanta’s credit facility.
Quanta is also subject to a commitment fee of
0.20%
to
0.40%
, based on its Consolidated Leverage Ratio, on any unused availability under the credit agreement.
The Consolidated Leverage Ratio is the ratio of Quanta’s Consolidated Funded Indebtedness to Consolidated EBITDA (as those terms are defined in the credit agreement). For purposes of calculating Quanta’s Consolidated Leverage Ratio, Consolidated Funded Indebtedness is reduced by available cash and Cash Equivalents (as defined in the credit agreement) in excess of
$25.0 million
. The Base Rate equals the highest of (i) the Federal Funds Rate (as defined in the credit agreement) plus
0.5%
, (ii) the prime rate publicly announced by Bank of America, N.A. and (iii) the Eurocurrency Rate plus
1.00%
.
Subject to certain exceptions, the credit agreement is secured by substantially all the assets of Quanta and Quanta’s wholly owned U.S. subsidiaries and by a pledge of all of the capital stock of Quanta’s wholly owned U.S. subsidiaries and
65%
of the capital stock of direct foreign subsidiaries of Quanta’s wholly owned U.S. subsidiaries. Quanta’s wholly owned U.S. subsidiaries also guarantee the repayment of all amounts due under the credit agreement. Subject to certain conditions, all collateral will automatically be released from the liens at any time Quanta maintains an Investment Grade Rating (defined in the credit agreement as two of the following three conditions being met: (i) a corporate credit rating that is BBB- or higher by Standard & Poor’s Rating Services, (ii) a corporate family rating that is Baa3 or higher by Moody’s Investors Services, Inc. or (iii) a corporate credit rating that is BBB- or higher by Fitch Ratings, Inc.).
The credit agreement contains certain covenants, including (1) a maximum Consolidated Leverage Ratio of
3.0
to 1.0 (provided that in connection with certain permitted acquisitions in excess of
$200.0 million
, such ratio is
3.5
to 1.0 for the fiscal quarter in which the acquisition is completed and the two subsequent fiscal quarters) and (2) a minimum Consolidated Interest Coverage Ratio (as defined in the credit agreement) of
3.0
to 1.0. As of
September 30, 2017
, Quanta was in compliance with all of the covenants in the credit agreement.
The credit agreement also limits certain acquisitions, mergers and consolidations, indebtedness, asset sales and prepayments of indebtedness and, subject to certain exceptions, prohibits liens on Quanta’s assets. The credit agreement allows cash payments for dividends and stock repurchases subject to compliance with the following requirements (after giving effect to the dividend or stock repurchase): (i) no default or event of default under the credit agreement; (ii) continued compliance with the financial covenants in the credit agreement; and (iii) at least
$100.0 million
of availability under the credit agreement and/or cash and cash equivalents on hand.
The credit agreement provides for customary events of default and contains cross-default provisions with Quanta’s underwriting, continuing indemnity and security agreement with its sureties and all of Quanta’s other debt instruments exceeding
$100.0 million
in borrowings or availability. If an Event of Default (as defined in the credit agreement) occurs and is continuing, on the terms and subject to the conditions set forth in the credit agreement, the lenders may declare all amounts outstanding and accrued and unpaid interest immediately due and payable, require that Quanta provide cash collateral for all outstanding letter of credit obligations, terminate the commitments under the credit agreement, and foreclose on the collateral.
8. EQUITY:
Exchangeable Shares and Series F and Series G Preferred Stock
In connection with certain Canadian acquisitions, the former owners of the acquired companies received exchangeable shares of certain Canadian subsidiaries of Quanta, which may be exchanged at the option of the holders for Quanta common stock on a
one
-for-one basis. The holders of exchangeable shares can make an exchange only once in any calendar quarter and must exchange a minimum of either
50,000
shares or, if less, the total number of remaining exchangeable shares registered in the name of the holder making the request. Additionally, in connection with
two
of such acquisitions, Quanta issued
one
share of Quanta Series F preferred stock and
one
share of Quanta Series G preferred stock (the Preferred Stock) to voting trusts on behalf of the respective holders of the exchangeable shares issued in such acquisitions. Each share of the Preferred Stock provides the holders of such exchangeable shares voting rights in Quanta common stock equivalent to the number of exchangeable shares outstanding.
The holders of exchangeable shares associated with the Preferred Stock have rights equivalent to Quanta common stockholders with respect to voting, dividends and other economic rights. The holders of exchangeable shares not associated with
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
the Preferred Stock have rights equivalent to Quanta common stockholders with respect to dividends and other economic rights but do not have voting rights.
During the three months ended
September 30, 2017
and
2016
,
no
and
0.3 million
exchangeable shares were exchanged for Quanta common stock. During the
nine
months ended
September 30, 2017
and
2016
,
2.5 million
and
0.3 million
exchangeable shares were exchanged for Quanta common stock. As of
September 30, 2017
, both shares of the Preferred Stock remained outstanding and
4.0 million
exchangeable shares remained outstanding, of which
3.9 million
were associated with the Preferred Stock.
Treasury Stock
Shares withheld for tax withholding obligations
Under the stock incentive plans described in Note 9, the tax withholding obligations of employees upon vesting of restricted stock, RSUs and performance units settled in common stock are typically satisfied by Quanta making such tax payments and withholding the number of vested shares having a value on the date of vesting equal to the tax withholding obligation. For the settlement of these employee tax liabilities, Quanta withheld
0.5 million
and
0.4 million
shares of Quanta common stock during the
nine
months ended
September 30, 2017
and
2016
, with a total market value of
$18.2 million
and
$7.5 million
. These shares and the related costs to acquire them were accounted for as adjustments to the balance of treasury stock.
Notional amounts recorded related to deferred compensation plans
For RSUs and performance units that vest but the settlement of which is deferred under Quanta’s deferred compensation plans, Quanta records an amount to treasury stock and an offsetting amount to APIC. No shares are recorded as treasury stock at vesting as the shares of Quanta common stock associated with deferred equity awards are not issued. Upon settlement of the deferred equity awards and issuance of the associated Quanta common stock, the original accounting entry is reversed. The net amounts recorded to treasury stock related to the deferred compensation plans during the three months ended
September 30, 2017
and
2016
were
none
and
$0.3 million
, and the net amounts recorded to treasury stock related to the deferred compensation plans during the
nine
months ended
September 30, 2017
and
2016
were
$3.4 million
and
$8.2 million
. An aggregate of
$17.7 million
was included in treasury stock for notional amounts related to deferred compensation plans at
September 30, 2017
.
Retirement of Treasury Stock
Effective December 1, 2016, Quanta retired
84.8 million
shares of treasury stock. These retired shares were restored to the status of authorized and unissued shares as permitted by Delaware law. The retired stock had a carrying value of
$1.95 billion
. In accordance with Quanta’s policy, Quanta recorded the formal retirement of treasury stock by deducting the par value from common stock and the excess of cost over par value from APIC.
Stock repurchases
During the second quarter of 2017, Quanta’s board of directors approved a stock repurchase program that authorizes Quanta to purchase, from time to time through June 30, 2020, up to
$300.0 million
of its outstanding common stock (the 2017 Repurchase Program). Repurchases under the 2017 Repurchase Program can be made in open market and privately negotiated transactions. As of
September 30, 2017
, Quanta had
not
repurchased any shares of its common stock under the 2017 Repurchase Program.
During the third quarter of 2015, Quanta’s board of directors approved a stock repurchase program that authorized Quanta to purchase, from time to time through February 28, 2017, up to
$1.25 billion
of its outstanding common stock (the 2015 Repurchase Program). Repurchases under the 2015 Repurchase Program were made in open market and privately negotiated transactions, including pursuant to an accelerated share repurchase arrangement and an issuer repurchase plan. During 2015, Quanta repurchased
19.2 million
shares of its common stock at a cost of
$449.9 million
in the open market under the 2015 Repurchase Program.
During the third quarter of 2015, Quanta also entered into an accelerated share repurchase arrangement (the ASR) to repurchase
$750.0 million
of its common stock under the 2015 Repurchase Program. Under the terms of the ASR, Quanta paid
$750.0 million
to JPMorgan Chase Bank, National Association, London Branch (JPMorgan) and initially received
25.7 million
shares of its common stock. The fair market value of these
25.7 million
shares at the time of delivery was
$600.0 million
, and the repurchased shares and the related cost to acquire them were accounted for as an adjustment to the balance of treasury stock during the third quarter of 2015, reducing the weighted-average number of basic and diluted common shares used to calculate Quanta’s earnings per share. The
$150.0 million
remaining under the ASR was recorded as an adjustment to APIC during the third quarter of 2015
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
and was reclassified from APIC to treasury stock upon final settlement of the ASR on
April 12, 2016
. At final settlement and based on the final volume-weighted average share price during the term of the ASR, minus a discount and subject to other adjustments, Quanta received
9.4 million
additional shares of its common stock from JPMorgan. Quanta repurchased a total of
54.3 million
shares of its common stock at a cost of
$1.20 billion
under the 2015 Repurchase Program prior to its termination on February 28, 2017. Other than the shares received at settlement of the ASR in the second quarter of 2016,
no
common stock was repurchased in the
nine
months ended
September 30, 2017
or
2016
under the 2015 Repurchase Program.
Other
Under Delaware corporate law, treasury stock is not counted for quorum purposes or entitled to vote.
Non-controlling Interests
Quanta holds investments in several joint ventures that provide infrastructure services under specific customer contracts. Quanta has determined that certain of these joint ventures are VIEs, with Quanta providing the majority of the infrastructure services to the joint venture, which management believes most significantly influences the economic performance of the joint venture. Management has concluded that Quanta is the primary beneficiary of each of the joint ventures determined to be VIEs and has accounted for each on a consolidated basis. The other parties’ equity interests in these joint ventures have been accounted for as “Non-controlling interests” in the accompanying condensed consolidated balance sheets. Net income attributable to the other joint venture members in the amounts of
$0.5 million
and
$0.4 million
for the three months ended
September 30, 2017
and
2016
and
$1.2 million
and
$0.9 million
for the
nine
months ended
September 30, 2017
and
2016
has been accounted for as a reduction of net income in deriving “Net income attributable to common stock” in the accompanying condensed consolidated statements of operations.
The carrying value of the investments held by Quanta in all of its VIEs was
$2.7 million
and
$3.3 million
at
September 30, 2017
and
December 31, 2016
. The carrying value of investments held by the non-controlling interests in these VIEs at
September 30, 2017
and
December 31, 2016
was
$2.7 million
and
$3.3 million
. During the three months ended
September 30, 2017
and
2016
, distributions to non-controlling interests were
$0.4 million
and
$0.6 million
. During the
nine
months ended
September 30, 2017
and
2016
, distributions to non-controlling interests were
$1.8 million
and
$0.6 million
. There were no other changes in equity as a result of transfers to/from the non-controlling interests during the
nine
months ended
September 30, 2017
or
2016
. See Note 10 for further disclosures related to Quanta’s joint venture arrangements.
9. EQUITY-BASED COMPENSATION:
Stock Incentive Plans
On
May 19, 2011
, Quanta’s stockholders approved the 2011 Omnibus Equity Incentive Plan (the 2011 Plan). The 2011 Plan provides for the award of non-qualified stock options, incentive (qualified) stock options, stock appreciation rights, restricted stock, RSUs, stock bonus awards, performance compensation awards (including performance units and cash bonus awards) or any combination of the foregoing. The purpose of the 2011 Plan is to attract and retain key personnel and provide participants with additional performance incentives by increasing their proprietary interest in Quanta. Employees, directors, officers, consultants or advisors of Quanta or its affiliates are eligible to participate in the 2011 Plan, as are prospective employees, directors, officers, consultants or advisors of Quanta who have agreed to serve Quanta in those capacities. An aggregate of
11,750,000
shares of Quanta common stock may be issued pursuant to awards granted under the 2011 Plan. Quanta also has a Restricted Stock Unit Plan (the RSU Plan), pursuant to which RSUs may be awarded to certain employees and consultants of Quanta’s Canadian operations. The 2011 Plan and the RSU Plan are referred to as the Plans.
Restricted Stock and RSUs to be Settled in Common Stock
During the three months ended
September 30, 2017
and
2016
, Quanta granted
0.2 million
and a nominal amount of RSUs to be settled in common stock under the 2011 Plan with weighted average grant date fair values of
$32.76
and
$24.92
. During the
nine
months ended
September 30, 2017
and
2016
, Quanta granted
1.4 million
and
1.8 million
RSUs to be settled in common stock under the 2011 Plan with weighted average grant date fair values of
$37.20
and
$22.13
. The grant date fair value for awards of restricted stock and RSUs to be settled in common stock is based on the market value of Quanta common stock on the date of grant. RSUs to be settled in common stock are subject to forfeiture, restrictions on transfer and certain other conditions until vesting, which generally occurs in equal installments over a
two
-year,
three
-year or
five
-year period following the date of grant. Holders of RSUs to be settled in common stock are entitled to receive a cash dividend equivalent payment equal to any cash dividend payable on account of common shares.
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
During the three months ended
September 30, 2017
and
2016
, vesting activity consisted of
0.1 million
and a nominal amount of RSUs settled in common stock with an approximate fair value at the time of vesting of
$1.1 million
and
$1.4 million
. During the
nine
months ended
September 30, 2017
and
2016
, vesting activity consisted of
1.5 million
and
1.3 million
shares of restricted stock and RSUs settled in common stock with an approximate fair value at the time of vesting of
$55.4 million
and
$27.8 million
.
During the three months ended
September 30, 2017
and
2016
, Quanta recognized
$9.9 million
and
$8.8 million
in non-cash stock compensation expense related to restricted stock and RSUs to be settled in common stock. During the
nine
months ended
September 30, 2017
and
2016
, Quanta recognized
$31.2 million
and
$30.5 million
in non-cash stock compensation expense related to restricted stock and RSUs to be settled in common stock. As of
September 30, 2017
, there was
$44.5 million
of total unrecognized compensation cost related to unvested RSUs to be settled in common stock granted to both employees and non-employees. This cost is expected to be recognized over a weighted average period of
1.83
years.
Performance Units to be Settled in Common Stock
Performance units awarded pursuant to the 2011 Plan provide for the issuance of shares of common stock upon vesting. These performance units cliff-vest at the end of a
three
-year performance period based on achievement of certain performance metrics established by Quanta’s compensation committee, including company performance goals and, with respect to certain awards, Quanta’s total shareholder return as compared to a predetermined group of peer companies. The final number of earned and vested performance units can range from
0%
to
200%
of the initial award based on the level of achievement, as determined by Quanta’s compensation committee.
During each of the three months ended
September 30, 2017
and
2016
, Quanta granted
no
performance units to be settled in common stock under the 2011 Plan. During each of the
nine
months ended
September 30, 2017
and
2016
, Quanta granted
0.3 million
performance units to be settled in common stock under the 2011 Plan with a weighted average grant date fair value of
$17.63
and
$22.86
per unit. The grant date fair value for awards of performance units without market-based metrics was based on the market value of Quanta common stock on the date of grant applied to the total number of performance units that Quanta anticipates will vest. The grant date fair value for awards of performance units with market-based metrics, which were granted in the
nine
months ended
September 30, 2017
, was based on a fair value as determined using a Monte Carlo simulation valuation methodology using the following key inputs:
|
|
|
|
Valuation date stock price based on the March 22, 2017 closing stock price
|
$36.31
|
Expected volatility
|
36.00
|
%
|
Risk-free interest rate
|
1.46
|
%
|
Term in years
|
2.78
|
|
This fair value is expensed ratably over the
three
-year performance period and is adjusted for changes in the expected probability of achievement of the underlying goals and the resulting number of performance units anticipated to vest, so that the expense recognized is equivalent to the proportion of the three-year period that has expired, multiplied by the fair value of the number of performance units anticipated to vest. During the three months ended
September 30, 2017
and
2016
, Quanta recognized
$1.0 million
and
$1.0 million
in compensation expense associated with performance units. During the
nine
months ended
September 30, 2017
and
2016
, Quanta recognized
$3.2 million
and
$2.5 million
in compensation expense associated with performance units. During the three months ended
September 30, 2017
and
2016
,
no
performance units vested, and
no
shares of common stock were issued in connection with performance units. During the
nine
months ended
September 30, 2017
and
2016
,
0.1 million
and
no
performance units vested, and
0.1 million
and
no
shares of common stock were issued in connection with performance units. The fair value of the
0.1 million
performance units that vested during the
nine
months ended
September 30, 2017
was
$4.3 million
at the time of vesting.
RSUs to be Settled in Cash
Certain RSUs granted by Quanta under the Plans are settled solely in cash. These cash-settled RSUs are intended to provide plan participants with cash performance incentives that are substantially equivalent to the risks and rewards of equity ownership in Quanta, typically vest in equal installments over a
two
-year or
three
-year period following the date of grant, and are subject to forfeiture under certain conditions, primarily termination of service. Additionally, subject to certain restrictions, Quanta’s non-employee directors may elect to cash settle a portion of their RSU awards, which generally vest upon conclusion of the director service year. For RSUs settled in cash, the holders receive for each vested RSU an amount in cash equal to the fair market value of
one
share of Quanta common stock on the settlement date, as specified in the applicable award agreement.
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
Compensation expense related to RSUs to be settled in cash was
$2.3 million
and
$2.0 million
for the three months ended
September 30, 2017
and
2016
and
$6.2 million
and
$4.9 million
for the
nine
months ended
September 30, 2017
and
2016
. Such expense is recorded in selling, general and administrative expenses. RSUs that are anticipated to be settled in cash are not included in the calculation of earnings per share, and the estimated earned value of such RSUs is classified as a liability. Quanta paid
$1.4 million
and
$1.0 million
to settle liabilities related to cash-settled RSUs in the three months ended
September 30, 2017
and
2016
and
$7.5 million
and
$4.4 million
to settle liabilities related to cash-settled RSUs in the
nine
months ended
September 30, 2017
and
2016
. Accrued liabilities for the estimated earned value of outstanding RSUs to be settled in cash were
$3.8 million
and
$5.1 million
at
September 30, 2017
and
December 31, 2016
.
10. COMMITMENTS AND CONTINGENCIES:
Investments in Affiliates and Other Entities
As described in Note 8, Quanta holds investments in certain joint ventures with third parties for the purpose of providing infrastructure services under certain customer contracts. Losses incurred by these joint ventures are generally shared ratably based on the percentage ownership of the joint venture members. However, each member of the joint venture typically is jointly and severally liable for all of the obligations of the joint venture under the contract with the customer, and therefore can be liable for full performance of the contract with the customer. In circumstances where Quanta’s participation in a joint venture qualifies as a general partnership, the joint venture partners are jointly and severally liable for all of the obligations of the joint venture, including obligations owed to the customer or any other person or entity. Quanta is not aware of circumstances that would lead to future claims against it for material amounts in connection with these joint and several liabilities.
In the joint venture arrangements entered into by Quanta, typically each joint venture party indemnifies the other party for any liabilities incurred in excess of the liabilities such other party is obligated to bear under the respective joint venture agreement. It is possible, however, that Quanta could be required to pay or perform obligations in excess of its share if the other party to the joint venture failed or refused to pay or perform its share of the obligations. Quanta is not aware of circumstances that would lead to future claims against it for material amounts that would not be indemnified.
During 2014, a limited partnership in which Quanta is a partner was selected for an engineering, procurement and construction (EPC) electric transmission project to construct approximately
500
kilometers of transmission line and
two
500
kV substations. Quanta will provide turnkey EPC services for the entire project. As of
September 30, 2017
, Quanta made aggregate contributions to this unconsolidated affiliate of
$67.3 million
, received
$3.1 million
as a return of capital and had outstanding additional capital commitments associated with this project of
$25.4 million
, which are anticipated to be paid in 2019.
Additionally, as of
September 30, 2017
, Quanta had outstanding capital commitments associated with investments in unconsolidated affiliates related to planned oil and gas infrastructure projects of
$17.3 million
, of which
$0.4 million
is expected to be paid in the
fourth
quarter of
2017
. The remaining
$16.9 million
of these capital commitments is anticipated to be paid by
May 31, 2022
. As described in Note 2, Quanta formed a partnership with select infrastructure investors that provides
$1.0 billion
of capital, including
$80.0 million
from Quanta, available to invest in certain specified infrastructure projects through July 1, 2024.
Leases
Quanta leases certain land, buildings and equipment under non-cancelable lease agreements, including related party leases. The terms of these agreements vary from lease to lease, including some with renewal options and escalation clauses. The following schedule shows the future minimum lease payments under these leases as of
September 30, 2017
(in thousands):
|
|
|
|
|
|
Operating Leases
|
Year Ending December 31 —
|
|
|
Remainder of 2017
|
$
|
34,740
|
|
2018
|
104,091
|
|
2019
|
69,368
|
|
2020
|
43,544
|
|
2021
|
24,880
|
|
Thereafter
|
39,971
|
|
Total minimum lease payments
|
$
|
316,594
|
|
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
Rent expense related to operating leases was
$67.4 million
and
$63.0 million
for the three months ended
September 30, 2017
and
2016
and
$200.2 million
and
$177.8 million
for the
nine
months ended
September 30, 2017
and
2016
.
Quanta has guaranteed the residual value on certain of its equipment operating leases. Quanta has agreed to pay any difference between this residual value and the fair market value of the underlying asset at the date of termination of the leases. At
September 30, 2017
, the maximum guaranteed residual value was
$614.0 million
. Quanta believes that no significant payments will be made as a result of the difference between the fair market value of the leased equipment and the guaranteed residual value. However, there can be no assurance that significant payments will not be required in the future.
Contingent Consideration
As discussed in further detail in Note 2, Quanta is obligated to pay contingent consideration amounts to the former owners of certain acquired businesses in the event that such acquired businesses achieve specified financial performance metrics. As of
September 30, 2017
and
December 31, 2016
, the estimated fair value of Quanta’s contingent consideration liabilities totaled
$70.9 million
and
$19.5 million
.
Committed Expenditures
Quanta has capital commitments for the expansion of its vehicle fleet in order to accommodate manufacturer lead times on certain types of vehicles. As of
September 30, 2017
,
$4.7 million
of production orders were issued with expected delivery dates in
2017
, and
$1.9 million
of production orders were issued with expected delivery dates in
2018
. Although Quanta has committed to purchase these vehicles at the time of their delivery, Quanta anticipates that these orders will be assigned to third party leasing companies and made available to Quanta under certain of its master equipment lease agreements, thereby releasing Quanta from its capital commitments.
Legal Proceedings
Quanta is from time to time party to various lawsuits, claims and other legal proceedings that arise in the ordinary course of business. These actions typically seek, among other things, compensation for alleged personal injury, breach of contract and/or property damages, employment-related damages, punitive damages, civil penalties or other losses, or injunctive or declaratory relief. With respect to all such lawsuits, claims and proceedings, Quanta records a reserve when it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. In addition, Quanta discloses matters for which management believes a material loss is at least reasonably possible. Except as otherwise stated below, none of these proceedings, separately or in the aggregate, are expected to have a material adverse effect on Quanta’s consolidated financial position, results of operations or cash flows. In all instances, management has assessed the matter based on current information and made a judgment concerning its potential outcome, giving due consideration to the nature of the claim, the amount and nature of damages sought and the probability of success. Management’s judgment may prove materially inaccurate, and such judgment is made subject to the known uncertainties of litigation.
Maurepas Project Dispute
. During the third quarter of 2017, Maurepas Pipeline, LLC (Maurepas) notified QPS Engineering, LLC (QPS), a subsidiary of Quanta, of Maurepas’ assertion of a claim for liquidated damages allegedly arising from delay in mechanical completion of a project in Louisiana. Quanta disputes the claim and believes that QPS is not responsible for liquidated damages under the contract terms. The matter remains subject to contractual dispute resolution measures; however, either party may choose to institute a formal legal proceeding upon completion of such measures. If, upon final resolution of this matter, Quanta is unsuccessful, any such liquidated damages would be recorded by QPS as additional costs on the project, and Quanta believes the range of reasonably possible loss could be up to
$22.0 million
, which is the maximum liability for liquidated damages pursuant to the contract terms.
Lorenzo Benton v. Telecom Network Specialists, Inc., et al.
In June 2006, plaintiff Lorenzo Benton filed a class action complaint in the Superior Court of California, County of Los Angeles, alleging various wage and hour violations against Telecom Network Specialists (TNS), a former subsidiary of Quanta. Quanta retained liability associated with this matter pursuant to the terms of Quanta’s sale of TNS in December 2012. Benton represents a class of workers that includes all persons who worked on certain TNS projects, including individuals that TNS retained through numerous staffing agencies. The plaintiff class in this matter is seeking damages for unpaid wages, penalties associated with the failure to provide meal and rest periods and overtime wages, interest and attorneys’ fees. In January 2017, the trial court granted a summary judgment motion filed by the plaintiff class and found that TNS was a joint employer of the class members and that it failed to provide adequate meal and rest breaks and failed to pay overtime wages. During the third quarter of 2017, a final motion for summary judgment on damages was filed by the plaintiff
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
class seeking approximately
$11.1 million
for its claims. Quanta believes the court’s decision on liability is not supported by controlling law and continues to contest its liability and the damage calculation asserted by the plaintiff class in this matter.
Additionally, in November 2007, TNS filed cross complaints for indemnity and breach of contract against the staffing agencies, which employed many of the individuals in question. In December 2012, the trial court heard cross-motions for summary judgment filed by TNS and the staffing agencies pertaining to TNS’s demand for indemnity. The court denied TNS’s motion and granted the motions filed by the staffing agencies; however, the California Appellate Court reversed the trial court’s decision in part and instructed the trial court to reconsider its ruling. In February 2017, the court denied a new motion for summary judgment filed by the staffing companies and stated that the staffing companies were liable to TNS for any damages owed to the class members that the staffing companies employed. TNS has filed a motion for summary judgment to formalize the trial court’s decision regarding the staffing companies’ liability.
The final amount of liability, if any, payable in connection with this matter remains the subject of pending litigation and will ultimately depend on various factors, including the outcome of Quanta’s appeal of the trial court’s ruling on liability, the final determination with respect to any damages owed by Quanta, and the solvency of the staffing agencies. Based on review and analysis of the trial court’s rulings on liability, Quanta does not believe, at this time, that it is probable this matter will result in a material loss. However, if Quanta is unsuccessful in this litigation and the staffing agencies are unable to fund damages owed to class members, Quanta believes the range of reasonably possible loss to Quanta upon final resolution of this matter could be up to approximately
$11.1 million
, plus attorneys’ fees and expenses of the plaintiff class.
For additional information regarding other pending legal proceedings, see
Collective Bargaining Agreements
in this Note 10.
Concentrations of Credit Risk
Quanta is subject to concentrations of credit risk related primarily to its cash and cash equivalents and net receivable position with customers, which includes amounts related to billed and unbilled accounts receivable and costs and estimated earnings in excess of billings on uncompleted contracts net of advanced billings with the same customer. Substantially all of Quanta’s cash and cash equivalents are managed by what it believes to be high credit quality financial institutions. In accordance with Quanta’s investment policies, these institutions are authorized to invest cash and cash equivalents in a diversified portfolio of what Quanta believes to be high quality cash and cash equivalent investments, which consist primarily of interest-bearing demand deposits, money market investments, money market mutual funds and investment grade commercial paper with original maturities of three months or less. Although Quanta does not currently believe the principal amount of these cash and cash equivalents is subject to any material risk of loss, changes in economic conditions could impact the interest income Quanta receives from these investments. In addition, Quanta grants credit under normal payment terms, generally without collateral, to its customers, which include electric power and oil and gas companies, governmental entities, general contractors, and builders, owners and managers of commercial and industrial properties located primarily in the United States, Canada and Australia. Consequently, Quanta is subject to potential credit risk related to changes in business and economic factors throughout the United States, Canada and Australia, which may be heightened as a result of uncertain economic and financial market conditions that have existed in recent years. However, Quanta generally has certain statutory lien rights with respect to services provided. Historically, some of Quanta’s customers have experienced significant financial difficulties, and others may experience financial difficulties in the future. These difficulties expose Quanta to increased risk related to collectability of billed and unbilled receivables and costs and estimated earnings in excess of billings on uncompleted contracts for services Quanta has performed.
At
December 31, 2016
,
one
customer within Quanta’s Electric Power Infrastructure Services segment accounted for approximately
16%
of Quanta’s consolidated net receivable position. Portions of this net receivable balance were related to invoicing challenges and billing delays on two electric transmission projects located in remote regions of northeastern Canada, which resulted from changed site conditions requiring extensive quality assurance documentation and administrative requirements. During the second quarter of 2017, Quanta and the customer reached a settlement and entered into a renegotiated contract, which eliminated the previous scheduling and billing issues and settled outstanding change orders.
Additionally,
one
customer within Quanta’s Oil and Gas Infrastructure Services segment accounted for approximately
10%
of Quanta’s consolidated net receivable position at
September 30, 2017
. This same customer also accounted for approximately
10%
of Quanta’s consolidated revenues during the three and
nine
months ended
September 30, 2017
. No other customers represented 10% or more of Quanta’s consolidated net receivable position as of
September 30, 2017
or
December 31, 2016
, and no other customers represented 10% or more of Quanta’s consolidated revenues for the three or
nine
months ended
September 30, 2017
or
2016
.
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
Self-Insurance
As discussed in Note 2, Quanta is insured for employer’s liability, workers’ compensation, auto liability, general liability and group health claims. As of
September 30, 2017
and
December 31, 2016
, the gross amount accrued for insurance claims totaled
$255.7 million
and
$218.2 million
, with
$198.3 million
and
$162.0 million
considered to be long-term and included in “Insurance and other non-current liabilities.” Related insurance recoveries/receivables as of
September 30, 2017
and
December 31, 2016
were
$45.1 million
and
$8.7 million
, of which
$0.5 million
and
$0.4 million
were included in “Prepaid expenses and other current assets” and
$44.6 million
and
$8.3 million
were included in “Other assets, net.”
Letters of Credit
Certain of Quanta’s vendors require letters of credit to ensure reimbursement for amounts they are disbursing on Quanta’s behalf, such as to beneficiaries under its self-funded insurance programs. In addition, from time to time, certain customers require Quanta to post letters of credit to ensure payment of subcontractors and vendors and guarantee performance under contracts. Such letters of credit are generally issued by a bank or similar financial institution, typically pursuant to Quanta’s credit facility. Each letter of credit commits the issuer to pay specified amounts to the holder of the letter of credit if the holder demonstrates that Quanta has failed to perform specified actions. If this were to occur, Quanta would be required to reimburse the issuer of the letter of credit. Depending on the circumstances of such a reimbursement, Quanta may also be required to record a charge to earnings for the reimbursement. Quanta does not believe that it is likely that any material claims will be made under a letter of credit in the foreseeable future.
As of
September 30, 2017
, Quanta had
$392.8 million
in outstanding letters of credit and bank guarantees under its credit facility securing its casualty insurance program and various contractual commitments. These are irrevocable stand-by letters of credit with maturities generally expiring at various times throughout
2017
and
2018
. Upon maturity, it is expected that the majority of the letters of credit related to the casualty insurance program will be renewed for subsequent one-year periods.
Performance Bonds and Parent Guarantees
In certain circumstances, Quanta is required to provide performance bonds in connection with its contractual commitments. Quanta has indemnified its sureties for any expenses paid out under these performance bonds. These performance bonds expire at various times ranging from mechanical completion of the related projects to a period extending beyond contract completion in certain circumstances, and as such a determination of maximum potential amounts outstanding requires the use of certain estimates and assumptions. Such amounts can also fluctuate from period to period based upon the mix and level of Quanta’s bonded operating activity. As of
September 30, 2017
, the total amount of the outstanding performance bonds was estimated to be approximately
$3.5 billion
. Quanta’s estimated maximum exposure as it relates to the value of the performance bonds outstanding is lowered on each bonded project as the cost to complete is reduced, and each of its commitments under the performance bonds generally extinguishes concurrently with the expiration of its related contractual obligation. The estimated cost to complete these bonded projects was approximately
$889 million
as of
September 30, 2017
.
Additionally, from time to time, Quanta guarantees the obligations of its wholly owned subsidiaries, including obligations in connection with certain contracts with customers, lease obligations, joint venture arrangements and, in some states, contractors’ licenses. Quanta is not aware of any material obligations for performance or payment asserted against it under any of these guarantees.
Employment Agreements
Quanta has various employment agreements with certain executives and other employees, which provide for compensation and certain other benefits and for severance payments under certain circumstances. Certain employment agreements also contain clauses that become effective upon a change in control of Quanta, and Quanta may be obligated to pay certain amounts to such employees upon the occurrence of any of the defined change in control events.
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
Collective Bargaining Agreements
Some of Quanta’s operating units are parties to various collective bargaining agreements with unions that represent certain of their employees. The collective bargaining agreements expire at various times and have typically been renegotiated and renewed on terms similar to those in the expiring agreements. From time to time, Quanta is a party to grievance actions based on claims arising out of the collective bargaining agreements. The agreements require the operating units to pay specified wages, provide certain benefits to their union employees and contribute certain amounts to multiemployer pension plans and employee benefit trusts. Quanta’s multiemployer pension plan contribution rates generally are specified in the collective bargaining agreements (usually on an annual basis), and contributions are made to the plans on a “pay-as-you-go” basis based on its union employee payrolls. The location and number of union employees that Quanta employs at any given time and the plans in which they may participate vary depending on the projects Quanta has ongoing at any time and the need for union resources in connection with those projects. Therefore, Quanta is unable to accurately predict its union employee payroll and the amount of the resulting multiemployer pension plan contribution obligation for future periods.
The Pension Protection Act of 2006 (PPA) also added special funding and operational rules generally applicable to plan years beginning after 2007 for multiemployer plans that are classified as “endangered,” “seriously endangered” or “critical” status based on multiple factors (including, for example, the plan’s funded percentage, cash flow position and whether it is projected to experience a minimum funding deficiency). Plans in these classifications must adopt measures to improve their funded status through a funding improvement or rehabilitation plan, as applicable, which may require additional contributions from employers (which may take the form of a surcharge on benefit contributions) and/or modifications to retiree benefits. Certain plans to which Quanta contributes or may contribute in the future are in “endangered,” “seriously endangered” or “critical” status. The amount of additional funds, if any, that Quanta may be obligated to contribute to these plans in the future cannot be estimated due to uncertainty of the future levels of work that require the specific use of union employees covered by these plans, as well as the future contribution levels and possible surcharges on contributions applicable to these plans.
Quanta may be subject to additional liabilities imposed by law as a result of its participation in multiemployer defined benefit pension plans. For example, the Employee Retirement Income Security Act of 1974, as amended by the Multiemployer Pension Plan Amendments Act of 1980, imposes certain liabilities upon an employer who is a contributor to a multiemployer pension plan if the employer withdraws from the plan or the plan is terminated or experiences a mass withdrawal. These liabilities include an allocable share of the unfunded vested benefits in the plan for all plan participants, not merely the benefits payable to a contributing employer’s own retirees. As a result, participating employers may bear a higher proportion of liability for unfunded vested benefits if other participating employers cease to contribute or withdraw, with the reallocation of liability being more acute in cases when a withdrawn employer is insolvent or otherwise fails to pay its withdrawal liability. Other than as described below, Quanta is not aware of any material amounts of withdrawal liability that have been incurred as a result of a withdrawal by any of Quanta’s operating units from any multiemployer defined benefit pension plans.
2011 Central States Plan Withdrawal Liability.
In the fourth quarter of 2011, certain Quanta subsidiaries withdrew from the Central States, Southeast and Southwest Areas Pension Plan (the Central States Plan). This withdrawal event was the result of an amendment to a collective bargaining agreement with the International Brotherhood of Teamsters (Teamsters) that eliminated certain employers’ obligations to contribute to the Central States Plan, which was then in critical status and significantly underfunded as to its vested benefit obligations. The amendment was negotiated by the Pipe Line Contractors Association (PLCA) on behalf of its members, which include certain Quanta subsidiaries. Because certain other Quanta subsidiaries continued participation in the Central States Plan into 2012, the Quanta subsidiaries’ withdrawals in 2011 effected only a partial withdrawal on behalf of Quanta for 2011. Quanta believed that the partial withdrawal was advantageous because it limited exposure to increased liability resulting from a future withdrawal event, at which point the Central States Plan could have been further underfunded. Quanta and other PLCA members now contribute to a different multiemployer pension plan on behalf of the affected Teamsters employees. While certain additional Quanta subsidiaries continued participation in the Central States Plan into 2012, Quanta believes that such subsidiaries withdrew from the Central States Plan in 2012, thereby effecting a complete withdrawal as of December 30, 2012 for all Quanta subsidiaries.
In connection with the partial withdrawal in 2011, Quanta recorded a withdrawal liability of approximately
$32.6 million
in the fourth quarter of 2011 based on estimates received from the Central States Plan. The Central States Plan subsequently asserted that the withdrawal of the PLCA members, and thus Quanta’s partial withdrawal, was not effective in 2011. The PLCA and Quanta believed at that time that a legally effective withdrawal had occurred during the fourth quarter of 2011, and this issue was litigated in the federal district court for the Northern District of Illinois, Eastern Division. In September 2013, the district court ruled in favor of the Central States Plan, and that decision was appealed by the PLCA. In July 2014, the Central States Plan provided Quanta with a Notice and Demand claiming partial withdrawal liability in the amount of
$39.6 million
and requiring Quanta to
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
make payments on this assessment while the dispute is ongoing. In September 2015, the United States Court of Appeals for the Seventh Circuit ruled in favor of the PLCA and reversed the district court’s previous ruling which had been in favor of the Central States Plan. Based on the outcome of the appeal, in January 2016, the Central States Plan issued a revised Notice and Demand claiming a partial withdrawal liability in the amount of
$32.9 million
.
Separately, in December 2013, the Central States Plan filed lawsuits against two of Quanta’s other subsidiaries in connection with their withdrawal in 2012. In the first lawsuit, the Central States Plan alleged that the subsidiary elected to participate in the Central States Plan pursuant to the collective bargaining agreement under which it participated. Quanta argued that no such election was made and that any payments made to the Central States Plan were made in error. In July 2014, the parties reached an agreement to settle the lawsuit, and the court dismissed the case with prejudice. In the second lawsuit, the Central States Plan alleged that contributions made by the Quanta subsidiary to a new industry fund created after Quanta withdrew from the Central States Plan should have been made to the Central States Plan. This arguably would have extended the withdrawal date for this subsidiary to at least the end of 2013. Quanta disputed these allegations on the basis that it properly paid contributions to the new industry fund based on the terms of the collective bargaining agreement under which it participated and asserted that it terminated its obligation to contribute to the Central States Plan by the end of 2012. The parties both moved for summary judgment, and in March 2015, the court entered judgment in favor of Quanta. The Central States Plan filed a notice of appeal in April 2015, and in December 2015, the Central States Plan agreed to dismiss the appeal with prejudice.
The ultimate liability associated with the complete withdrawal of Quanta’s subsidiaries from the Central States Plan will depend on various factors, including interpretations of the terms of the collective bargaining agreements under which the subsidiaries participated and whether exemptions from withdrawal liability applicable to construction industry employers will be available. In September 2017, the Central States Plan provided revised estimates indicating that the total withdrawal liability based on certain withdrawal scenarios could range between
$42.2 million
and
$48.2 million
. Quanta believes this to be the range of reasonably possible loss for this matter and previously recorded an adjustment to cost of services that is within such range. However, given the unknown nature of some of the factors mentioned above, the final withdrawal liability cannot yet be determined with certainty. Accordingly, it is reasonably possible that the amount owed upon final resolution of these matters could be materially higher than the expense Quanta recognized through
September 30, 2017
. Although Quanta disputes the total liability owed to the Central States Plan, it continues to make monthly payments according to the terms of the January 2016 Notice and Demand while the parties determine the final withdrawal liability. As of
September 30, 2017
, Quanta had made payments totaling
$22.3 million
toward the withdrawal liability assessment.
2013 Central States Plan Withdrawal Liability.
On October 9, 2013, Quanta acquired a company that experienced a complete withdrawal from the Central States Plan prior to the date of acquisition. Prior to the acquisition, the Central States Plan issued a Notice and Demand to the acquired company claiming a withdrawal liability in the total amount of
$6.9 million
and requiring payments to be made on this assessment while the dispute is ongoing. In connection with the acquisition, Quanta recorded an initial liability of
$4.8 million
related to this withdrawal liability, and a portion of the purchase price for the acquired company was deposited into an escrow account to fund any withdrawal obligation in excess of the initial liability recorded. In January 2016, the Central States Plan issued a revised Notice and Demand claiming a withdrawal liability in the amount of
$4.8 million
. Although Quanta continues to dispute the total liability owed to the Central States Plan, it continues to make monthly payments according to the terms of this revised Notice and Demand while the parties determine the final withdrawal liability. As of
September 30, 2017
, payments totaling
$4.0 million
had been made toward the withdrawal liability assessment.
The final amount of withdrawal liability payable in connection with this matter remains the subject of a pending arbitration proceeding and will ultimately depend on various factors, including the outcome of the PLCA litigation described above. However, the acquired company’s withdrawal from the Central States Plan is not expected to have a material impact on Quanta’s financial condition, results of operations or cash flows.
Indemnities
Quanta generally indemnifies its customers for the services it provides under its contracts, as well as other specified liabilities, which may subject Quanta to indemnity claims and liabilities and related litigation. Additionally, in connection with certain acquisitions and dispositions, Quanta has indemnified various parties against specified liabilities that those parties might incur in the future. The indemnities under acquisition or disposition agreements are usually contingent upon the other party incurring liabilities that reach specified thresholds. As of
September 30, 2017
, except as otherwise set forth above in
Legal Proceedings
, Quanta does not believe any material liabilities for claims exist against it in connection with any of these indemnity obligations.
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
In the normal course of Quanta’s acquisition transactions, Quanta obtains rights to indemnification from the sellers or former owners of acquired companies for certain risks, liabilities and obligations arising from their prior operations, such as performance, operational, safety, workforce or tax issues, some of which Quanta may not have discovered during due diligence. However, the indemnities may not cover all of Quanta’s exposure for such pre-acquisition matters, and the indemnitors may be unwilling or unable to pay the amounts owed to Quanta. Accordingly, Quanta may incur expenses for which it is not reimbursed. Quanta is currently in the process of determining certain pre-acquisition obligations associated with non-U.S. payroll taxes that may be due from a business acquired by Quanta in 2013. As of
September 30, 2017
, Quanta had recorded
$11.4 million
as its estimate of the pre-acquisition tax obligations and a corresponding indemnification asset, as management expects to recover
from the indemnity counterparties any amounts that Quanta may be required to pay in connection with any such obligations.
11. SEGMENT INFORMATION:
Quanta presents its operations under
two
reportable segments: (1) Electric Power Infrastructure Services and (2) Oil and Gas Infrastructure Services. This structure is generally based on the broad end-user markets for Quanta’s services. See Note 1 for additional information regarding Quanta’s reportable segments.
Quanta’s segment results are derived from the types of services provided across its operating units in each of the end user markets described above. Quanta’s entrepreneurial business model allows each of its operating units to serve the same or similar customers and to provide a range of services across end user markets. Quanta’s operating units are organized into one of
two
internal divisions, namely, the Electric Power Infrastructure Services Division and the Oil and Gas Infrastructure Services Division. These internal divisions are closely aligned with the reportable segments described above based on their operating units’ predominant type of work.
Reportable segment information, including revenues and operating income by type of work, is gathered from each operating unit for the purpose of evaluating segment performance in support of Quanta’s market strategies. These classifications of Quanta’s operating unit revenues by type of work for segment reporting purposes can at times require judgment on the part of management. Quanta’s operating units may perform joint infrastructure service projects for customers in multiple industries, deliver multiple types of network services under a single customer contract or provide service across industries. For example, Quanta performs joint trenching projects to install distribution lines for electric power and natural gas customers.
In addition, Quanta’s integrated operations and common administrative support at each of its operating units require that certain allocations of shared and indirect costs, such as facility costs and indirect operating expenses, including depreciation and general and administrative costs, be made to determine operating segment profitability. Corporate costs, such as payroll and benefits, employee travel expenses, facility costs, professional fees, acquisition costs and amortization related to intangible assets are not allocated.
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
Summarized financial information for Quanta’s reportable segments is presented in the following table (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
September 30,
|
|
September 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Revenues:
|
|
|
|
|
|
|
|
|
|
Electric Power Infrastructure Services
|
$
|
1,504,752
|
|
|
$
|
1,222,432
|
|
|
$
|
4,024,983
|
|
|
$
|
3,568,521
|
|
Oil and Gas Infrastructure Services
|
1,104,555
|
|
|
819,754
|
|
|
2,962,868
|
|
|
1,979,832
|
|
Consolidated
|
$
|
2,609,307
|
|
|
$
|
2,042,186
|
|
|
$
|
6,987,851
|
|
|
$
|
5,548,353
|
|
Operating income (loss)
:
|
|
|
|
|
|
|
|
|
|
Electric Power Infrastructure Services
|
$
|
150,054
|
|
|
$
|
118,998
|
|
|
$
|
362,769
|
|
|
$
|
282,256
|
|
Oil and Gas Infrastructure Services
|
58,508
|
|
|
65,661
|
|
|
165,076
|
|
|
83,401
|
|
Corporate and non-allocated costs
|
(68,134
|
)
|
|
(54,496
|
)
|
|
(202,552
|
)
|
|
(162,731
|
)
|
Consolidated
|
$
|
140,428
|
|
|
$
|
130,163
|
|
|
$
|
325,293
|
|
|
$
|
202,926
|
|
Depreciation:
|
|
|
|
|
|
|
|
|
|
Electric Power Infrastructure Services
|
$
|
23,996
|
|
|
$
|
22,906
|
|
|
$
|
68,232
|
|
|
$
|
68,788
|
|
Oil and Gas Infrastructure Services
|
20,737
|
|
|
17,296
|
|
|
56,235
|
|
|
50,351
|
|
Corporate and non-allocated costs
|
3,693
|
|
|
2,476
|
|
|
11,302
|
|
|
7,468
|
|
Consolidated
|
$
|
48,426
|
|
|
$
|
42,678
|
|
|
$
|
135,769
|
|
|
$
|
126,607
|
|
Separate measures of Quanta’s assets and cash flows by reportable segment, including capital expenditures, are not produced or utilized by management to evaluate segment performance. Quanta’s fixed assets, which are held at the operating unit level, include operating machinery, equipment and vehicles, as well as office equipment, buildings and leasehold improvements, and are used on an interchangeable basis across its reportable segments. As such, for reporting purposes, total depreciation expense is allocated each quarter among Quanta’s reportable segments based on the ratio of each reportable segment’s revenue contribution to consolidated revenues.
Foreign Operations
During the three months ended
September 30, 2017
and
2016
, Quanta derived
$653.1 million
and
$459.6 million
of its revenues from foreign operations. During the
nine
months ended
September 30, 2017
and
2016
, Quanta derived
$1.83 billion
and
$1.15 billion
of its revenues from foreign operations. Of Quanta’s foreign revenues,
80%
and
78%
were earned in Canada during the three months ended
September 30, 2017
and
2016
and
81%
and
75%
were earned in Canada during the
nine
months ended
September 30, 2017
and
2016
. In addition, Quanta held property and equipment of
$334.0 million
and
$320.7 million
in foreign countries, primarily Canada, as of
September 30, 2017
and
December 31, 2016
.
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
12. SUPPLEMENTAL CASH FLOW INFORMATION:
The net effect of changes in operating assets and liabilities, net of non-cash transactions, on cash flows from operating activities of continuing operations is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
September 30,
|
|
September 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Accounts and notes receivable
|
$
|
(272,131
|
)
|
|
$
|
(177,832
|
)
|
|
$
|
(398,574
|
)
|
|
$
|
86,562
|
|
Costs and estimated earnings in excess of billings on uncompleted contracts
|
20,981
|
|
|
(35,075
|
)
|
|
(126,999
|
)
|
|
(169,998
|
)
|
Inventories
|
13,525
|
|
|
(12,405
|
)
|
|
8,727
|
|
|
(10,124
|
)
|
Prepaid expenses and other current assets
|
10,495
|
|
|
19,664
|
|
|
(23,142
|
)
|
|
7,977
|
|
Accounts payable and accrued expenses and other non-current liabilities
|
203,743
|
|
|
105,362
|
|
|
217,384
|
|
|
115,686
|
|
Billings in excess of costs and estimated earnings on uncompleted contracts
|
43,836
|
|
|
(78,306
|
)
|
|
80,042
|
|
|
(90,833
|
)
|
Other, net
|
(6,621
|
)
|
|
(6,486
|
)
|
|
12,221
|
|
|
(7,485
|
)
|
Net change in operating assets and liabilities, net of non-cash transactions
|
$
|
13,828
|
|
|
$
|
(185,078
|
)
|
|
$
|
(230,341
|
)
|
|
$
|
(68,215
|
)
|
Additional supplemental cash flow information is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
September 30,
|
|
September 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Cash (paid) received during the period for —
|
|
|
|
|
|
|
|
|
|
Interest paid related to continuing operations
|
$
|
(5,808
|
)
|
|
$
|
(3,344
|
)
|
|
$
|
(13,314
|
)
|
|
$
|
(8,851
|
)
|
Income taxes paid related to continuing operations
|
$
|
(3,616
|
)
|
|
$
|
(21,799
|
)
|
|
$
|
(105,112
|
)
|
|
$
|
(55,323
|
)
|
Income taxes paid related to discontinued operations
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(6,080
|
)
|
Income tax refunds related to continuing operations
|
$
|
5,058
|
|
|
$
|
2,554
|
|
|
$
|
7,727
|
|
|
$
|
4,233
|
|
During the
nine
months ended
September 30, 2017
, Quanta entered into a non-cash transaction whereby Quanta accepted title to a marine vessel in satisfaction and discharge of a
$7.1 million
note receivable.
13. SUBSEQUENT EVENT:
Credit Facility
On
October 31, 2017
, Quanta entered into an amendment to its amended and restated credit agreement with various lenders that provides for a
$1.81 billion
senior secured revolving credit facility, which, among other things, extended the maturity date of the credit facility from December 18, 2020 to
October 31, 2022
and adjusted the interest rates for certain borrowings. Pursuant to the amendment and subsequent to filing of Quanta’s compliance certificate in mid-November of 2017, amounts borrowed in U.S. dollars will bear interest, at Quanta’s option, at a rate equal to either (i) the Eurocurrency Rate plus
1.125%
to
2.000%
, as determined based on Quanta’s Consolidated Leverage Ratio, or (ii) the Base Rate plus
0.125%
to
1.000%
, as determined based on Quanta’s Consolidated Leverage Ratio. Amounts borrowed as revolving loans under the credit agreement in any currency other than U.S. dollars will bear interest at a rate equal to the Eurocurrency Rate plus
1.125%
to
2.000%
, as determined based on Quanta’s Consolidated Leverage Ratio. Additionally, subsequent to mid-November of 2017, standby or commercial letters of credit issued under the credit agreement will be subject to a letter of credit fee of
1.125%
to
2.000%
, based on Quanta’s Consolidated Leverage Ratio, and Performance Letters of Credit issued under the credit agreement in support of certain contractual obligations will be subject to a letter of credit fee of
0.675%
to
1.150%
, based on Quanta’s Consolidated Leverage Ratio. See Note 7 for additional information regarding Quanta’s credit facility.