e10vk
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
December 31, 2007
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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Commission file number 1-13831
Quanta Services, Inc.
(Exact name of registrant as
specified in its charter)
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Delaware
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74-2851603
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(State or other jurisdiction
of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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1360 Post Oak Boulevard, Suite 2100
Houston, Texas 77056
(Address of principal executive
offices, including ZIP Code)
(713) 629-7600
(Registrants telephone
number, including area code)
Securities registered pursuant to Section 12(b) of the
Act:
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Title of Each Class
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Name of Exchange on Which Registered
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Common Stock, $.00001 par value
Rights to Purchase Series D Junior Participating Preferred
Stock
(attached to Common Stock)
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New York Stock Exchange
New York Stock Exchange
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Securities registered pursuant to Section 12(g) of the
Act:
Title of Each
Class
None
Indicate by check mark if the Registrant is a well-known
seasoned issuer (as defined in Rule 405 of the Securities
Act). Yes þ No o
Indicate by check mark if the Registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Exchange
Act. Yes o No þ
Indicate by check mark whether the Registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days: Yes þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of Registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check one):
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Large accelerated filer
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Accelerated filer
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Non-accelerated filer
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(Do not check if smaller reporting
company)
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Smaller reporting company
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Indicate by check mark whether the Registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
As of June 29, 2007 (the last business day of the
Registrants most recently completed second fiscal
quarter), the aggregate market value of the Common Stock and
Limited Vote Common Stock of the Registrant held by
non-affiliates of the Registrant, based on the last sale price
of the Common Stock reported by the New York Stock Exchange on
such date, was approximately $3.57 billion and
$13.2 million, respectively (for purposes of calculating
these amounts, only directors, officers and beneficial owners of
10% or more of the outstanding capital stock of the Registrant
have been deemed affiliates).
As of February 20, 2008, the number of outstanding shares
of the Common Stock of the Registrant was 170,319,214. As of the
same date, 749,131 shares of Limited Vote Common Stock were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrants Definitive Proxy Statement for
the 2008 Annual Meeting of Stockholders are incorporated by
reference into Part III of this
Form 10-K.
QUANTA
SERVICES, INC.
ANNUAL REPORT ON
FORM 10-K
For the Year Ended December 31, 2007
INDEX
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PART I
General
Quanta Services, Inc. (Quanta) is a leading specialized
contracting services company, delivering
end-to-end
network solutions to the electric power, gas, telecommunications
and cable television industries. Our comprehensive services
include designing, installing, repairing and maintaining network
infrastructure. With operations in all 50 states and
Canada, we have the manpower, resources and expertise to
complete projects that are local, regional, national or
international in scope.
On August 30, 2007, Quanta acquired, through a merger
transaction (the Merger), all of the outstanding common stock of
InfraSource Services, Inc. (InfraSource). For accounting
purposes, the transaction was effective as of August 31,
2007, and results of InfraSources operations have been
included in our consolidated financial statements subsequent to
August 31, 2007. Similar to Quanta, InfraSource provided
specialized infrastructure contracting services to the electric
power, gas and telecommunications industries primarily in the
United States. The acquisition enhanced and expanded our
footprint, enhanced capabilities in our existing service areas
and added a dark fiber leasing business that involves the
leasing of
point-to-point
telecommunications infrastructure in select markets.
We believe that we are one of the largest contractors serving
the transmission and distribution sector of the North American
electric utility industry. Our consolidated revenues for the
year ended December 31, 2007 were approximately
$2.66 billion, of which 57% was attributable to electric
power work, 14% to gas work, 17% to telecommunications and cable
television work and 12% to ancillary services, such as inside
electrical wiring, intelligent traffic networks, fueling
systems, cable and control systems for light rail lines,
airports and highways and specialty rock trenching, directional
boring and road milling for industrial and commercial customers.
We were organized as a corporation in the state of Delaware in
1997 and since that time have made strategic acquisitions and
grown organically to expand our geographic presence, generate
operating synergies with existing businesses and develop new
capabilities to meet our customers evolving needs.
We have established a nationwide presence with a workforce of
over 15,000 employees, which enables us to quickly and
reliably serve our diversified customer base. Our customers
include many of the leading companies in the industries we serve.
Representative customers include:
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American Electric Power
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AT&T
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BC Transmission Corporation
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CenterPoint Energy
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Comcast
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Crosstex Energy Services
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Duke Energy
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Entergy
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Exelon
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Florida Power & Light
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Georgia Power Company
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Lower Colorado River Authority
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Nokia
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Northeast Utilities System
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Pacific Gas and Electric
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Puget Sound Energy
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San Diego Gas & Electric
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Sempra Energy Company
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Southern California Edison
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Verizon Communications
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Westar Energy, Inc.
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Wisconsin Public Service
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Xcel Energy
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We believe our reputation for responsiveness, performance,
geographic reach and a comprehensive service offering has also
enabled us to develop strong strategic alliances with numerous
customers.
Industry
Overview
We estimate that the total amount of annual outsourced
infrastructure spending in the four primary industries we serve
is in excess of $30 billion. We believe that we are one of
the largest specialty contractors
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providing services for the installation and maintenance of
network infrastructure and that we and four other large
specialty contractors providing these services account for less
than 15% of this market. Smaller, typically private companies
provide the balance of these services.
We expect the following industry trends to impact demand for our
services in the future, although we cannot predict the timing or
magnitude of that impact:
Need to upgrade electric power transmission and distribution
networks. The U.S. and Canadian electric
power grid, which consists of more than 200,000 miles of
high-voltage lines delivering electricity to over
300 million people, is aging and requires significant
maintenance and expansion to handle the nations current
and growing power needs. In addition, the grid must facilitate
the sale of electricity across competitive regional networks, a
function for which it was not originally designed. According to
the North American Electric Reliability Council (NERC), industry
professionals rank the aging infrastructure and limited new
construction as the number one challenge to reliability of the
transmission system.
While the grid continues to deteriorate, demand for electricity
is expected to continue to grow. According to the 2008 Annual
Energy Outlook published by the U.S. Department of
Energys Energy Information Administration (EIA),
population in the United States has increased by about 20% since
1990, with energy consumption increasing by a comparable 18%.
The EIA also projects in the same report that total
U.S. electricity sales from producers to consumers will
increase by 41% from 3,660 billion
kilowatt-hours
in 2005 to 5,168 billion
kilowatt-hours
in 2030. NERC reports in its 2007 Long-Term Reliability
Assessment that peak demand for electricity in the U.S., which
typically occurs in the summer, is forecast to increase by
135,000 megawatts or 17.7% over the next ten years.
This increasing demand for electricity, coupled with the aging
infrastructure, is expected to result in increased spending on
transmission and distribution systems. According to an Edison
Electric Institute (EEI) report published in January 2008,
investor-owned utilities spent a total of $6.9 billion on
their transmission systems in 2006 and plan to invest an
additional $38.1 billion in their transmission systems from
2007 to 2010. This represents a 60% increase over the amount
invested from 2003 to 2006. NERC projects the number of
transmission miles will increase by 8.8% or 14,500 circuit miles
in the U.S. over the next ten years. We believe spending
levels will continue to increase as utilities work to address
infrastructure maintenance requirements, as well as the future
reliability standards required by the Energy Policy Act of 2005
(Energy Act).
The Energy Policy Act of 2005. We expect the
Energy Act, which was enacted in August 2005, to result in
increased spending by the power industry over the next decade.
Since enactment, several aspects of the Energy Act have come
into effect and, as a result, have better positioned utilities
to finance and implement system enhancements. The objectives of
the Energy Act include improving the nations electric
transmission capacity and reliability and promoting investment
in the nations energy infrastructure. It provides for a
self-regulating reliability organization to implement and
enforce mandatory reliability standards on all market
participants, with oversight by the Federal Energy Regulatory
Commission (FERC). FERC has issued rules to provide a more
favorable return on equity for transmission system owners, and
it has approved incentive rates to encourage transmission
expansion and help ensure reliability in certain regions of the
nation.
A significant provision of the Energy Act is the repeal of a
longstanding barrier to effective competition the
Public Utility Holding Company Act of 1935 (PUHCA). We believe
the repeal of PUHCA opens the electricity and natural gas
sectors to new sources of investment in necessary energy
infrastructure.
We also anticipate that other aspects of the Energy Act will
make investment in the nations transmission system more
attractive and lead to a streamlined permitting process. The
Energy Act provides for the designation of National Interest
Electric Transmission Corridors (NIETCs) to facilitate siting of
new transmission infrastructure. In October 2007, the
Department of Energy (DOE) designated two NIETCs the
Mid-Atlantic Area National Corridor and the Southwest Area
National Corridor. These NIETCs include two of the nations
most populated regions with major transmission
congestion the Northeast/Mid-Atlantic region and the
Southwest region. The NIETCs will be in effect for 12 years
to give regional transmission owners and utilities time to
evaluate, plan, and build additional transmission infrastructure
in the NIETCs. In addition, in
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November 2006, FERC issued a final rule promulgating the
requirements and procedures for invoking FERCs new
backstop authority to issue permits to construct or
modify electric transmission facilities in the NIETCs under
certain circumstances. However, both DOEs NIETC
designations and FERCs final rule regarding permitting
have been challenged and are currently subject to federal court
and administrative proceedings. Accordingly, the long-term
effect of DOEs NIETC designations and the transmission
siting rules will depend on the results of those challenges.
Increased opportunities in Fiber to the Premises, or FTTP,
and Fiber to the Node, or FTTN. We believe that
several of the large telecommunications companies are increasing
their spending, particularly for FTTP and FTTN initiatives.
Initiatives for this
last-mile
fiber build-out have been announced by Verizon and AT&T as
well as municipalities throughout the United States. Verizon has
indicated that it expects to pass 18 million premises with
its fiber network by the end of 2010. This equates to more than
50% of the households in Verizons 28-state area.
AT&T has also announced plans to offer internet telephone
service to 18 million homes by the middle of 2008,
including the installation of more than 38,000 miles of
fiber at an estimated cost of $4 billion. At the end of
2006, AT&T had launched its U-verse suite of services,
which includes internet protocol (IP) based television,
high-speed internet access and voice services. At the end of
2007, AT&T announced a major expansion of its U-verse
services, with deployment expected to reach approximately
30 million living units across 22 states by the end of
2010.
This fiber will deliver integrated
IP-based
television, high-speed internet and IP voice and wireless
bundles of products and services. More than two million
North American households have direct connections into
high-speed fiber networks. The rate of growth in fiber to the
home connections continues to increase as more Americans look to
next-generation networks for faster internet and more robust
video services. As a result of these efforts, we expect an
increase in demand for our telecommunications and underground
construction services over the next few years. While not all of
this spending will be for services that we provide, we believe
that we are well-positioned to furnish infrastructure solutions
for these initiatives throughout the United States.
Increased outsourcing of network infrastructure installation
and maintenance. We believe that electric power,
gas, telecommunications and cable television providers are
increasingly focusing on their core competencies, resulting in
an increase in the outsourcing of network services. Total
employment in the electric utility industry declined
dramatically in the last decade, reflecting, in part, the
outsourcing trend by utilities. We believe that by outsourcing
network services to third-party service providers such as us,
our customers can reduce costs, provide flexibility in budgets
and improve service and performance.
One of the largest issues facing utilities is the aging of the
workforce. NERC estimates that approximately one in three
utility workers will be 50 or older by 2010, yet there will be a
25 percent increase in demand by 2015. Many utilities look
to a third-party partner to help address this issue. With more
than 15,000 employees across the nation, we believe we are
well-positioned to provide skilled labor to supplement or
completely outsource a utilitys workforce. As a specialty
contractor with nationwide scope, we are able to leverage our
existing labor force and equipment infrastructure across
multiple customers and projects, resulting in better utilization
of labor and assets.
Increased capital expenditures resulting from our
customers improved financial position. The
economic health of the industries we serve continues to improve
after the downturn that a number of companies, including many of
our customers, suffered in past years. As a result, we believe
that both capital spending and maintenance budgets have
stabilized and will increase in certain key end markets. We
believe, however, that it is possible that a prolonged recession
could have a negative impact on our customers spending
patterns.
Increased demand calls for new generation
sources. Industry resources estimate that almost
50 percent of North American power generation currently
relies on fossil fuels such as coal, oil and natural gas.
Concerns about fuel diversification and greenhouse gas emissions
are driving an increased focus on the development of renewable
power sources such as wind, solar and hydro electric. Under
current mandates in 25 states, clean energy must comprise
up to 30 percent of a utilitys energy portfolio
within the next five to fifteen years. In
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2003, just ten states had such requirements. In a recent report
published by an industry research firm, it is predicted that the
U.S. wind power generation market alone will exceed 50
gigawatts of capacity by 2015 and will require capital
expenditures ranging from $184 billion to $356 billion
between 2007 and 2025. Due to the often remote location of
renewable sources of energy, significant transmission
infrastructure will be required. As renewable power resources
will only fulfill a portion of the increased demand in the
future, we also expect a continuation of new power generation
based on traditional resources such as natural gas. We
anticipate that the development of renewable power sources,
together with other power generation facilities to be built,
will result in an increase in demand for transmission and
substation engineering and installation services.
Strengths
Geographic reach and significant size and
scale. As a result of our nationwide operations
and significant scale, we are able to deploy services to
customers across the United States. This capability is
particularly important to our customers who operate networks
that span multiple states or regions. The scale of our
operations also allows us to mobilize significant numbers of
employees on short notice for emergency restoration services.
Strong financial profile. Our strong liquidity
position provides us with the flexibility to capitalize on new
business and growth opportunities. As of December 31, 2007,
we had cash and cash equivalents of $407.1 million, working
capital of $547.3 million and long-term debt of
$143.8 million. We also have a $475 million credit
facility under which we have available borrowing capacity of
$306.4 million as of December 31, 2007.
Strong and diverse customer relationships. Our
customer relationships extend over multiple end markets, and
include electric power, gas, telecommunications and cable
television companies, as well as commercial, industrial and
governmental entities. We have established a solid base of
long-standing customer relationships by providing high quality
service in a cost-efficient and timely manner. We enjoy
multi-year relationships with many of our customers. In some
cases, these relationships are decades old. We derive a
significant portion of our revenues from strategic alliances or
long-term maintenance agreements with our customers, which we
believe offer opportunities for future growth. For example,
certain of our strategic alliances contain an exclusivity clause
or a right of first refusal for a certain type of work or work
in a certain geographic region.
Proprietary technology. Our electric power
customers benefit from our ability to perform services without
interrupting power service to their customers, which we refer to
as energized services. We hold a U.S. patent for the
exclusive use through 2014 of the
LineMastertm
robotic arm, which enhances our ability to deliver these
energized services to our customers. We believe that delivery of
energized services is a significant factor in differentiating us
from our competition and winning new business. Our energized
services workforce is specially trained to deliver these
services and operate the
LineMastertm
robotic arm.
Delivery of comprehensive
end-to-end
solutions. We believe that electric power, gas,
telecommunications and cable television companies will continue
to seek service providers who can design, install and maintain
their networks on a quick and reliable, yet cost effective
basis. We are one of the few network service providers capable
of regularly delivering
end-to-end
solutions on a nationwide basis. As companies in the electric
power, gas, telecommunications and cable television industries
continue to search for service providers who can effectively
design, install and maintain their networks, we believe that our
service, industry and geographical breadth place us in a strong
position to meet these needs.
Experienced management team. Our executive
management team has an average of 30 years of experience
within the contracting industry, and our operating unit
executives average over 27 years of experience in
their respective industries.
Strategy
The key elements of our business strategy are:
Capitalize on favorable trends in certain key end
markets. We believe that we are well-positioned
to capitalize on increased capital spending by customers across
certain key end markets. Our strong and diverse
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customer relationships and geographic reach should allow us to
benefit from investments by, among others, electric power
customers in transmission and distribution infrastructure and by
large telecommunications companies in FTTP and FTTN initiatives.
Leverage existing customer relationships and expand services
to drive growth. We believe we can improve our
rate of growth by expanding the portfolio of services and
solutions we can provide to our existing and potential customer
base. Expanding our portfolio of services allows us to develop,
build and maintain networks on a regional, national and
international scale and adapt to our customers changing
needs. We believe that increasing our geographic and
technological capabilities, together with promoting best
practices and cross-selling our services to our customers,
positions us well for the current end market environment.
Focus on expanding operating efficiencies. We
intend to continue to:
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focus on growth in our more profitable services and on projects
that have higher margins;
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combine overlapping operations of certain operating units;
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share pricing, bidding, technology, equipment and best practices
among our operating units;
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adjust our costs to match the level of demand for our
services; and
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develop and expand the use of management information systems.
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Expand our dark fiber network. We intend to
continue to expand our dark fiber network which was acquired as
part of the InfraSource acquisition. Approximately
$85 million of our capital spending for 2008 is targeted
for the expansion of our dark fiber network in connection with
committed leasing arrangements with customers, with another
$75 million estimated to be expended in 2009. The dark
fiber leasing business consists primarily of leasing
point-to-point
telecommunications infrastructure in select markets to
communication services providers, large industrial and financial
services customers, school districts and other entities with
high bandwidth telecommunication needs.
Pursue strategic acquisitions. We continue to
evaluate potential acquisitions of companies with strong
management teams and good reputations to broaden our customer
base, expand our geographic area of operation and grow our
portfolio of services. During 2007 and from 1998 through 2000,
we grew significantly through acquisitions. We believe that
attractive acquisition candidates still exist as a result of the
highly fragmented nature of the industry, the inability of many
companies to expand and modernize due to capital constraints and
the desire of owners of acquisition candidates for liquidity. We
also believe that our financial strength, strong equity market
position and experienced management team will be attractive to
acquisition candidates.
Pursue new business opportunities. We
continuously leverage our core expertise and pursue new business
opportunities, including opportunities with renewable energy
projects and in the government and international arenas. In
connection with renewable energy projects, we have the
capabilities to install the facilities as well as provide
connectivity to the grid. We also believe that we are
well-positioned to participate in power and communications
infrastructure projects in the United States and overseas
involving customers in both the public and private sectors.
Services
We design, install and maintain networks for the electric power,
gas, telecommunications and cable television industries as well
as provide various ancillary services to commercial, industrial
and governmental entities. The following provides an overview of
the types of services we provide:
Electric power network services. We provide a
variety of
end-to-end
services to the electric power industry, including:
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installation, repair and maintenance of electric power
transmission lines ranging in capacity from 69,000 volts to
765,000 volts;
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installation, repair and maintenance of electric power
distribution networks;
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provision of planning services for electric distribution
networks;
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energized installation, maintenance and upgrades utilizing
unique bare hand and hot stick methods and our proprietary
robotic arm;
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design and construction of independent power producer (IPP)
transmission and substation facilities;
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design and construction of substation projects;
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installation of fiber optic lines for voice, video and data
transmission on existing electric power infrastructure;
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installation of broadband over power line (BPL) technology on
electric distribution networks;
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installation and maintenance of joint trench systems, which
include electric power, natural gas and telecommunications
networks in one trench;
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trenching and horizontal boring for underground electric power
network installations;
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design and installation of wind turbine facilities;
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installation of redundant systems, switchyards and transmission
networks for renewable generation power plants such as wind and
solar;
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provision of technical strategic consulting for electric
transmission and distribution systems;
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cable and fault locating; and
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storm damage and other emergency restoration work.
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Gas network services. We provide various
services to the natural gas industry, including:
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installation and maintenance of gas transmission and
distribution systems;
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trenching and horizontal boring for underground gas network
installations;
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provision of cathodic protection design and installation
services; and
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provision of pipeline testing and integrity services.
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Telecommunications and cable television network
services. Our telecommunications and cable
television network services include:
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fiber optic, copper and coaxial cable installation and
maintenance for video, data and voice transmission;
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design, construction and maintenance of DSL networks;
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leasing
point-to-point
telecommunications infrastructure through our dark fiber
business;
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engineering and erection of cellular, digital,
PCS®,
microwave and other wireless communications towers;
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design and installation of switching systems for incumbent local
exchange carriers, newly competitive local exchange carriers,
long distance providers and cable television providers;
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installation and maintenance of joint trench systems, which
include telecommunication, electric power and natural gas
networks in one trench;
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trenching and plowing applications;
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horizontal directional boring;
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vacuum excavation services;
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cable locating;
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upgrading power and telecommunications infrastructure for cable
installations;
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splicing and testing of fiber optic and copper networks and
balance sweep certification of coaxial networks;
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residential installation and customer connects, both analog and
digital, for cable television, telephone and Internet services;
and
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storm damage and other emergency restoration work.
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Ancillary services. We provide a variety of
comprehensive ancillary services to commercial, industrial and
governmental entities, including:
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design, installation, maintenance and repair of electrical
components, fiber optic cabling and building control and
automation systems;
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installation of intelligent traffic networks such as traffic
signals, controllers, connecting signals, variable message
signs, closed circuit television and other monitoring devices
for governments;
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installation of cable and control systems for light rail lines,
airports and highways;
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provision of specialty rock trenching, rock saw, rock wheel,
directional boring and road milling for industrial and
commercial customers; and
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installation of fueling systems.
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Financial
Information about Geographic Areas
We operate primarily in the United States; however, we derived
$25.7 million, $53.6 million and $71.5 million of
our revenues from foreign operations, the majority of which was
earned in Canada, during the years ended December 31, 2005,
2006 and 2007, respectively. In addition, we held property and
equipment in the amount of $4.9 million, $6.0 million
and $9.0 million in foreign countries as of December 31,
2005, 2006 and 2007, respectively.
Our business, financial condition and results of operations in
foreign countries may be adversely impacted by monetary and
fiscal policies, currency fluctuations, energy shortages,
regulatory requirements and other political, social and economic
developments or instability.
Customers,
Strategic Alliances and Preferred Provider
Relationships
Our customers include electric power, gas, telecommunications
and cable television companies, as well as commercial,
industrial and governmental entities. Our 10 largest customers
accounted for 30.7% of our consolidated revenues during the year
ended December 31, 2007. Our largest customer accounted for
approximately 5.1% of our consolidated revenues for the year
ended December 31, 2007.
Although we have a centralized marketing strategy, management at
each of our operating units is responsible for developing and
maintaining successful long-term relationships with customers.
Our operating unit management teams build upon existing customer
relationships to secure additional projects and increase revenue
from our current customer base. Many of these customer
relationships originated decades ago and are maintained through
a partnering approach to account management that includes
project evaluation and consulting, quality performance,
performance measurement and direct customer contact. On an
operating unit level, management maintains a parallel focus on
pursuing growth opportunities with prospective customers. We
continue to encourage operating unit management to cross-sell
services of other operating units to their customers. In
addition, our business development group promotes and markets
our services for prospective large national accounts and
projects that would require services from multiple operating
units.
We strive to maintain our status as a preferred vendor to our
customers. Many of our customers and prospective customers
maintain a list of preferred vendors with whom the customer
enters into a formal contractual agreement as a result of a
request-for-proposal
process. As a preferred vendor, we have met
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minimum standards for a specific category of service, maintain a
high level of performance and agree to certain payment terms and
negotiated rates.
We believe that our strategic relationships with large providers
of electric power and telecommunications services will offer
opportunities for future growth. Many of these strategic
relationships take the form of a strategic alliance or long-term
maintenance agreement. Strategic alliance agreements generally
state an intention to work together and many provide us with
preferential bidding procedures. Strategic alliances and
long-term maintenance agreements are typically agreements for an
initial term of approximately two to four years that may include
an option to add extensions at the end of the initial term.
Certain of our strategic alliance and long-term maintenance
agreements are evergreen contracts with exclusivity
clauses providing that we will be awarded all contracts, or a
right of first refusal, for a certain type of work or work in a
certain geographic region.
Backlog
Backlog represents the amount of revenue that we expect to
realize from work to be performed in the future on uncompleted
contracts, including new contractual agreements on which work
has not begun. Our backlog at December 31, 2005 and 2006
was approximately $1.30 billion and $1.48 billion
based only on work expected to be performed over the next twelve
months. At that time, we did not include estimated revenues
beyond twelve months in our calculations. Our total backlog at
December 31, 2007 was approximately $4.67 billion, of
which $2.36 billion is expected to be performed over the
next twelve months.
The backlog estimates above include amounts under long-term
maintenance contracts in addition to construction contracts. We
determine the amount of work under long-term maintenance
contracts, or master service agreements (MSAs), to be disclosed
as backlog as the estimate of future work to be performed based
upon recurring historical trends inherent in the current MSAs,
factoring in seasonal demand and projected customer needs based
upon ongoing communications with the customer. In many
instances, our customers are not contractually committed to
specific volumes of services under our MSAs, and many of our
contracts may be terminated with notice. There can be no
assurance as to our customers requirements or that our
estimates are accurate. In addition, many of our MSAs, as well
as contracts for dark fiber leasing, are subject to renewal
options. For purposes of calculating backlog, we have included
future renewal options only to the extent the renewals can
reasonably be expected to occur.
Competition
The markets in which we operate are highly competitive. We
compete with other contractors in most of the geographic markets
in which we operate, and several of our competitors are large
domestic companies that have significant financial, technical
and marketing resources. In addition, there are relatively few
barriers to entry into some of the industries in which we
operate and, as a result, any organization that has adequate
financial resources and access to technical expertise may become
a competitor. A significant portion of our revenues is currently
derived from unit price or fixed price agreements, and price is
often an important factor in the award of such agreements.
Accordingly, we could be underbid by our competitors in an
effort by them to procure such business. We believe that as
demand for our services increases, customers will increasingly
consider other factors in choosing a service provider, including
technical expertise and experience, financial and operational
resources, nationwide presence, industry reputation and
dependability, which we expect to benefit contractors such as
us. There can be no assurance, however, that our competitors
will not develop the expertise, experience and resources to
provide services that are superior in both price and quality to
our services, or that we will be able to maintain or enhance our
competitive position. We may also face competition from the
in-house service organizations of our existing or prospective
customers, including electric power, gas, telecommunications,
cable television and engineering companies, which employ
personnel who perform some of the same types of services a those
provided by us. Although a significant portion of these services
is currently outsourced by our customers, there can be no
assurance that our existing or prospective customers will
continue to outsource services in the future.
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Employees
As of December 31, 2007, we had 1,954 salaried employees,
including executive officers, project managers and engineers,
job superintendents, staff and clerical personnel, and
13,307 hourly employees, the number of which fluctuates
depending upon the number and size of the projects we undertake
at any particular time. Approximately 50% of our hourly
employees at December 31, 2007 were covered by collective
bargaining agreements with certain of our subsidiaries,
primarily with the International Brotherhood of Electrical
Workers (IBEW). These collective bargaining agreements require
the payment of specified wages to our union employees, the
observance of certain workplace rules and the payment of certain
amounts to multi-employer pension plans and employee benefit
trusts rather than administering the funds on behalf of these
employees. These collective bargaining agreements have varying
terms and expiration dates. The majority of the collective
bargaining agreements contain provisions that prohibit work
stoppages or strikes, even during specified negotiation periods
relating to agreement renewal, and provide for binding
arbitration dispute resolution in the event of prolonged
disagreement.
We provide a health, welfare and benefit plan for employees who
are not covered by collective bargaining agreements. We have a
401(k) plan pursuant to which eligible employees who are not
provided retirement benefits through a collective bargaining
agreement may make contributions through a payroll deduction. We
make matching cash contributions of 100% of each employees
contribution up to 3% of that employees salary and 50% of
each employees contribution between 3% and 6% of such
employees salary, up to the maximum amount permitted by
law.
Our industry is experiencing a shortage of journeyman linemen in
certain geographic areas. In response to the shortage, we seek
to take advantage of various IBEW and National Electrical
Contractors Association (NECA) training programs and support the
joint IBEW/NECA Apprenticeship Program which trains qualified
electrical workers. We have also established apprenticeship
training programs approved by the U.S. Department of Labor
for employees not subject to the IBEW/NECA Apprenticeship
Program, as well as additional company-wide and project-specific
employee training and educational programs.
We believe our relationships with our employees and union
representatives are good.
Materials
Our customers typically supply most or all of the materials
required for each job. However, for some of our contracts, we
may procure all or part of the materials required. We purchase
such materials from a variety of sources and do not anticipate
experiencing any difficulties in procuring such materials.
Training,
Quality Assurance and Safety
Performance of our services requires the use of equipment and
exposure to conditions that can be dangerous. Although we are
committed to a policy of operating safely and prudently, we have
been and will continue to be subject to claims by employees,
customers and third parties for property damage and personal
injuries resulting from performance of our services. Our
policies require that employees complete the prescribed training
and service program of the operating unit for which they work in
addition to those required, if applicable, by the IBEW/NECA
Apprenticeship Program prior to performing more sophisticated
and technical jobs. For example, all journeyman linemen are
required by the IBEW/NECA Apprenticeship Program to complete a
minimum of 7,000 hours of
on-the-job
training, approximately 200 hours of classroom education
and extensive testing and certification. Certain of our
operating units have established apprenticeship training
programs approved by the U.S. Department of Labor that
prescribe training requirements for employees who are not
otherwise subject to the requirements of the IBEW/NECA
Apprenticeship Program. Also, each operating unit requires
additional training, depending upon the sophistication and
technical requirements of each particular job. We have
established company-wide training and educational programs, as
well as comprehensive safety policies and regulations, by
sharing best practices throughout our operations.
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Regulation
Our operations are subject to various federal, state, local and
international laws and regulations including:
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licensing, permitting and inspection requirements applicable to
electricians and engineers;
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building and electrical codes;
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permitting and inspection requirements applicable to
construction projects;
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regulations relating to worker safety and environmental
protection; and
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special bidding, procurement and other requirements on
government projects.
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We believe that we have all the licenses required to conduct our
operations and that we are in substantial compliance with
applicable regulatory requirements. Our failure to comply with
applicable regulations could result in substantial fines or
revocation of our operating licenses.
Environmental
Matters
We are committed to the protection of the environment and train
our employees to perform their duties accordingly. We are
subject to numerous federal, state, local and international
environmental laws and regulations governing our operations,
including the handling, transportation and disposal of
non-hazardous and hazardous substances and wastes, as well as
emissions and discharges into the environment, including
discharges to air, surface water and groundwater and soil. We
also are subject to laws and regulations that impose liability
and cleanup responsibility for releases of hazardous substances
into the environment. Under certain of these laws and
regulations, such liabilities can be imposed for cleanup of
previously owned or operated properties, or properties to which
hazardous substances or wastes were sent by current or former
operations at our facilities, regardless of whether we directly
caused the contamination or violated any law at the time of
discharge or disposal. The presence of contamination from such
substances or wastes could interfere with ongoing operations or
adversely affect our ability to sell, lease or use our
properties as collateral for financing. In addition, we could be
held liable for significant penalties and damages under certain
environmental laws and regulations and also could be subject to
a revocation of our licenses or permits, which could materially
and adversely affect our business and results of operations.
From time to time, we may incur costs and obligations for
correcting environmental noncompliance matters and for
remediation at or relating to certain of our properties. We
believe we have complied with, and are currently complying with
our environmental obligations to date and that such obligations
will not have a material adverse effect on our business or
financial performance.
Risk
Management and Insurance
As of December 31, 2007, we were insured for
employers liability and general liability claims, subject
to a deductible of $1.0 million per occurrence, and for
auto liability subject to a deductible of $3.0 million per
occurrence. We were also insured for workers compensation
claims, subject to a deductible of $2.0 million per
occurrence. Additionally, we were subject to an annual
cumulative aggregate liability of up to $1.0 million on
workers compensation claims in excess of $2.0 million
per occurrence. We also had an employee health care benefits
plan for employees not subject to collective bargaining
agreements, which was subject to a deductible of $250,000 per
claimant per year until December 31, 2007. The deductible
for employee health care benefits was increased to $350,000 per
claimant per year beginning January 1, 2008.
Effective upon the Merger, InfraSource became insured under
Quantas property and casualty insurance program.
Previously, InfraSource was insured for workers
compensation, general liability and employers liability,
each subject to a deductible of $0.75 million per
occurrence. InfraSource was also insured for auto liability,
subject to a deductible of $0.5 million per occurrence.
InfraSource continued to operate its own health plan for
employees not subject to collective bargaining agreements
through December 31, 2007, which was subject to a
deductible of $150,000 per claimant per year.
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Losses under all of these insurance programs are accrued based
upon our estimates of the ultimate liability for claims reported
and an estimate of claims incurred but not reported, with
assistance from third-party actuaries. The accruals are based
upon known facts and historical trends, and management believes
such accruals to be adequate. As of December 31, 2006 and
December 31, 2007, the gross amount accrued for
self-insurance claims totaled $117.2 million and
$152.0 million, with $73.4 million and
$110.1 million considered to be long-term and included in
other non-current liabilities. Related insurance
recoveries/receivables as of December 31, 2006 and
December 31, 2007 were $10.7 million and
$22.1 million, of which $5.0 million and
$11.9 million are included in prepaid expenses and other
current assets and $5.7 million and $10.2 million are
included in other assets, net.
Our casualty insurance carrier for the policy periods from
August 1, 2000 to February 28, 2003 is experiencing
financial distress but is currently paying valid claims. In the
event that this insurers financial situation deteriorates,
we may be required to pay certain obligations that otherwise
would have been paid by this insurer. We estimate that the total
future claim amount that this insurer is currently obligated to
pay on our behalf for the above-mentioned policy periods is
approximately $4.5 million, and we have recorded a
receivable and corresponding liability for such amount as of
December 31, 2007. However, our estimate of the potential
range of these future claim amounts is between $2.1 million
and $7.8 million. The actual amounts ultimately paid by us
related to these claims, if any, may vary materially from the
above range and could be impacted by further claims development
and the extent to which the insurer could not honor its
obligations. We continue to monitor the financial situation of
this insurer and analyze any alternative actions that could be
pursued. In any event, we do not expect any failure by this
insurer to honor its obligations to us, or any alternative
actions we may pursue, to have a material adverse impact on our
financial condition; however, the impact could be material to
our results of operations or cash flows in a given period.
Seasonality
and Cyclicality
Our revenues and results of operations can be subject to
seasonal variations. These variations are influenced by weather,
customer spending patterns, bidding seasons and holidays.
Typically, our revenues are lowest in the first quarter of the
year because cold, snowy or wet conditions cause delays. The
second quarter is typically better than the first, as some
projects begin, but continued cold and wet weather can often
impact second quarter productivity. The third quarter is
typically the best of the year, as a greater number of projects
are underway and weather is more accommodating to work on
projects. Revenues during the fourth quarter of the year are
typically lower than the third quarter but higher than the
second quarter. Many projects are completed in the fourth
quarter and revenues often are impacted positively by customers
seeking to spend their capital budget before the end of the
year; however, the holiday season and inclement weather
sometimes can cause delays and thereby reduce revenues and
increase costs.
Working capital needs are generally higher during the spring and
summer seasons due to increased work activity. Conversely,
working capital needs are typically lower during the winter
months when work is usually slower due to winter weather.
Our industry can be highly cyclical. As a result, our volume of
business may be adversely affected by declines in new projects
in various geographic regions in the United States. Project
schedules, in particular in connection with larger, longer-term
projects, can also create fluctuations in the services provided
under projects, which may adversely affect us in a given
quarter. The financial condition of our customers and their
access to capital, variations in the margins of projects
performed during any particular quarter, regional economic
conditions, timing of acquisitions and the timing and magnitude
of acquisition assimilation costs may also materially affect our
quarterly results. Accordingly, our operating results in any
particular quarter or year may not be indicative of the results
that can be expected for any other quarter or year.
Website
Access and Other Information
Our website address is www.quantaservices.com. You may obtain
free electronic copies of our Annual Reports on
Form 10-K,
Quarterly Reports on
Form 10-Q,
Current Reports on
Form 8-K,
and any amendments to these reports through our website under
the heading SEC Filings or through the website of
the Securities
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and Exchange Commission (the SEC) at www.sec.gov. These reports
are available on our website as soon as reasonably practicable
after we electronically file them with, or furnish them to, the
SEC. In addition, our Corporate Governance Guidelines, Code of
Ethics and Business Conduct and the charters of our Audit
Committee, Compensation Committee and Governance and Nominating
Committee are posted on our website under the heading
Corporate Governance. We intend to disclose on our
website any amendments or waivers to our Code of Ethics and
Business Conduct that are required to be disclosed pursuant to
Item 5.05 of
Form 8-K.
You may obtain free copies of these items from our website or by
contacting our Corporate Secretary. This Annual Report on
Form 10-K
and our website contain information provided by other sources
that we believe are reliable. We cannot assure you that the
information obtained from other sources is accurate or complete.
No information on our website is incorporated by reference
herein.
Annual
CEO Certification
As required by New York Stock Exchange rules, on June 11,
2007, we submitted an annual certification signed by our Chief
Executive Officer certifying that he was not aware of any
violation by us of New York Stock Exchange corporate governance
listing standards as of the date of the certification.
Our business is subject to a variety of risks and uncertainties,
including, but not limited to, the risks and uncertainties
described below. The risks and uncertainties described below are
not the only ones facing our company. Additional risks and
uncertainties not known to us or not described below also may
impair our business operations. If any of the following risks
actually occur, our business, financial condition and results of
operations could be harmed and we may not be able to achieve our
goals. This Annual Report on
Form 10-K
also includes statements reflecting assumptions, expectations,
projections, intentions or beliefs about future events that are
intended as forward-looking statements under the
Private Securities Litigation Reform Act of 1995 and should be
read in conjunction with the section entitled
Uncertainty of Forward-Looking Statements and
Information included in Item 7
Managements Discussion and Analysis of Financial
Condition and Results of Operations.
Our
operating results may vary significantly from quarter to
quarter.
We typically experience lower gross and operating margins during
winter months due to lower demand for our services and more
difficult operating conditions. Additionally, our quarterly
results may be materially and adversely affected by:
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variations in the margins of projects performed during any
particular quarter;
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a change in the demand for our services caused by severe weather
conditions;
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increases in construction and design costs;
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the timing and volume of work under contract;
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regional or general economic conditions;
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the budgetary spending patterns of customers;
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the termination of existing agreements;
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losses experienced in our operations not otherwise covered by
insurance;
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a change in the mix of our customers, contracts and business;
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payment risk associated with the financial condition of our
customers;
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changes in bonding and lien requirements applicable to existing
and new agreements;
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costs we incur to support growth internally or through
acquisitions or otherwise;
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the timing and integration of acquisitions; and
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the timing and magnitude of acquisition integration costs and
potential goodwill impairments.
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Accordingly, our operating results in any particular quarter may
not be indicative of the results that you can expect for any
other quarter or for the entire year.
We
incurred substantial transaction and Merger-related costs in
connection with the Merger and we may not realize all of the
anticipated synergies and other benefits from acquiring
InfraSource.
We have incurred and expect to continue to incur a number of
non-recurring transaction and Merger-related costs associated
with completing the Merger with InfraSource, combining the
operations of the two companies and achieving desired synergies.
These fees and costs may be significant. Additional
unanticipated costs may be incurred in the integration of the
businesses of Quanta and InfraSource. Although we expect that
the elimination of duplicative costs, as well as the realization
of other efficiencies, related to the integration of the two
businesses will offset the incremental transaction and
Merger-related costs over time, this net benefit may not be
achieved in the near term, or at all.
The success of the Merger will depend, in part, on our ability
to realize the synergies and other benefits from acquiring
InfraSource. To realize these synergies and benefits, however,
we must successfully integrate the operations and personnel of
InfraSource into our business. We have made substantial progress
toward the integration of the two companies, but if this
integration is unsuccessful, the anticipated benefits of the
Merger may not be realized fully or at all, may take longer or
cost more to realize than expected. Because we and InfraSource
have previously operated as independent companies, it is
possible that integration will result in the future loss of
valuable employees, the disruption of our business or
inconsistencies in standards, controls, procedures, practices,
policies and compensation arrangements. The size of the Merger
may also make integration difficult, expensive and disruptive,
adversely affecting our revenues and earnings.
As a
result of the Merger with InfraSource, we are subject to
additional risks.
As a result of the Merger, our results of operations could be
adversely affected by any issues attributable to
InfraSources operations that arose prior to the closing of
the Merger, including issues with respect to InfraSource
projects that may decrease our profitability or result in
litigation. Furthermore, to the extent that InfraSource had or
is perceived by customers to have had operational challenges,
such as on-time performance, safety issues or workforce issues,
those challenges may raise concerns by our customers, which may
limit or impede our future ability to obtain additional work
from those customers.
Quanta and InfraSource also had some customer overlap prior to
the Merger. If any of these customers in common decrease their
amount of business with us to reduce their reliance on a single
company, such decrease in business could adversely impact our
sales and profitability.
InfraSource, certain of its officers and directors and various
other parties, including David R. Helwig, the former chief
executive officer of InfraSource, who became a director of
Quanta after completion of the Merger, are defendants in a
lawsuit seeking unspecified damages filed in the State District
Court in Harris County, Texas. The plaintiffs allege that the
defendants violated their fiduciary duties and committed
constructive fraud by failing to maximize shareholder value in
connection with certain acquisitions by InfraSource Incorporated
that closed in 1999 and 2000 and the acquisition of InfraSource
Incorporated by InfraSource in 2003 and committed other acts of
misconduct following the filing of the petition. The parties
agreed to settle this lawsuit in January 2008 and agreed to a
dismissal of all material claims, although the dismissal has not
yet been ordered by the court.
An
economic downturn may lead to less demand for our
services.
Because the vast majority of our revenue is derived from a few
industries, a downturn in any of those industries would
adversely affect our results of operations. The
telecommunications and utility markets experienced substantial
change during 2002 and 2003 as evidenced by an increased number
of bankruptcies in the telecommunications market, continued
devaluation of many of our customers debt and equity
securities and pricing pressures resulting from challenges faced
by major industry participants. These factors contributed
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to the delay and cancellation of projects and reduction of
capital spending, which impacted our operations and our ability
to grow at historical levels. A number of other factors,
including financing conditions and potential bankruptcies in the
industries we serve or a prolonged economic recession, could
adversely affect our customers and their ability or willingness
to fund capital expenditures in the future or pay for past
services. Additionally, our gas distribution installation
business is driven in part by the housing construction market,
and continued declines in new housing construction could cause
reductions in our gas distribution installation business.
Consolidation, competition or capital constraints in the
electric power, gas, telecommunications or cable television
industries may also result in reduced spending by, or the loss
of, one or more of our customers.
Project
delays or cancellations may result in additional costs to us,
reductions in revenues or the payment of liquidated
damages.
In certain circumstances, we guarantee project completion by a
scheduled acceptance date or achievement of certain acceptance
and performance testing levels. Failure to meet any of those
schedules or performance requirements could result in additional
costs or penalties, including liquidated damages, and such
amounts could exceed expected project profit. Many projects
involve challenging engineering, procurement and construction
phases that may occur over extended time periods, sometimes up
to two years. We may encounter difficulties in engineering,
delays in designs or materials provided by the customer or a
third party, equipment and material delivery, schedule changes,
weather-related delays and other factors, some of which are
beyond our control, that impact our ability to complete the
project in accordance with the original delivery schedule. For
example, the recent increase in demand for transmission services
has strained production resources, creating significant lead
times for obtaining large transformers, transmission towers and
poles. As a result, electric transmission project revenues could
be significantly reduced or delayed due to the difficulty we or
our customers may experience in obtaining required materials. In
addition, we occasionally contract with third-party
subcontractors to assist us with the completion of contracts.
Any delay by suppliers or by subcontractors in the completion of
their portion of the project, or any failure by a subcontractor
to satisfactorily complete its portion of the project may result
in delays in the overall progress of the project or may cause us
to incur additional costs, or both. We also may encounter
project delays due to local opposition, which may include
injunctive actions as well as public protests, to the siting of
transmission lines or other facilities.
Delays and additional costs may be substantial and, in some
cases, we may be required to compensate the customer for such
delays. We may not be able to recover all of such costs. In
extreme cases, the above-mentioned factors could cause project
cancellations, and we may not be able to replace such projects
with similar projects or at all. Such delays or cancellations
may impact our reputation or relationships with customers,
adversely affecting our ability to secure new contracts.
Project contracts may require customers or other parties to
provide design, engineering information, equipment or materials
to be used on a project. In some cases, the project schedule or
the design, engineering information, equipment or materials may
be deficient or delivered later than required by the project
schedule. Our customers may change various elements of the
project after its commencement. Under these circumstances, we
generally negotiate with the customer with respect to the amount
of additional time required and the compensation to be paid to
us. We are subject to the risk that we may be unable to obtain,
through negotiation, arbitration, litigation or otherwise,
adequate amounts to compensate us for the additional work or
expenses incurred by us due to customer-requested change orders
or failure by the customer to timely deliver items, such as
engineering drawings or materials, required to be provided by
the customer. A failure to obtain adequate compensation for
these matters could require us to record a reduction to amounts
of revenue and gross profit recognized in prior periods under
the
percentage-of-completion
accounting method. Any such adjustments could be substantial.
Our
dependence upon fixed price contracts could adversely affect our
business.
We currently generate, and expect to continue to generate, a
portion of our revenues under fixed price contracts. We must
estimate the costs of completing a particular project to bid for
fixed price contracts. The actual cost of labor and materials,
however, may vary from the costs we originally estimated. These
variations,
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along with other risks inherent in performing fixed price
contracts, may cause actual revenue and gross profits for a
project to differ from those we originally estimated and could
result in reduced profitability or losses on projects. Depending
upon the size of a particular project, variations from the
estimated contract costs could have a significant impact on our
operating results for any fiscal quarter or year.
Our
use of
percentage-of-completion
accounting could result in a reduction or elimination of
previously reported profits.
As discussed in Item 7 Managements
Discussion and Analysis of Financial Condition and Results of
Operations Critical Accounting Policies
and in the notes to our consolidated financial statements
included in Item 8 hereof, a significant portion of our
revenues are recognized using the
percentage-of-completion
method of accounting, utilizing the
cost-to-cost
method. This method is used because management considers
expended costs to be the best available measure of progress on
these contracts. This accounting method is generally accepted
for fixed price contracts. The
percentage-of-completion
accounting practice we use results in our recognizing contract
revenues and earnings ratably over the contract term in
proportion to our incurrence of contract costs. The earnings or
losses recognized on individual contracts are based on estimates
of contract revenues, costs and profitability. Contract losses
are recognized in full when determined, and contract profit
estimates are adjusted based on ongoing reviews of contract
profitability. Further, a substantial portion of our contracts
contain various cost and performance incentives. Penalties are
recorded when known or finalized, which generally occurs during
the latter stages of the contract. In addition, we record cost
recovery claims when we believe recovery is probable and the
amounts can be reasonably estimated. Actual collection of claims
could differ from estimated amounts and could result in a
reduction or elimination of previously recognized earnings. In
certain circumstances, it is possible that such adjustments
could be significant.
We may
be unsuccessful at generating internal growth.
Our ability to generate internal growth will be affected by,
among other factors, our ability to:
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expand the range of services we offer to customers to address
their evolving network needs;
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attract new customers;
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increase the number of projects performed for existing customers;
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hire and retain qualified employees; and
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expand geographically, including internationally.
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In addition, our customers may delay or reduce the number or
size of projects available to us due to their inability to
obtain capital or pay for services provided. Many of the factors
affecting our ability to generate internal growth may be beyond
our control, and we cannot be certain that our strategies will
be successful or that we will be able to generate cash flow
sufficient to fund our operations and to support internal
growth. If we are unsuccessful, we may not be able to achieve
internal growth, expand our operations or grow our business.
Our
industry is highly competitive.
Our industry is served by numerous small, owner-operated private
companies, a few public companies and several large regional
companies. In addition, relatively few barriers prevent entry
into some of our industries. As a result, any organization that
has adequate financial resources and access to technical
expertise may become one of our competitors. Competition in the
industry depends on a number of factors, including price.
Certain of our competitors may have lower overhead cost
structures and, therefore, may be able to provide their services
at lower rates than we are able to provide. In addition, some of
our competitors have significant resources including financial,
technical and marketing resources. We cannot be certain that our
competitors will not develop the expertise, experience and
resources to provide services that are superior in both price
and quality to our services. Similarly, we cannot be certain
that we will be able to maintain or
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enhance our competitive position within our industry or maintain
our customer base at current levels. We also may face
competition from the in-house service organizations of our
existing or prospective customers. Electric power, gas,
telecommunications and cable television service providers
usually employ personnel who perform some of the same types of
services we do. We cannot be certain that our existing or
prospective customers will continue to outsource services in the
future.
The
Energy Policy Act of 2005 may fail to result in increased
spending on the electric power transmission
infrastructure.
Implementation of the Energy Act is still subject to
considerable fiscal and regulatory uncertainty. Regulations
implementing the components of the Energy Act that may affect
demand for our services have only recently been finalized and in
some cases remain subject to challenge before the Department of
Energy and in the federal courts. Accordingly, the effect of
these regulations, once finally implemented, is uncertain. As a
result, the legislation may not result in increased spending on
the electric power transmission infrastructure. Continued
uncertainty regarding the implementation of the Energy Act may
result in slower growth in demand for our services.
Our
business is labor intensive, and we may be unable to attract and
retain qualified employees.
Our ability to maintain our productivity and profitability will
be limited by our ability to employ, train and retain skilled
personnel necessary to meet our requirements. We cannot be
certain that we will be able to maintain an adequate skilled
labor force necessary to operate efficiently and to support our
growth strategy. For instance, we may experience shortages of
qualified journeyman linemen. In addition, we cannot be certain
that our labor expenses will not increase as a result of a
shortage in the supply of these skilled personnel. Labor
shortages or increased labor costs could impair our ability to
maintain our business or grow our revenues.
Our
business growth could outpace the capability of our corporate
management infrastructure.
We cannot be certain that our infrastructure will be adequate to
support our operations as they expand. Future growth also could
impose significant additional responsibilities on members of our
senior management, including the need to recruit and integrate
new senior level managers and executives. We cannot be certain
that we will be able to recruit and retain such additional
managers and executives. To the extent that we are unable to
manage our growth effectively, or are unable to attract and
retain additional qualified management, we may not be able to
expand our operations or execute our business plan.
Factors
beyond our control may affect our ability to successfully
execute our acquisition strategy, which may have an adverse
impact on our growth strategy.
Our business strategy includes expanding our presence in the
industries we serve through strategic acquisitions of companies
that complement or enhance our business. We expect to face
competition for acquisition opportunities, and some of our
competitors may have access to financing on more favorable terms
than us or have greater financial resources. This competition
may limit our acquisition opportunities and our ability to grow
through acquisitions or could raise the prices of acquisitions
and make them less accretive or possibly non-accretive to us.
Acquisitions that we may pursue may also involve significant
cash expenditures, debt incurrence or the issuance of
securities. Any acquisition may ultimately have a negative
impact on our business, financial condition and results of
operations.
We may
be unsuccessful at integrating companies that either we have
acquired or that we may acquire in the future.
As a part of our business strategy, we have acquired, and seek
to acquire in the future, companies that complement or enhance
our business. However, we cannot be sure that we will be able to
successfully integrate each of these companies with our existing
operations without substantial costs, delays or other
operational or financial problems. If we do not implement proper
overall business controls, our decentralized
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operating strategy could result in inconsistent operating and
financial practices at the companies we acquire and our overall
profitability could be adversely affected. Integrating our
acquired companies involves a number of special risks which
could have a negative impact on our business, financial
condition and results of operations, including:
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failure of acquired companies to achieve the results we expect;
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diversion of our managements attention from operational
and other matters;
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difficulties integrating the operations and personnel of
acquired companies;
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inability to retain key personnel of acquired companies;
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risks associated with unanticipated events or
liabilities; and
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potential disruptions of our business.
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If one of our acquired companies suffers customer
dissatisfaction or performance problems, the reputation of our
entire company could suffer.
Our
results of operations could be adversely affected as a result of
goodwill impairments.
When we acquire a business, we record an asset called
goodwill equal to the excess amount we pay for the
business, including liabilities assumed, over the fair value of
the tangible and intangible assets of the business we acquire.
For example, in connection with the Merger, we recorded
approximately $989.8 million in goodwill and
$158.8 million of intangible assets based on the
application of purchase accounting. Statement of Financial
Accounting Standards (SFAS) No. 142 provides that goodwill
and other intangible assets that have indefinite useful lives
not be amortized, but instead be tested at least annually for
impairment, and intangible assets that have finite useful lives
continue to be amortized over their useful lives.
SFAS No. 142 provides specific guidance for testing
goodwill and other
non-amortized
intangible assets for impairment. SFAS No. 142
requires management to make certain estimates and assumptions
when allocating goodwill to reporting units and determining the
fair value of reporting unit net assets and liabilities,
including, among other things, an assessment of market
conditions, projected cash flows, investment rates, cost of
capital and growth rates, which could significantly impact the
reported value of goodwill and other intangible assets. Fair
value is determined using a combination of the discounted cash
flow, market multiple and market capitalization valuation
approaches. Absent any impairment indicators, we perform our
impairment tests annually during the fourth quarter. As part of
our 2006 annual test for goodwill impairment, goodwill in the
amount of $56.8 million was written off as a non-cash
operating expense associated with a decrease in the expected
future demand for the services of one of our businesses, which
has historically served the cable television industry. Any
future impairments, including impairments of the goodwill or
intangible assets recorded in connection with the Merger, would
negatively impact our results of operations for the period in
which the impairment is recognized.
Our
financial results are based upon estimates and assumptions that
may differ from actual results.
In preparing our consolidated financial statements in conformity
with accounting principles generally accepted in the United
States, several estimates and assumptions are used by management
in determining the reported amounts of assets and liabilities,
revenues and expenses recognized during the periods presented
and disclosures of contingent assets and liabilities known to
exist as of the date of the financial statements. These
estimates and assumptions must be made because certain
information that is used in the preparation of our financial
statements is dependent on future events, cannot be calculated
with a high degree of precision from data available or is not
capable of being readily calculated based on generally accepted
methodologies. In some cases, these estimates are particularly
difficult to determine and we must exercise significant
judgment. Estimates are primarily used in our assessment of the
allowance for doubtful accounts, valuation of inventory, useful
lives of property and equipment, fair value assumptions in
analyzing goodwill and long-lived asset impairments,
self-insured claims liabilities, forfeiture estimates relating
to stock-based compensation, revenue recognition under
percentage-of-completion
accounting and provision for income taxes. Actual results for
all
19
estimates could differ materially from the estimates and
assumptions that we use, which could have a material adverse
effect on our financial condition, results of operations and
cash flows.
During
the ordinary course of our business, we may become subject to
lawsuits or indemnity claims, which could materially and
adversely affect our business and results of
operations.
We have in the past been, and may in the future be, named as a
defendant in lawsuits, claims and other legal proceedings during
the ordinary course of our business. These actions may seek,
among other things, compensation for alleged personal injury,
workers compensation, employment discrimination, breach of
contract, property damage, punitive damages, civil penalties or
other losses or injunctive or declaratory relief. In addition,
we generally indemnify our customers for claims related to the
services we provide and actions we take under our contracts with
them, and, in some instances, we may be allocated risk through
our contract terms for actions by our customers or other third
parties. Because our services in certain instances may be
integral to the operation and performance of our customers
infrastructure, we may become subject to lawsuits or claims for
any failure of the systems that we work on, even if our services
are not the cause of such failures, and we could be subject to
civil and criminal liabilities to the extent that our services
contributed to any property damage, personal injury or system
failure. The outcome of any of these lawsuits, claims or legal
proceedings could result in significant costs and diversion of
managements attention to the business. Payments of
significant amounts, even if reserved, could adversely affect
our reputation, liquidity and results of operations.
We are
self-insured against potential liabilities.
Although we maintain insurance policies with respect to
employers liability, general liability, automobile and
workers compensation claims, those policies are subject to
deductibles ranging from $1.0 million to $3.0 million
per occurrence depending on the insurance policy. We are
primarily self-insured for all claims that do not exceed the
amount of the applicable deductible. Additionally, we are
subject to an annual cumulative aggregate liability of up to
$1.0 million on workers compensation claims in excess
of $2.0 million per occurrence. We also have an employee
health care benefits plan for employees not subject to
collective bargaining agreements, which was subject to a
deductible of $250,000 per claimant per year until
December 31, 2007. The deductible for employee health care
benefits was increased to $350,000 per claimant per year
effective January 1, 2008.
Effective upon the Merger, InfraSource became insured under
Quantas property and casualty insurance program.
Previously, InfraSource was insured for workers
compensation, general liability and employers liability,
each subject to a deductible of $0.75 million per
occurrence. InfraSource was also insured for auto liability,
subject to a deductible of $0.5 million per occurrence.
InfraSource continued to operate its own health plan for
employees not subject to collective bargaining agreements
through December 31, 2007, which was subject to a
deductible of $150,000 per claimant per year.
Losses under all of these insurance programs are accrued based
upon our estimates of the ultimate liability for claims reported
and an estimate of claims incurred but not reported, with
assistance from third-party actuaries. However, insurance
liabilities are difficult to assess and estimate due to unknown
factors, including the severity of an injury, the determination
of our liability in proportion to other parties, the number of
incidents not reported and the effectiveness of our safety
program. The accruals are based upon known facts and historical
trends and management believes such accruals to be adequate. If
we were to experience insurance claims or costs significantly
above our estimates, our results of operations could be
materially and adversely affected in a given period.
Our
casualty insurance carrier for prior periods is experiencing
financial distress, which may require us to make payments for
losses that otherwise would be insured.
Our casualty insurance carrier for the policy periods from
August 1, 2000 to February 28, 2003 is experiencing
financial distress, but is currently paying valid claims. In the
event that this insurers financial situation deteriorates,
we may be required to pay certain obligations that otherwise
would have been paid by
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this insurer. We estimate that the total future claim amount
that this insurer is currently obligated to pay on our behalf
for the above mentioned policy periods is approximately
$4.5 million; however, our estimate of the potential range
of these future claim amounts is between $2.1 million and
$7.8 million. The actual amounts ultimately paid by us
related to these claims, if any, may vary materially from the
above range and could be impacted by further claims development
and the extent to which the insurer can not honor its
obligations. In any event, we do not expect any failure by this
insurer to honor its obligations to us to have a material
adverse impact on our financial condition; however, the impact
could be material to our results of operations or cash flow in a
given period.
We may
incur liabilities or suffer negative financial impact relating
to occupational health and safety matters.
Our operations are subject to extensive laws and regulations
relating to the maintenance of safe conditions in the workplace.
While we have invested, and will continue to invest, substantial
resources in our occupational health and safety programs, our
industry involves a high degree of operational risk and there
can be no assurance that we will avoid significant liability
exposure. Although we have taken what we believe are appropriate
precautions, we have suffered fatalities in the past and may
suffer additional fatalities in the future. Claims for damages
to persons, including claims for bodily injury or loss of life,
could result in substantial costs and liabilities. In addition,
if our safety record were to substantially deteriorate over
time, our customers could cancel our contracts and not award us
future business.
Our
profitability and financial operations may be negatively
affected by changes in, or interpretations of, existing state or
federal telecommunications regulations or new regulations that
could adversely affect our dark fiber leasing
business.
In connection with the Merger, we acquired InfraSources
dark fiber leasing business. Many of the dark fiber customers
benefit from the Universal Service
E-rate
program, which was established by Congress in the 1996
Telecommunications Act and is administered by the Universal
Service Administrative Company (the USAC) under the oversight of
the Federal Communications Commission (FCC). Under the
E-rate
program, schools, libraries and certain health-care facilities
may receive subsidies for certain approved telecommunications
services, internet access and internal connections. From time to
time, bills have been introduced in Congress that would
eliminate or curtail the
E-rate
program. Passage of such actions by the FCC or USAC to further
limit E-rate
subsidies could decrease the demand for telecommunications
infrastructure service by certain customers.
The telecommunications services we provide through our dark
fiber leasing business are subject to regulation by the FCC, to
the extent that they are interstate telecommunications services,
and by state regulatory agencies, when wholly within a
particular state. To remain eligible to provide services under
the E-rate
program, we must maintain telecommunications authorizations in
every state where we operate. Changes in federal or state
regulations could reduce the profitability of our dark fiber
leasing business. We could be subject to fines if the FCC or a
state regulatory agency were to determine that any of our
activities or positions are not in compliance with certain
regulations. If the profitability of our dark fiber leasing
business were to decline, or if this business were to become
subject to fines, our profitability and results of operations
could also be adversely affected.
Our
dark fiber leasing business is capital intensive and requires a
substantial investment before returns can be
realized.
Our dark fiber leasing business requires substantial amounts of
capital investment to build out new fiber networks. In 2008, our
proposed capital expenditures for our dark fiber leasing
business is approximately $85 million, with another
$75 million estimated to be expended in 2009. Although we
do not commit capital to new networks until we have a committed
lease arrangement in place with at least one customer, we may
not be able to recoup our initial investment in the network if
that customer defaults on its commitment. Even if the customer
does not default or we add additional customers to the network,
we still may not realize a return on the capital investment for
an extended period of time. Additionally, new or developing
technologies
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could negatively impact our dark fiber leasing business. If any
of the above events occur, it could result in an impairment of
our dark fiber network.
Many
of our contracts may be canceled on short notice or may not be
renewed upon completion or expiration, and we may be
unsuccessful in replacing our contracts in such
events.
We could experience a decrease in our revenue, net income and
liquidity if any of the following occur:
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our customers cancel a significant number of contracts or
contracts having significant value;
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we fail to win a significant number of our existing contracts
upon re-bid;
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we complete a significant number of non-recurring projects and
cannot replace them with similar projects; or
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we fail to reduce operating and overhead expenses consistent
with any decrease in our revenue.
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Many of our customers may cancel our contracts on short notice,
typically
30-90 days,
even if we are not in default under the contract. Certain of our
customers assign work to us on a
project-by-project
basis under master service agreements. Under these agreements,
our customers often have no obligation to assign a specific
amount of work to us. Our operations could decline significantly
if the anticipated volume of work is not assigned to us. Many of
our contracts, including our master service agreements, are
opened to public bid at the expiration of their terms. There can
be no assurance that we will be the successful bidder on our
existing contracts that come up for re-bid.
Backlog
may not be realized or may not result in profits.
Backlog is difficult to determine with certainty. Customers
often have no obligation under our contracts to assign or
release work to us, and many contracts may be terminated on
short notice. Reductions in backlog due to cancellation by a
customer or for other reasons could significantly reduce the
revenue and profit we actually receive from contracts included
in backlog. In the event of a project cancellation, we may be
reimbursed for certain costs but typically have no contractual
right to the total revenues reflected in our backlog. The
backlog we obtain in connection with any companies we acquire,
including InfraSource, may not be as large as we believed or may
not result in the revenue or profits we expected. In addition,
projects may remain in backlog for extended periods of time.
Consequently, we cannot assure you as to our customers
requirements or that our estimates are accurate.
We
extend credit to customers for purchases of our services, and in
the past we have had, and in the future we may have, difficulty
collecting receivables from major customers that have filed
bankruptcy or are otherwise experiencing financial
difficulties.
We grant credit, generally without collateral, to our customers,
which include electric power and gas companies,
telecommunications and cable television system operators,
governmental entities, general contractors, and builders, owners
and managers of commercial and industrial properties located
primarily in the United States. Consequently, we are subject to
potential credit risk related to changes in business and
economic factors throughout the United States. In the past, our
customers in the telecommunications business have experienced
significant financial difficulties and in several instances have
filed for bankruptcy. A number of our utility customers have
also experienced business challenges in the past. If additional
major customers file for bankruptcy or continue to experience
financial difficulties, or if anticipated recoveries relating to
receivables in existing bankruptcies or other workout situations
fail to materialize, we could experience reduced cash flows and
losses in excess of current allowances provided. In addition,
material changes in any of our customers revenues or cash
flows could affect our ability to collect amounts due from them.
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A
portion of our business depends on our ability to provide surety
bonds. We may be unable to compete for or work on certain
projects if we are not able to obtain the necessary surety
bonds.
Current or future market conditions, including losses incurred
in the construction industry or as a result of large corporate
bankruptcies, as well as changes in our suretys assessment
of our operating and financial risk, could cause our surety
providers to decline to issue or renew, or substantially reduce
the amount of, bonds for our work and could increase our bonding
costs. These actions could be taken on short notice. If our
surety providers were to limit or eliminate our access to
bonding, our alternatives would include seeking bonding capacity
from other sureties, finding more business that does not require
bonds and posting other forms of collateral for project
performance, such as letters of credit or cash. We may be unable
to secure these alternatives in a timely manner, on acceptable
terms, or at all, which could affect our ability to bid for or
work on future projects requiring financial assurances.
We have also granted security interests in various of our assets
to collateralize our obligations to the surety. Furthermore,
under standard terms in the surety market, sureties issue or
continue bonds on a
project-by-project
basis and can decline to issue bonds at any time or require the
posting of additional collateral as a condition to issuing or
renewing any bonds. If we were to experience an interruption or
reduction in the availability of bonding capacity as a result of
these or any other reasons, we may be unable to compete for or
work on certain projects that would require bonding.
The
departure of key personnel could disrupt our
business.
We depend on the continued efforts of our executive officers and
on senior management of our operating units, including the
businesses we acquire. Although we have entered into employment
agreements with terms of one to three years with most of our
executive officers and certain other key employees, we cannot be
certain that any individual will continue in such capacity for
any particular period of time. The loss of key personnel, or the
inability to hire and retain qualified employees, could
negatively impact our ability to manage our business. We do not
carry key-person life insurance on any of our employees.
Our
unionized workforce could adversely affect our operations and
our ability to complete future acquisitions.
As of December 31, 2007, approximately 50% of our hourly
employees were covered by collective bargaining agreements.
Although the majority of these agreements prohibit strikes and
work stoppages, we cannot be certain that strikes or work
stoppages will not occur in the future. Strikes or work
stoppages would adversely impact our relationships with our
customers and could cause us to lose business and decrease our
revenue. Additionally, these agreements may require us to
participate with other companies in multi-employer pension
plans. To the extent those plans are underfunded, the Employee
Retirement Income Security Act of 1974, as amended by the
Multi-Employer Pension Plan Amendments Act of 1980, may subject
us to substantial liabilities under those plans if we withdraw
from them or they are terminated. Furthermore, the Pension
Protection Act of 2006 added new funding rules generally
applicable to plan years beginning after 2007 for multi-employer
plans that are classified as endangered,
seriously endangered, or critical
status. For a plan in critical status, additional required
contributions and benefit reductions apply; however, we are not
currently aware of any multi-employer plan to which any of our
subsidiaries contributes being in critical status.
Our ability to complete future acquisitions could be adversely
affected because of our union status for a variety of reasons.
For instance, our union agreements may be incompatible with the
union agreements of a business we want to acquire and some
businesses may not want to become affiliated with a union based
company. Additionally, we may increase our exposure to
withdrawal liabilities for underfunded multi-employer pension
plans to which an acquired company contributes.
We may
not be successful in continuing to meet the requirements of the
Sarbanes-Oxley Act of 2002.
The Sarbanes-Oxley Act of 2002 has introduced many requirements
applicable to us regarding corporate governance and financial
reporting, including the requirements for management to report
on our internal
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controls over financial reporting and for our independent
registered public accounting firm to express an opinion over the
operating effectiveness of our internal control over financial
reporting. During 2007, we continued actions to ensure our
ability to comply with these requirements. As of
December 31, 2007, our internal control over financial
reporting was effective; however, there can be no assurance that
our internal control over financial reporting will be effective
in future years. In accordance with SEC guidance, our assessment
of the effectiveness of internal control over financial
reporting did not include InfraSource, which will be included in
future assessments. Failure to maintain effective internal
controls or the identification of significant internal control
deficiencies in InfraSource or other acquisitions made during
2007 or in the future could result in a decrease in the market
value of our common stock and our other publicly traded
securities, the reduced ability to obtain financing, the loss of
customers, penalties and additional expenditures to meet the
requirements.
Our
failure to comply with environmental laws could result in
significant liabilities.
Our operations are subject to various environmental laws and
regulations, including those dealing with the handling and
disposal of waste products, PCBs, fuel storage and air quality.
We perform work in many different types of underground
environments. If the field location maps supplied to us are not
accurate, or if objects are present in the soil that are not
indicated on the field location maps, our underground work could
strike objects in the soil, some of which may contain
pollutants. These objects may also rupture, resulting in the
discharge of pollutants. In such circumstances, we may be liable
for fines and damages, and we may be unable to obtain
reimbursement from the parties providing the incorrect
information. In addition, we perform directional drilling
operations below certain environmentally sensitive terrains and
water bodies. Due to the inconsistent nature of the terrain and
water bodies, it is possible that such directional drilling may
cause a surface fracture, resulting in the release of subsurface
materials. These subsurface materials may contain contaminants
in excess of amounts permitted by law, potentially exposing us
to remediation costs and fines. We also own and lease several
facilities at which we store our equipment. Some of these
facilities contain fuel storage tanks which are above or below
ground. If these tanks were to leak, we could be responsible for
the cost of remediation as well as potential fines.
In addition, new laws and regulations, stricter enforcement of
existing laws and regulations, the discovery of previously
unknown contamination or leaks, or the imposition of new
clean-up
requirements could require us to incur significant costs or
become the basis for new or increased liabilities that could
harm our financial condition and results of operations. In
certain instances, we have obtained indemnification or covenants
from third parties (including predecessors or lessors) for such
cleanup and other obligations and liabilities that we believe
are adequate to cover such obligations and liabilities. However,
such third-party indemnities or covenants may not cover all of
our costs, and such unanticipated obligations or liabilities, or
future obligations and liabilities, may have a material adverse
effect on our business operations or financial condition.
Further, we cannot be certain that we will be able to identify
or be indemnified for all potential environmental liabilities
relating to any acquired business.
Risks
associated with operating in international markets could
restrict our ability to expand globally and harm our business
and prospects.
While only a small percentage of our revenue is currently
derived from international markets, we hope to continue to
expand the volume of services that we provide internationally.
We presently conduct our international sales efforts in Canada,
Mexico and selected countries overseas, but expect that the
number of countries that we operate in could expand
significantly over the next few years. Economic conditions,
including those resulting from wars, civil unrest, acts of
terrorism and other conflicts, may adversely affect the global
economy, our customers and their ability to pay for our
services. In addition, there are numerous risks inherent in
conducting our business internationally, including, but not
limited to, potential instability in international markets,
changes in regulatory requirements applicable to international
operations, currency fluctuations in foreign countries,
political, economic and social conditions in foreign countries
and complex U.S. and foreign laws and treaties, including
tax laws and the U.S. Foreign Corrupt Practices Act. These
risks
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could restrict our ability to provide services to international
customers and could adversely affect our ability to operate our
business profitably.
Opportunities
within the government arena could lead to increased governmental
regulation applicable to us and unrecoverable start-up
costs.
Most government contracts are awarded through a regulated
competitive bidding process. As we pursue increased
opportunities in the government arena, managements focus
associated with the start up and bidding process may be diverted
away from other opportunities. If we were to be successful in
being awarded government contracts, a significant amount of
costs could be required before any revenues were realized from
these contracts. In addition, as a government contractor, we
would be subject to a number of procurement rules and other
public sector liabilities, any deemed violation of which could
lead to fines or penalties or a loss of business. Government
agencies routinely audit and investigate government contractors.
Government agencies may review a contractors performance
under its contracts, cost structure, and compliance with
applicable laws, regulations and standards. If government
agencies determine through these audits or reviews that costs
were improperly allocated to specific contracts, they will not
reimburse the contractor for those costs or may require the
contractor to refund previously reimbursed costs. If government
agencies determine that we engaged in improper activity, we may
be subject to civil and criminal penalties. In addition, if the
government were to even allege improper activity, we also could
experience serious harm to our reputation. Many government
contracts must be appropriated each year. If appropriations are
not made in subsequent years we would not realize all of the
potential revenues from any awarded contracts.
The
industries we serve are subject to rapid technological and
structural changes that could reduce the demand for the services
we provide.
The electric power, gas, telecommunications and cable television
industries are undergoing rapid change as a result of
technological advances that could, in certain cases, reduce the
demand for our services, impair the value of our dark fiber
network or otherwise negatively impact our business. New or
developing technologies could displace the wireline systems used
for voice, video and data transmissions, and improvements in
existing technology may allow telecommunications and cable
television companies to significantly improve their networks
without physically upgrading them.
We may
not have access in the future to sufficient funding to finance
desired growth and operations.
If we cannot secure additional financing in the future on
acceptable terms, we may be unable to support our growth
strategy or future operations. We cannot readily predict the
ability of certain customers to pay for past services or the
timing, size and success of our acquisition efforts. Using cash
for acquisitions limits our financial flexibility and makes us
more likely to seek additional capital through future debt or
equity financings. Our existing debt agreements contain
significant restrictions on our operational and financial
flexibility, including our ability to incur additional debt or
conduct equity financings, and if we seek more debt we may have
to agree to additional covenants that limit our operational and
financial flexibility. When we seek additional debt or equity
financings, we cannot be certain that additional debt or equity
will be available to us on terms acceptable to us or at all.
Furthermore, our credit facility has commitments from several
banks. With the current turbulent credit markets resulting from,
among other factors, losses from the sub-prime mortgage crisis,
banks may become more restrictive in their lending practices or
unable to fund their commitments, which may limit our access to
the capital needed to fund our growth and operations.
Our
convertible subordinated notes are presently convertible or may
be convertible in the future, which, if converted, may result in
substantial dilution to existing stockholders, lower prevailing
market prices for our common stock or cause a significant cash
outlay.
As a result of our common stock satisfying the market price
condition of our convertible subordinated notes, our 4.5%
convertible subordinated notes due 2023 (4.5% Notes) were
convertible at the option of the holder during each quarter of
2006 and 2007, and our 3.75% convertible subordinated notes due
2026 (3.75% Notes) were convertible at the option of the
holders during the third quarter of 2007. During 2007,
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$21,000 in aggregate principal amount of the 4.5% Notes
were settled in cash upon conversion by the holders. The
remaining 4.5% Notes are presently convertible at the
option of each holder, and the conversion period will expire on
March 31, 2008, but may continue or resume in future
periods upon the satisfaction of the market price condition or
other conditions. The 3.75% Notes are not presently
convertible, but may resume convertibility in future periods
upon satisfaction of the market price condition or other
conditions.
At any time on or after October 8, 2008, we may redeem for
cash some or all of the 4.5% Notes at the principal amount
thereof, plus accrued and unpaid interest. The holders of the
4.5% Notes that are called for redemption will have the
right to convert all or some of their notes.
We have the right to deliver shares of our common stock, cash or
a combination of cash and shares of our common stock upon a
conversion of the notes. The number of shares issuable upon
conversion will be determined based on a conversion rate of
approximately $11.14 per share for the 4.5% Notes and
approximately $22.41 for the 3.75% Notes. In the event that
all 4.5% Notes were converted for common stock, we would
issue an aggregate of 24.2 million shares of our common
stock. In the event that all 3.75% Notes were converted for
common stock, we would issue an aggregate of 6.4 million
shares of our common stock. The conversion of some or all of our
4.5% or 3.75% Notes into our common stock could cause
substantial dilution to existing stockholders. Any sales in the
public market of the common stock issued upon such conversion
could adversely affect prevailing market prices of our common
stock. In addition, the possibility that the notes may be
converted may encourage short-selling by market participants
because the conversion of the notes could depress the price of
our common stock.
If we elect to satisfy the conversion obligation in cash, the
amount of cash payable upon conversion of the notes will be
determined by the product of (i) the number of shares
issuable for the principal amount of the converted notes at a
conversion rate of approximately $11.14 per share for the
4.5% Notes and approximately $22.41 per share for the
3.75% Notes and (ii) the average closing price of our
common stock during a
20-day
trading period following the holders unretracted election to
convert the notes. To the extent we decide to pay cash to settle
any conversions and the average closing price of our common
stock during this period exceeds $11.14 per share for the
4.5% Notes or $22.41 for the 3.75% Notes, we would
have to pay cash in excess of the principal amount of the notes
being converted, which would result in the recording of a loss
on extinguishment of debt.
On October 1, 2008, the holders of the 4.5% Notes may
elect repayment, which would require us to pay, in cash, the
aggregate principal amount, plus accrued and unpaid interest, of
the notes held by the holders who elect repayment. As a result
of the holders repayment right, we reclassified the
$270 million aggregate principal amount outstanding of the
4.5% Notes into a current obligation in October 2007.
Currently, our common stock price exceeds the conversion price.
If our common stock price exceeds the conversion price in
October 2008, it is not likely that any holder of the
4.5% Notes will elect repayment on October 1, 2008,
but it is likely that if we were to redeem the 4.5% Notes
on or after October 8, 2008, the holders of the notes
subject to redemption would convert their notes. On the other
hand, if our common stock price is below the conversion price,
it is more likely that the holders of the 4.5% Notes would
elect repayment or would not convert upon a redemption. We have
not yet determined whether we will use cash on hand, issue
equity or incur additional debt to fund our cash obligation if
we are required to repay or determine to redeem the
4.5% Notes. We have also not yet determined whether we will
settle any conversion obligation with respect to the
4.5% Notes in shares of our common stock, cash or a
combination thereof.
Certain
provisions of our corporate governing documents could make an
acquisition of our company more difficult.
The following provisions of our certificate of incorporation and
bylaws, as currently in effect, as well as our stockholder
rights plan and Delaware law, could discourage potential
proposals to acquire us, delay or
26
prevent a change in control of us or limit the price that
investors may be willing to pay in the future for shares of our
common stock:
|
|
|
|
|
our certificate of incorporation permits our Board of Directors
to issue blank check preferred stock and to adopt
amendments to our bylaws;
|
|
|
|
our bylaws contain restrictions regarding the right of
stockholders to nominate directors and to submit proposals to be
considered at stockholder meetings;
|
|
|
|
our certificate of incorporation and bylaws restrict the right
of stockholders to call a special meeting of stockholders and to
act by written consent;
|
|
|
|
we are subject to provisions of Delaware law which prohibit us
from engaging in any of a broad range of business transactions
with an interested stockholder for a period of three
years following the date such stockholder became classified as
an interested stockholder; and
|
|
|
|
we have adopted a stockholder rights plan that could cause
substantial dilution to a person or group that attempts to
acquire us on terms not approved by our Board of Directors or
permitted by the stockholder rights plan.
|
|
|
ITEM 1B.
|
Unresolved
Staff Comments
|
None.
Facilities
We lease our corporate headquarters in Houston, Texas and
maintain facilities nationwide. Our facilities are used for
offices, equipment yards, warehouses, storage and vehicle shops.
As of December 31, 2007, we own 30 of the facilities we
occupy, many of which are encumbered by our credit facility, and
we lease the remainder. We believe that our existing facilities
are sufficient for our current needs.
Equipment
We operate a nationwide fleet of owned and leased trucks and
trailers, support vehicles and specialty construction equipment,
such as backhoes, excavators, trenchers, generators, boring
machines, cranes, wire pullers and tensioners, all of which are
encumbered by our credit facility. As of December 31, 2007,
the total size of the rolling-stock fleet was approximately
25,000 units. Most of this fleet is serviced by our own
mechanics who work at various maintenance sites and facilities.
We believe that these vehicles generally are well maintained and
adequate for our present operations.
|
|
ITEM 3.
|
Legal
Proceedings
|
InfraSource, certain of its officers and directors and various
other parties, including David R. Helwig, the former chief
executive officer of InfraSource who became a director of Quanta
after completion of the Merger, are defendants in a lawsuit
seeking unspecified damages filed in the State District Court in
Harris County, Texas on September 21, 2005. The plaintiffs
allege that the defendants violated their fiduciary duties and
committed constructive fraud by failing to maximize shareholder
value in connection with certain acquisitions by InfraSource
Incorporated that closed in 1999 and 2000 and the acquisition of
InfraSource Incorporated by InfraSource in 2003 and committed
other acts of misconduct following the filing of the petition.
The parties settled this lawsuit in January 2008 and agreed to a
dismissal of all material claims, although the dismissal has not
yet been ordered by the court. At December 31, 2007, we had
accrued a reserve for the settlement amount.
We are from time to time a 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, punitive damages, civil penalties or other
losses, or injunctive or declaratory relief. With respect to all
such lawsuits, claims and proceedings, we record
27
reserves when it is probable that a liability has been incurred
and the amount of loss can be reasonably estimated. We do not
believe that any of these proceedings, separately or in the
aggregate, would be expected to have a material adverse effect
on our financial position, results of operations or cash flows.
|
|
ITEM 4.
|
Submission
of Matters to a Vote of Security Holders
|
During the fourth quarter of the year covered by this report, no
matters were submitted to a vote of our security holders,
through the solicitation of proxies or otherwise.
PART II
|
|
ITEM 5.
|
Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
|
Our common stock is listed on the New York Stock Exchange (NYSE)
under the symbol PWR. Our common stock trades with
an attached right to purchase Series D Junior Participating
Preferred Stock as more fully described under the heading
Stockholder Rights Plan in Note 10 to
our consolidated financial statements included in Item 8
hereof. The following table sets forth the high and low sales
prices of our common stock per quarter, as reported by the NYSE,
for the two most recent fiscal years.
|
|
|
|
|
|
|
|
|
|
|
High
|
|
|
Low
|
|
|
Year Ended December 31, 2006
|
|
|
|
|
|
|
|
|
1st Quarter
|
|
$
|
16.09
|
|
|
$
|
12.24
|
|
2nd Quarter
|
|
|
18.92
|
|
|
|
14.47
|
|
3rd Quarter
|
|
|
18.02
|
|
|
|
14.40
|
|
4th Quarter
|
|
|
20.05
|
|
|
|
16.32
|
|
Year Ended December 31, 2007
|
|
|
|
|
|
|
|
|
1st Quarter
|
|
$
|
26.04
|
|
|
$
|
18.66
|
|
2nd Quarter
|
|
|
32.11
|
|
|
|
25.27
|
|
3rd Quarter
|
|
|
32.58
|
|
|
|
23.36
|
|
4th Quarter
|
|
|
33.42
|
|
|
|
23.58
|
|
On February 20, 2008, there were 1,049 holders of record of
our common stock and 15 holders of record of our Limited Vote
Common Stock. There is no established trading market for the
Limited Vote Common Stock; however, the Limited Vote Common
Stock converts into common stock immediately upon sale. See
Note 10 to Notes to Consolidated Financial Statements for a
description of our Limited Vote Common Stock.
Unregistered
Sales of Securities During the Fourth Quarter of 2007
Between October 1, 2007 and December 31, 2007, Quanta
completed one acquisition in which some of the consideration was
unregistered securities of Quanta. The aggregate consideration
paid in this transaction was $15.5 million in cash and
337,108 shares of common stock. This acquisition was not
affiliated with any other acquisition prior to such transaction.
All securities listed on the following table were shares of
common stock. Quanta relied on Section 4(2) of the
Securities Act of 1933, as amended (the Securities Act), as the
basis for exemption from registration. For all issuances, the
purchasers were accredited investors as defined in
Rule 501 of the Securities Act. All issuances were to the
owners of the business acquired in privately negotiated
transactions, and not pursuant to public solicitations.
|
|
|
|
|
|
|
|
|
|
|
|
|
Period
|
|
Number of Shares
|
|
|
Purchaser
|
|
Consideration
|
|
October 1, 2007 October 31, 2007
|
|
|
337,108
|
|
|
|
Stockholders of
|
|
|
|
Sale of
|
|
|
|
|
|
|
|
|
acquired
|
|
|
|
acquired
|
|
|
|
|
|
|
|
|
company
|
|
|
|
company
|
|
28
Issuer
Purchases of Equity Securities During the Fourth Quarter of
2007
The following table contains information about our purchases of
equity securities during the three months ended
December 31, 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(d) Maximum
|
|
|
|
|
|
|
(c) Total Number
|
|
Number of Shares
|
|
|
|
|
|
|
of Shares Purchased
|
|
That May Yet be
|
|
|
|
|
|
|
as Part of Publicly
|
|
Purchased Under
|
|
|
(a) Total Number of
|
|
(b) Average Price
|
|
Announced Plans or
|
|
the Plans or
|
Period
|
|
Shares Purchased
|
|
Paid per Share
|
|
Programs
|
|
Programs
|
|
December 1, 2007 December 31, 2007
|
|
|
1,268
|
(i)
|
|
$
|
26.45
|
|
|
|
None
|
|
|
|
None
|
|
|
|
|
(i) |
|
Represents shares purchased from employees to satisfy tax
withholding obligations in connection with the vesting of
restricted stock awards pursuant to the 2001 Stock Incentive
Plan (as amended and restated March 13, 2003). |
Dividends
We currently intend to retain our future earnings, if any, to
finance the growth, development and expansion of our business.
Accordingly, we currently do not intend to declare or pay any
cash dividends on our common stock in the immediate future. The
declaration, payment and amount of future cash dividends, if
any, will be at the discretion of our Board of Directors after
taking into account various factors. These factors include our
financial condition, results of operations, cash flows from
operations, current and anticipated capital requirements and
expansion plans, the income tax laws then in effect and the
requirements of Delaware law. In addition, as discussed in
Debt Instruments Credit Facility
in Item 7 Managements Discussion and
Analysis of Financial Condition and Results of Operations,
our credit facility includes limitations on the payment of cash
dividends without the consent of the lenders.
Performance
Graph
The following Performance Graph and related information shall
not be deemed soliciting material or to be
filed with the Securities and Exchange Commission,
nor shall such information be incorporated by reference into any
future filing under the Securities Act of 1933 or Securities
Exchange Act of 1934, each as amended, except to the extent that
we specifically incorporate it by reference into such filing.
The following graph compares, for the period from
December 31, 2002 to December 31, 2007, the cumulative
stockholder return on our common stock with the cumulative total
return on the Standard & Poors 500 Index (the
S&P 500 Index), the Russell 2000 Index, and a peer group
index previously selected by our management that includes six
public companies within our industry (the Peer Group). The
comparison assumes that $100 was invested on December 31,
2002 in our common stock, the S&P 500 Index, the Russell
2000 Index and the Peer Group, and further assumes all dividends
were reinvested. The stock price performance reflected on the
following graph is not necessarily indicative of future stock
price performance.
The Peer Group is composed of Dycom Industries, Inc., MasTec,
Inc., Chicago Bridge & Iron Company N.V., Shaw Group,
Inc. and Pike Electric Corporation. InfraSource Services, Inc.
was included in the Peer Group from 2004 through 2006 but has
been deleted from the Peer Group for 2007 as a result of its
acquisition by us in 2007. The companies in the Peer Group were
selected because they comprise a broad group of publicly held
corporations, each of which has some operations similar to ours.
When taken as a whole, the Peer Group more closely resembles our
total business than any individual company in the group.
29
COMPARISON
OF 5 YEAR CUMULATIVE TOTAL RETURN
AMONG QUANTA SERVICES, INC., THE S & P 500 INDEX,
THE RUSSELL 2000 INDEX AND THE PEER GROUP
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Measurement Period
|
|
|
|
|
|
12/31/2002
|
|
|
12/31/2003
|
|
|
12/31/2004
|
|
|
12/31/2005
|
|
|
12/31/2006
|
|
|
12/31/2007
|
|
Quanta Services, Inc.
|
|
$
|
100.00
|
|
|
|
|
208.57
|
|
|
|
|
228.57
|
|
|
|
|
376.29
|
|
|
|
|
562.00
|
|
|
|
|
749.71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
S&P 500 Index
|
|
$
|
100.00
|
|
|
|
|
128.68
|
|
|
|
|
142.69
|
|
|
|
|
149.70
|
|
|
|
|
173.34
|
|
|
|
|
182.87
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Russell 2000 Index
|
|
$
|
100.00
|
|
|
|
|
147.25
|
|
|
|
|
174.24
|
|
|
|
|
182.18
|
|
|
|
|
215.64
|
|
|
|
|
212.26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Peer Group
|
|
$
|
100.00
|
|
|
|
|
180.62
|
|
|
|
|
210.36
|
|
|
|
|
242.08
|
|
|
|
|
273.52
|
|
|
|
|
455.28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ITEM 6.
|
Selected
Financial Data
|
The following historical selected financial data has been
derived from the audited financial statements of Quanta. The
historical financial statement data reflects the acquisitions of
businesses accounted for as purchase transactions as of their
respective acquisition dates. On August 31, 2007, we sold
the operating assets associated with the business of
Environmental Professional Associates, Limited (EPA), a Quanta
subsidiary. The statements of operations data below do not
reflect the operations of EPA in any periods since EPAs
results of operations are reflected as discontinued operations
in our accompanying consolidated statements of operations.
Accordingly, the 2003 through 2006 amounts below do not agree to
the amounts previously reported. The historical selected
financial data should be read in conjunction with the historical
Consolidated Financial Statements and related notes thereto
included in Item 8 Financial Statements and
Supplementary Data.
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2007(f)
|
|
|
|
(In thousands, except per share information)
|
|
|
Consolidated Statements of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
1,624,563
|
|
|
$
|
1,608,577
|
|
|
$
|
1,842,255
|
|
|
$
|
2,109,632
|
|
|
$
|
2,656,036
|
|
Cost of services (including depreciation)
|
|
|
1,427,405
|
|
|
|
1,428,646
|
|
|
|
1,587,556
|
|
|
|
1,796,916
|
|
|
|
2,227,289
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
197,158
|
|
|
|
179,931
|
|
|
|
254,699
|
|
|
|
312,716
|
|
|
|
428,747
|
|
Selling, general and administrative expenses
|
|
|
176,912
|
|
|
|
170,231
|
|
|
|
186,411
|
|
|
|
181,478
|
|
|
|
240,508
|
|
Amortization of intangible assets
|
|
|
367
|
|
|
|
367
|
|
|
|
365
|
|
|
|
363
|
|
|
|
18,759
|
|
Goodwill impairment
|
|
|
6,452
|
(a)
|
|
|
|
|
|
|
|
|
|
|
56,812
|
(d)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
13,427
|
|
|
|
9,333
|
|
|
|
67,923
|
|
|
|
74,063
|
|
|
|
169,480
|
|
Interest expense
|
|
|
(31,822
|
)
|
|
|
(25,067
|
)
|
|
|
(23,949
|
)
|
|
|
(26,822
|
)
|
|
|
(21,515
|
)
|
Interest income
|
|
|
1,065
|
|
|
|
2,551
|
|
|
|
7,416
|
|
|
|
13,924
|
|
|
|
19,977
|
|
Gain (loss) on early extinguishment of debt, net
|
|
|
(35,055
|
)(b)
|
|
|
|
|
|
|
|
|
|
|
1,598
|
(e)
|
|
|
(34
|
)
|
Other income (expense), net
|
|
|
(2,481
|
)
|
|
|
17
|
|
|
|
235
|
|
|
|
425
|
|
|
|
(546
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before income taxes
|
|
|
(54,866
|
)
|
|
|
(13,166
|
)
|
|
|
51,625
|
|
|
|
63,188
|
|
|
|
167,362
|
|
Provision (benefit) for income taxes
|
|
|
(18,772
|
)
|
|
|
(3,689
|
)
|
|
|
22,446
|
|
|
|
46,955
|
|
|
|
34,222
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
|
(36,094
|
)
|
|
|
(9,477
|
)
|
|
|
29,179
|
|
|
|
16,233
|
|
|
|
133,140
|
|
Dividends on preferred stock, net of forfeitures
|
|
|
(2,109
|
)(c)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations attributable to common
stock
|
|
$
|
(33,985
|
)
|
|
$
|
(9,477
|
)
|
|
$
|
29,179
|
|
|
$
|
16,233
|
|
|
$
|
133,140
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share from continuing operations
|
|
$
|
(0.31
|
)
|
|
$
|
(0.08
|
)
|
|
$
|
0.25
|
|
|
$
|
0.14
|
|
|
$
|
0.98
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share from continuing operations
|
|
$
|
(0.31
|
)
|
|
$
|
(0.08
|
)
|
|
$
|
0.25
|
|
|
$
|
0.14
|
|
|
$
|
0.87
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
As part of our 2003 annual goodwill test for impairment,
goodwill of $6.5 million was written off as a non-cash
operating expense associated with the closure of one of our
telecommunications businesses. |
|
(b) |
|
In the fourth quarter of 2003, we recorded a $35.1 million
loss on early extinguishment of debt comprised of make-whole
prepayment premiums, the write-off of certain unamortized debt
issuance costs and other related costs due to the retirement of
our senior secured notes and termination of our then existing
credit facility. |
|
(c) |
|
For the year ended December 31, 2003, we recorded
approximately $2.1 million in forfeitures of dividends on
the Series A Convertible Preferred Stock. During the first
quarter of 2003, all outstanding shares of Series A
Convertible Preferred Stock were converted into shares of common
stock and the series was eliminated during the second quarter of
2003. Any dividends that had accrued on the respective shares of
Series A Convertible Preferred Stock were forfeited and the
dividend accrual was reversed on the date of conversion. |
31
|
|
|
(d) |
|
As part of our 2006 annual goodwill test for impairment,
goodwill of $56.8 million was written off as a non-cash
operating expense associated with a decrease in the expected
future demand for the services of one of our businesses, which
has historically served the cable television industry. |
|
(e) |
|
In the second quarter of 2006, we recorded a $1.6 million
gain on early extinguishment of debt comprised of the gain from
repurchasing a portion of our 4.0% convertible subordinated
notes, partially offset by costs associated with the related
tender offer for such notes. |
|
(f) |
|
On August 30, 2007, we acquired InfraSource and the results
of InfraSources operations have been included in the
consolidated financial statements subsequent to August 31,
2007. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2007 (a)
|
|
|
|
(In thousands)
|
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital
|
|
$
|
476,703
|
|
|
$
|
478,978
|
|
|
$
|
572,939
|
|
|
$
|
656,173
|
|
|
$
|
547,333
|
|
Total assets
|
|
|
1,466,435
|
|
|
|
1,459,997
|
|
|
|
1,554,785
|
|
|
|
1,639,157
|
|
|
|
3,387,832
|
|
Long-term debt, net of current maturities
|
|
|
58,051
|
|
|
|
21,863
|
|
|
|
7,591
|
|
|
|
|
|
|
|
|
|
Convertible subordinated notes, net of current maturities
|
|
|
442,500
|
|
|
|
442,500
|
|
|
|
442,500
|
|
|
|
413,750
|
|
|
|
143,750
|
|
Total stockholders equity
|
|
|
663,132
|
|
|
|
663,247
|
|
|
|
703,738
|
|
|
|
729,083
|
|
|
|
2,185,143
|
|
|
|
|
(a) |
|
On August 30, 2007, we acquired InfraSource and the results
of InfraSources operations have been included in the
consolidated financial statements subsequent to August 31,
2007. |
|
|
ITEM 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
The following discussion and analysis of our financial
condition and results of operations should be read in
conjunction with our historical consolidated financial
statements and related notes thereto in Item 8
Financial Statements and Supplementary Data. The
discussion below contains forward-looking statements that are
based upon our current expectations and are subject to
uncertainty and changes in circumstances. Actual results may
differ materially from these expectations due to inaccurate
assumptions and known or unknown risks and uncertainties,
including those identified in Uncertainty of
Forward-Looking Statements and Information below and in
Item 1A Risk Factors.
Introduction
We are a leading national provider of specialty contracting
services, offering
end-to-end
network solutions to the electric power, gas,
telecommunications, cable television and specialty services
industries. We believe we are one of the largest contractors
servicing the transmission and distribution sector of the North
American electric utility industry. We derive our revenues from
one reportable segment. Our customers include electric power,
gas, telecommunications and cable television companies, as well
as commercial, industrial and governmental entities. We had
consolidated revenues for the year ended December 31, 2007
of approximately $2.66 billion, of which 57% was
attributable to electric power work, 14% to gas work, 17% to
telecommunications and cable television work and 12% to
ancillary services, such as inside electrical wiring,
intelligent traffic networks, fueling systems, cable and control
systems for light rail lines, airports and highways and
specialty rock trenching, directional boring and road milling
for industrial and commercial customers.
Our customers include many of the leading companies in the
industries we serve. We have developed strong strategic
alliances with numerous customers and strive to develop and
maintain our status as a preferred vendor to our customers. We
enter into various types of contracts, including competitive
unit price, hourly rate, cost-plus (or time and materials
basis), and fixed price (or lump sum basis), the final terms and
prices of which we frequently negotiate with the customer.
Although the terms of our contracts vary considerably, most are
made on either a unit price or fixed price basis in which we
agree to do the work for a price per unit of
32
work performed (unit price) or for a fixed amount for the entire
project (fixed price). We complete a substantial majority of our
fixed price projects within one year, while we frequently
provide maintenance and repair work under open-ended unit price
or cost-plus master service agreements that are renewable
annually. Some of our customers require us to post performance
and payment bonds upon execution of the contract, depending upon
the nature of the work to be performed.
We generally recognize revenue on our unit price and cost-plus
contracts when units are completed or services are performed.
For our fixed price contracts, we typically record revenues as
work on the contract progresses on a
percentage-of-completion
basis. Under this valuation method, revenue is recognized based
on the percentage of total costs incurred to date in proportion
to total estimated costs to complete the contract. Fixed price
contracts generally include retainage provisions under which a
percentage of the contract price is withheld until the project
is complete and has been accepted by our customer.
Merger
with InfraSource Services, Inc.
On August 30, 2007, Quanta acquired, through a merger
transaction (the Merger), all of the outstanding common stock of
InfraSource Services, Inc. (InfraSource). Similar to Quanta,
InfraSource provided design, engineering, procurement,
construction, testing and maintenance services to electric power
utilities, natural gas utilities, telecommunication customers,
government entities and heavy industrial companies, such as
petrochemical, processing and refining businesses, primarily in
the United States. As a result of the Merger, Quanta enhanced
and expanded its position as a leading specialized contracting
services company serving the electric power, gas,
telecommunications and cable television industries and added a
dark fiber leasing business. The dark fiber leasing business
consists primarily of leasing
point-to-point
telecommunications infrastructure in select markets to
communication services providers, large industrial and financial
services customers, school districts and other entities with
high bandwidth telecommunication needs. The telecommunication
services provided through this business are subject to
regulation by the Federal Communications Commission and certain
state public utility commissions.
Seasonality;
Fluctuations of Results
Our revenues and results of operations can be subject to
seasonal and other variations. These variations are influenced
by weather, customer spending patterns, bidding seasons, project
schedules and timing and holidays. Typically, our revenues are
lowest in the first quarter of the year because cold, snowy or
wet conditions cause delays. The second quarter is typically
better than the first, as some projects begin, but continued
cold and wet weather can often impact second quarter
productivity. The third quarter is typically the best of the
year, as a greater number of projects are underway and weather
is more accommodating to work on projects. Revenues during the
fourth quarter of the year are typically lower than the third
quarter but higher than the second quarter. Many projects are
completed in the fourth quarter and revenues often are impacted
positively by customers seeking to spend their capital budget
before the end of the year; however, the holiday season and
inclement weather sometimes can cause delays and thereby reduce
revenues and increase costs.
Additionally, our industry can be highly cyclical. As a result,
our volume of business may be adversely affected by declines in
new projects in various geographic regions in the United States.
Project schedules, in particular in connection with larger,
longer-term projects, can also create fluctuations in the
services provided under projects, which may adversely affect us
in a given quarter. The financial condition of our customers and
their access to capital, variations in the margins of projects
performed during any particular quarter, regional and national
economic conditions, timing of acquisitions, the timing and
magnitude of acquisition assimilation costs and interest rate
fluctuations may also materially affect quarterly results.
Accordingly, our operating results in any particular quarter or
year may not be indicative of the results that can be expected
for any other quarter or for any other year. You should read
Outlook and Understanding Gross
Margins for additional discussion of trends and
challenges that may affect our financial condition and results
of operations.
33
Understanding
Gross Margins
Our gross margin is gross profit expressed as a percentage of
revenues. Cost of services, which is subtracted from revenues to
obtain gross profit, consists primarily of salaries, wages and
benefits to employees, depreciation, fuel and other equipment
expenses, equipment rentals, subcontracted services, insurance,
facilities expenses, materials and parts and supplies. Various
factors some controllable, some not
impact our gross margins on a quarterly or annual basis.
Seasonal and Geographical. As discussed above,
seasonal patterns can have a significant impact on gross
margins. Generally, business is slower in the winter months
versus the warmer months of the year. This can be offset
somewhat by increased demand for electrical service and repair
work resulting from severe weather. In addition, the mix of
business conducted in different parts of the country will affect
margins, as some parts of the country offer the opportunity for
higher gross margins than others.
Weather. Adverse or favorable weather
conditions can impact gross margins in a given period. For
example, it is typical in the first quarter of any fiscal year
that parts of the country may experience snow or rainfall that
may negatively impact our revenues and gross margin due to
reduced productivity. In many cases, projects may be delayed or
temporarily placed on hold. Conversely, in periods when weather
remains dry and temperatures are accommodating, more work can be
done, sometimes with less cost, which would have a favorable
impact on gross margins. In some cases, strong storms or
hurricanes can provide us with high margin emergency service
restoration work, which generally has a positive impact on
margins.
Revenue Mix. The mix of revenues derived from
the industries we serve will impact gross margins. Changes in
our customers spending patterns in each of the industries
we serve can cause an imbalance in supply and demand and,
therefore, affect margins and mix of revenues by industry served.
Service and Maintenance versus
Installation. Installation work is often obtained
on a fixed price basis, while maintenance work is often
performed under pre-established or negotiated prices or
cost-plus pricing arrangements. Gross margins for installation
work may vary from project to project, and can be higher than
maintenance work, because work obtained on a fixed price basis
has higher risk than other types of pricing arrangements. We
typically derive approximately 50% of our annual revenues from
maintenance work, but a higher portion of installation work in
any given quarter may affect our gross margins for that quarter.
Subcontract Work. Work that is subcontracted
to other service providers generally yields lower gross margins.
An increase in subcontract work in a given period may contribute
to a decrease in gross margin. We typically subcontract
approximately 10% to 15% of our work to other service providers.
Materials versus Labor. Margins may be lower
on projects on which we furnish materials as our
mark-up on
materials is generally lower than on labor costs. In a given
period, a higher percentage of work that has a higher materials
component may decrease overall gross margin.
Depreciation. We include depreciation in cost
of services. This is common practice in our industry, but can
make comparability to other companies difficult. This must be
taken into consideration when comparing us to other companies.
Insurance. Gross margins could be impacted by
fluctuations in insurance accruals as additional claims arise
and as circumstances and conditions of existing claims change.
We are insured for employers liability and general
liability claims, subject to a deductible of $1.0 million
per occurrence, and for auto liability subject to a deductible
of $3.0 million per occurrence. We are also insured for
workers compensation claims, subject to a deductible of
$2.0 million per occurrence. Additionally, we are subject
to an annual cumulative aggregate liability of up to
$1.0 million on workers compensation claims in excess
of $2.0 million per occurrence. We also have an employee
health care benefits plan for employees not subject to
collective bargaining agreements, which was subject to a
deductible of $250,000 per claimant per year until
December 31, 2007. The deductible for employee health care
benefits was increased to $350,000 per claimant per year
effective January 1, 2008.
Effective upon the Merger, InfraSource became insured under
Quantas property and casualty insurance program.
Previously, InfraSource was insured for workers
compensation, general liability and employers
34
liability, each subject to a deductible of $0.75 million
per occurrence. InfraSource was also insured for auto liability,
subject to a deductible of $0.5 million per occurrence.
InfraSource continued to operate its own health plan for
employees not subject to collective bargaining agreements
through December 31, 2007, which was subject to a
deductible of $150,000 per claimant per year.
Selling,
General and Administrative Expenses
Selling, general and administrative expenses consist primarily
of compensation and related benefits to management,
administrative salaries and benefits, marketing, office rent and
utilities, communications, professional fees, bad debt expense,
letter of credit fees and gains and losses on the sale of
property and equipment.
Results
of Operations
In accordance with SFAS No. 144, Accounting for
the Impairment or Disposal of Long-Lived Assets, the
results of operations data below does not reflect the operations
of Environmental Professional Associates, Limited (EPA) in any
periods since EPAs results of operations are reflected as
discontinued operations in our accompanying consolidated
statements of operations. Accordingly, the 2005 and 2006 amounts
below do not agree to the amounts previously reported. The
following table sets forth selected statements of operations
data and such data as a percentage of revenues for the years
indicated (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
Revenues
|
|
$
|
1,842,255
|
|
|
|
100.0
|
%
|
|
$
|
2,109,632
|
|
|
|
100.0
|
%
|
|
$
|
2,656,036
|
|
|
|
100.0
|
%
|
Cost of services (including depreciation)
|
|
|
1,587,556
|
|
|
|
86.2
|
|
|
|
1,796,916
|
|
|
|
85.2
|
|
|
|
2,227,289
|
|
|
|
83.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
254,699
|
|
|
|
13.8
|
|
|
|
312,716
|
|
|
|
14.8
|
|
|
|
428,747
|
|
|
|
16.1
|
|
Selling, general and administrative expenses
|
|
|
186,411
|
|
|
|
10.1
|
|
|
|
181,478
|
|
|
|
8.6
|
|
|
|
240,508
|
|
|
|
9.0
|
|
Amortization of intangible assets
|
|
|
365
|
|
|
|
|
|
|
|
363
|
|
|
|
|
|
|
|
18,759
|
|
|
|
0.7
|
|
Goodwill impairment
|
|
|
|
|
|
|
|
|
|
|
56,812
|
|
|
|
2.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
67,923
|
|
|
|
3.7
|
|
|
|
74,063
|
|
|
|
3.5
|
|
|
|
169,480
|
|
|
|
6.4
|
|
Interest expense
|
|
|
(23,949
|
)
|
|
|
(1.3
|
)
|
|
|
(26,822
|
)
|
|
|
(1.2
|
)
|
|
|
(21,515
|
)
|
|
|
(0.8
|
)
|
Interest income
|
|
|
7,416
|
|
|
|
0.4
|
|
|
|
13,924
|
|
|
|
0.7
|
|
|
|
19,977
|
|
|
|
0.7
|
|
Gain (loss) on early extinguishment of debt, net
|
|
|
|
|
|
|
|
|
|
|
1,598
|
|
|
|
|
|
|
|
(34
|
)
|
|
|
|
|
Other, net
|
|
|
235
|
|
|
|
|
|
|
|
425
|
|
|
|
|
|
|
|
(546
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes
|
|
|
51,625
|
|
|
|
2.8
|
|
|
|
63,188
|
|
|
|
3.0
|
|
|
|
167,362
|
|
|
|
6.3
|
|
Provision for income taxes
|
|
|
22,446
|
|
|
|
1.2
|
|
|
|
46,955
|
|
|
|
2.2
|
|
|
|
34,222
|
|
|
|
1.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
29,179
|
|
|
|
1.6
|
%
|
|
$
|
16,233
|
|
|
|
0.8
|
%
|
|
$
|
133,140
|
|
|
|
5.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
compared to 2006
Revenues. Revenues increased
$546.4 million, or 25.9%, to $2.66 billion for the
year ended December 31, 2007. Of the $546.4 million
increase, approximately $348.4 million relates to revenues
of the InfraSource operating units acquired through the Merger
for the period from September 1, 2007 through
December 31, 2007. The remaining $198.0 million
increase is due primarily to electric power services increasing
by approximately $157.3 million, or 13.7%, and
telecommunications and cable television network services
increasing by approximately $46.9 million, or 12.9%, offset
by a slight decrease in gas and ancillary services. The increase
in electric power services work is primarily due to the
increased number and size of projects that are a result of
larger capital budgets for our customers, approximately
$24.9 million in additional
35
emergency restoration service work, and improved pricing.
Revenues from telecommunications and cable television services
increased primarily due to increased services related to fiber
to the premises initiatives and improved pricing.
Gross profit. Gross profit increased
$116.0 million, or 37.1%, to $428.7 million for the
year ended December 31, 2007. Of the $116.0 million
increase, approximately $61.0 million relates to gross
profit of the InfraSource operating units acquired in the Merger
for the period September 1, 2007 through December 31,
2007. The additional $54.9 million increase in gross profit
resulted primarily from increased margins associated with
generally improved pricing for our services, higher productivity
and good weather that favorably impacted projects in the
Northeast during the summer months, higher volumes of emergency
restoration service work and better absorption of fixed costs.
These positive effects were partially offset by lower
productivity on certain projects due to heavy rainfall in the
south central United States during the second quarter and early
part of the third quarter.
Selling, general and administrative
expenses. Selling, general and administrative
expenses increased $59.0 million, or 32.5%, to
$240.5 million for the year ended December 31, 2007.
As a percentage of revenues, selling, general and administrative
expenses increased from 8.6% in 2006 to 9.0% in 2007. Of the
$59.0 million increase, $28.9 million relates to
selling, general and administrative expenses of the InfraSource
operating units acquired in the Merger for the period of
September 1, 2007 through December 31, 2007. The
remaining $30.1 million increase in selling, general and
administrative expenses resulted in part from $11.2 million
in increased salaries and benefits costs associated with
additional personnel, salary increases and higher performance
bonuses, $5.2 million in increased professional fees
primarily associated with ongoing litigation costs and
$2.4 million in third-party integration costs that were
incurred in 2007 as part of the InfraSource acquisition. Also
included were $5.3 million in net losses on sales of
equipment during 2007, as compared to $0.7 million in net
gains on sales of equipment in 2006. Included in the
$5.3 million in net losses in 2007 was an impairment charge
of $3.5 million for assets held for sale as of
December 31, 2007. As part of the Merger, management
identified excess equipment among the combined operations and
determined that this equipment would not be placed back into
service. Additionally, we had increases in travel costs of
$1.8 million and facilities costs of $1.7 million.
Goodwill impairment. A goodwill impairment
charge in the amount of $56.8 million was recorded during
the year ended December 31, 2006, while no goodwill
impairment was recorded during the year ended December 31,
2007. As part of our 2006 annual test for goodwill impairment,
goodwill in the amount of $56.8 million was written off as
a non-cash operating expense associated with a decrease in the
expected future demand for the services of one of our
businesses, which historically served the cable television
industry.
Interest expense. Interest expense decreased
$5.3 million to $21.5 million for the year ended
December 31, 2007, due partially to the expensing of
unamortized debt issuance costs of $3.3 million during 2006
as a result of replacing our prior credit facility in June 2006
and repurchasing 80.7% of our 4.0% convertible subordinated
notes in the second quarter of 2006. The 3.75% convertible
subordinated notes issued in the second quarter of 2006 have a
lower interest rate than the 4.0% convertible subordinated
notes. Additionally, interest expense has decreased as a result
of the maturity and repayment of the remaining 4.0% convertible
subordinated notes on July 2, 2007.
Interest income. Interest income was
$20.0 million for the year ended December 31, 2007,
compared to $13.9 million for the year ended
December 31, 2006. The increase in interest income
primarily relates to a higher average investment balance and
higher average interest rates for the year ended
December 31, 2007 as compared to the year ended
December 31, 2006.
Provision for income taxes. The provision for
income taxes was $34.2 million for the year ended
December 31, 2007, with an effective tax rate of 20.4%,
compared to a provision of $47.0 million for the year ended
December 31, 2006, with an effective tax rate of 74.3%. The
lower effective tax rate for 2007 results from
$34.4 million of tax benefits recorded in 2007 primarily
due to a decrease in reserves for uncertain tax positions
resulting from the settlement of a multi-year Internal Revenue
Service audit in the first quarter of 2007 and the expiration of
various federal and state tax statutes of limitations during the
third quarter of 2007. Excluding the tax benefits, the effective
tax rate would have been 41% for the year ended
December 31, 2007.
36
The higher tax rate in 2006 results primarily from the goodwill
impairment charge recorded during the fourth quarter of 2006,
the majority of which is not deductible for tax purposes.
Excluding the effect of the goodwill impairment charge, the
effective tax rate would have been 39.2% for the year ended
December 31, 2006.
2006
compared to 2005
Revenues. Revenues increased
$267.4 million, or 14.5%, to $2.11 billion for the
year ended December 31, 2006. Revenues for 2006 included a
lower volume of emergency restoration services as compared to
2005, which included the highest volume of emergency restoration
services in our history in the wake of hurricanes in the Gulf
Coast region of the United States. The total revenues associated
with emergency restoration services in 2005 were approximately
$167.5 million as compared to $106.0 million of
emergency restoration services in 2006. Excluding emergency
restoration service revenues from both periods, revenues derived
from electric power services increased in 2006 approximately
$138.2 million, or 15.3%. Actual revenues derived from
electric power services, including emergency restoration
services revenues, increased approximately $76.8 million,
or 7.2%. Revenues from gas network services increased by
approximately $90.4 million, or 45.1%, revenues from
telecommunications and cable television network services
increased by approximately $39.1 million, or 12.0%, and
revenues from ancillary services increased by approximately
$61.1 million, or 24.9%, for the year ended
December 31, 2006. These increases in revenues are
primarily a result of a higher volume of work from increased
spending by our customers resulting from the continued improving
financial health of our customers as well as improved pricing.
Gross profit. Gross profit increased
$58.0 million, or 22.8%, to $312.7 million for the
year ended December 31, 2006. As a percentage of revenues,
gross margin increased from 13.8% for the year ended
December 31, 2005 to 14.8% for the year ended
December 31, 2006. The increase in gross margins for the
year ended December 31, 2006 was primarily attributable to
higher margins on work from our electric power and gas network
services and our telecommunications and cable television network
services due to continued strengthening market conditions,
improved pricing and our margin enhancement initiatives. Margins
improved during 2006 on work from our electric power and gas
network services despite the lower volume of higher margin
emergency restoration services in 2006 compared to 2005, as
discussed above. In addition, during the first half of 2006, we
achieved higher margins on certain jobs due to better
productivity and cost control and relatively mild weather as
compared to the first half of 2005, which was negatively
impacted by cost overruns during the period and weather delays
on certain projects during the first quarter.
Selling, general and administrative
expenses. Selling, general and administrative
expenses decreased $4.9 million, or 2.6%, to
$181.5 million for the year ended December 31, 2006.
The $4.9 million decrease relates primarily to a decrease
in professional fees in the amount of $9.9 million related
to costs incurred for our margin enhancement program and for
specific bidding activity during the year ended
December 31, 2005 that were not incurred during the year
ended December 31, 2006, as well as lower legal costs from
ongoing litigation during the year ended December 31, 2006.
These decreases were partially offset by an $8.5 million
increase in salaries and benefits costs associated with
increased personnel, costs of living adjustments and increased
performance bonuses. In addition, we recorded net losses from
sales of property and equipment in the amount of
$3.1 million for the year ended December 31, 2005
compared to net gains from the sales of property and equipment
in the amount of $0.7 million for the year ended
December 31, 2006.
Goodwill impairment. A goodwill impairment
charge in the amount of $56.8 million was recorded during
the year ended December 31, 2006, while no goodwill
impairment was recorded during the year ended December 31,
2005. As part of our 2006 annual test for goodwill impairment,
goodwill in the amount of $56.8 million was written off as
a non-cash operating expense associated with a decrease in the
expected future demand for the services of one of our
businesses, which historically served the cable television
industry.
Interest expense. Interest expense increased
$2.9 million to $26.8 million for the year ended
December 31, 2006, primarily due to the expense of
unamortized debt issuance costs of $3.2 million. We
replaced our prior credit facility and expensed the remaining
balance of unamortized debt issuance costs of $2.6 million.
In addition, we expensed $0.7 million of unamortized debt
issuance costs related to the repurchase of a portion of our
4.0% convertible subordinated notes during the second quarter of
2006. This increase was partially
37
offset by lower interest expense associated with lower
outstanding borrowings under our credit facilities during 2006
as compared to 2005.
Interest income. Interest income was
$13.9 million for the year ended December 31, 2006,
compared to $7.4 million for the year ended
December 31, 2005. The increase in interest income
primarily relates to a higher average investment balance and
higher average interest rates for the year ended
December 31, 2006 as compared to the year ended
December 31, 2005.
Provision for income taxes. The provision for
income taxes was $47.0 million for the year ended
December 31, 2006, with an effective tax rate of 74.3%,
compared to a provision of $22.4 million for the year ended
December 31, 2005, with an effective tax rate of 43.5%. The
higher tax rate in 2006 results primarily from the goodwill
impairment charge recorded during the fourth quarter of 2006,
the majority of which is not deductible for tax purposes.
Excluding the effect of the goodwill impairment charge, the
impact of which is 35.1%, the effective tax rate would have been
39.2% for the year ended December 31, 2006. The decrease
after excluding the effect of the goodwill impairment charge is
primarily due to the impact of the recording of a refund from a
multi-year state tax claim during the second quarter of 2006 and
the impact of tax-exempt interest income from investments in
2006, which were not held in 2005.
Liquidity
and Capital Resources
Cash
Requirements
We anticipate that our cash and cash equivalents on hand, which
totaled $407.1 million as of December 31, 2007,
borrowing capacity under our credit facility, and our future
cash flows from operations will provide sufficient funds to
enable us to meet our future operating needs, debt service
requirements and planned capital expenditures and to facilitate
our future ability to grow. Initiatives to rebuild the United
States electric power grid or momentum in deployment of fiber to
the premises may require a significant amount of additional
working capital. We also evaluate opportunities for strategic
acquisitions from time to time that may require cash. We believe
that we have adequate cash and availability under our credit
facility to meet all such needs.
Capital expenditures are expected to be approximately
$195 million for 2008. Approximately $85 million of
expected 2008 capital expenditures are targeted for the
expansion of our dark fiber leasing network in connection with
committed leasing arrangements with customers, and the majority
of the remaining expenditures will be for operating equipment.
The 4.5% Notes are presently convertible at the option of each
holder, and the conversion period will expire on March 31,
2008, but may continue or resume in future periods upon the
satisfaction of the market price condition or other conditions.
Additionally, the 3.75% Notes were convertible during the
third quarter of 2007, but the conversion period expired
September 30, 2007, and the 3.75% Notes are not
presently convertible. The 3.75% Notes could become
convertible in future periods upon the satisfaction of the
market price condition or other conditions. If any holder of the
convertible notes requests to convert their notes, we have the
option to deliver cash, shares of our common stock or a
combination thereof, with the amount of cash determined in
accordance with the terms of the indenture under which the notes
were issued. During 2007, $21,000 aggregate principal
amount of the 4.5% Notes were settled for approximately $55,000
in cash. The difference between the principal amount and the
cash paid was recorded as a loss on extinguishment of debt in
the income statement.
On October 1, 2008, the holders of the 4.5% Notes may
elect repayment, which would require us to pay, in cash, the
aggregate principal amount, plus accrued and unpaid interest, of
the notes held by the holders who elect repayment. As a result
of the holders repayment right, we reclassified the
$270 million aggregate principal amount outstanding of the
4.5% Notes into a current obligation in October 2007.
Additionally, at any time on or after October 8, 2008, we
may redeem for cash some or all of the 4.5% Notes at the
principal amount thereof, plus accrued and unpaid interest. The
holders of the 4.5% Notes that are called for redemption
will have the right to convert all or some of their notes, which
we may satisfy by delivery of shares of our common stock, cash
or a combination thereof, as described in further detail under
Debt Instruments 4.5% Convertible
Subordinated Notes. Currently, our common stock is
trading at prices in excess of the
38
conversion price. If our common stock price exceeds the
conversion price in October 2008, it is not likely that any
holder of the 4.5% Notes will elect repayment on
October 1, 2008, but it is likely that if we were to redeem
the 4.5% Notes on or after October 8, 2008, the
holders of the notes subject to redemption would convert their
notes. On the other hand, if our common stock price is below the
conversion price, it is more likely that the holders of the
4.5% Notes would elect repayment or would not convert upon
a redemption. We have not yet determined whether we will use
cash on hand, issue equity or incur additional debt to fund our
cash obligation if we are required to repay or determine to
redeem the 4.5% Notes. If a conversion obligation arises,
we have also not yet determined whether we will settle it in our
common stock, cash or a combination thereof.
Sources
and Uses of Cash
As of December 31, 2007, we had cash and cash equivalents
of $407.1 million, working capital of $547.3 million
and long-term debt of $143.8 million, net of current
maturities. We also had $168.6 million of letters of credit
outstanding under our credit facility, leaving
$306.4 million available for revolving loans or issuing new
letters of credit.
Operating
Activities
Operating activities provided net cash to us of
$219.2 million during 2007 as compared to
$120.6 million and $82.4 million during 2006 and 2005.
Cash flow from operations is primarily influenced by demand for
our services, operating margins and the type of services we
provide. Working capital needs are generally higher during the
spring and summer seasons due to increased work activity.
Conversely, working capital needs are typically lower during the
winter months when work is usually slower due to winter weather.
Investing
Activities
During 2007, we used net cash in investing activities of
$120.6 million as compared to $38.5 million and
$30.6 million used in investing activities in 2006 and
2005. Investing activities in 2006 and the first quarter of 2007
included purchases and sales of variable rate demand notes
(VRDNs), which are classified as short-term investments,
available for sale when held. We did not invest in VRDNs in the
remaining quarters of 2007. Other investing activities in 2007
include $127.9 million used for capital expenditures offset
by $27.5 million of proceeds from the sale of equipment.
During 2006 and 2005, we used $48.5 million and
$42.6 million for capital expenditures offset by
$10.0 million and $12.0 million of proceeds from the
sale of equipment. The $79.5 million increase in capital
expenditures in 2007 compared to 2006 is related primarily to
the growth in our business and capital expenditure requirements
of our dark fiber business acquired through the Merger.
Additionally, Quanta made four acquisitions during 2007.
Investing cash flows in 2007 include $20.1 million related
to the net impact of cash paid for the acquisitions including
$12.1 million of acquisition expenses.
Financing
Activities
In 2007, financing activities used net cash flow of
$78.9 million as compared to $2.7 million and
$13.2 million used in financing activities in 2006 and
2005. Net cash used in financing activities in 2007 resulted
from a $60.5 million repayment of debt associated with the
Merger and a $33.3 million repayment of the 4.0%
convertible subordinated notes, partially offset by a
$6.3 million tax benefit from stock-based equity awards and
$10.3 million received from the exercise of stock options.
The $2.7 million net use of cash in 2006 resulted primarily
from a repayment of $7.5 million under the term loan
portion of our prior credit facility coupled with
$6.0 million in debt issuance costs, partially offset by
$5.8 million in net borrowings and $4.9 million
related to the tax benefit from stock-based equity awards and
the exercise of stock options. The $5.8 million in net
borrowings primarily relates to the issuance of
$143.8 million aggregate principal amount of our 3.75%
convertible subordinated notes and the repurchase through a
tender offer of $139.2 million aggregate principal amount
of our 4.0% convertible subordinated notes. The
$13.2 million net use of cash in 2005 resulted primarily
from a $13.3 million net repayment under the term portion
of our prior credit facility
39
in order to be able to issue additional letters of credit.
Additionally, in 2005, Quanta received a $4.3 million cash
inflow for the issuance of stock under the 1999 Employee Stock
Purchase Plan which was terminated in 2005 and a
$0.8 million cash inflow related to the exercise of stock
options, partially offset by other net debt repayments of
$5.0 million.
Debt
Instruments
Credit
Facility
We have a credit facility with various lenders that provides for
a $475.0 million senior secured revolving credit facility
maturing on September 19, 2012. Subject to the conditions
specified in the credit facility, we have the option to increase
the revolving commitments under the credit facility by up to an
additional $125.0 million from time to time upon receipt of
additional commitments from new or existing lenders. Borrowings
under the credit facility are to be used for working capital,
capital expenditures and other general corporate purposes. The
entire unused portion of the credit facility is available for
the issuance of letters of credit. The credit facility was
entered into in June 2006 as an amendment and restatement of our
prior credit facility and has since been amended as described
below.
During the third quarter of 2007, we entered into two amendments
to the credit facility. The first amendment was entered into in
connection with the consummation of the Merger and was closed
August 30, 2007. Among other terms, the first amendment
amended the timing of (i) the requirement of Quanta and its
subsidiaries to pledge certain regulated assets acquired in the
Merger and (ii) the requirement of Quantas regulated
subsidiaries acquired in the Merger to become guarantors under
the credit facility. Additionally, the first amendment provided
an exception to the pledge of certain licenses acquired in the
Merger, added certain security interests acquired in the Merger
as permitted liens, added certain surety bonds acquired in the
Merger as permitted indebtedness and permitted the sale of the
assets of a Quanta subsidiary. The second amendment, effective
as of September 19, 2007, increased the amount of the
aggregate revolving commitments in effect at the time from
$300.0 million to $475.0 million and extended the
maturity date to September 19, 2012. The second amendment
also permitted additional types and amounts of liens and other
encumbrances on our assets, indebtedness that we can incur and
investments and other similar payments that we can make.
Additionally, the second amendment removed a minimum
consolidated net worth covenant, reduced certain other
restrictions and provided the opportunity for lower borrowing
rates, commitment fees and letter of credit fees under the
credit facility, which are described below. We incurred
$0.8 million in costs in the third quarter of 2007
associated with these amendments to the credit facility. These
costs were capitalized and, along with costs incurred in
connection with the amendment and restatement of the credit
facility in June 2006, are being amortized until
September 19, 2012, the amended maturity date.
As of December 31, 2007, we had approximately
$168.6 million of letters of credit issued under the credit
facility and no outstanding revolving loans. The remaining
$306.4 million was available for revolving loans or issuing
new letters of credit. Amounts borrowed under the credit
facility bear interest, at our option, at a rate equal to either
(a) the Eurodollar Rate (as defined in the credit facility)
plus 0.875% to 1.75%, as determined by the ratio of
Quantas total funded debt to consolidated EBITDA (as
defined in the credit facility), or (b) the base rate (as
described below) plus 0.00% to 0.75%, as determined by the ratio
of Quantas total funded debt to consolidated EBITDA.
Letters of credit issued under the credit facility are subject
to a letter of credit fee of 0.875% to 1.75%, based on the ratio
of Quantas total funded debt to consolidated EBITDA. We
are also subject to a commitment fee of 0.15% to 0.35%, based on
the ratio of its total funded debt to consolidated EBITDA, on
any unused availability under the credit facility. The base rate
equals the higher of (i) the Federal Funds Rate (as defined
in the credit facility) plus
1/2
of 1% and (ii) the banks prime rate.
40
The credit facility contains certain covenants, including
covenants with respect to maximum funded debt to consolidated
EBITDA, maximum senior debt to consolidated EBITDA and minimum
interest coverage, in each case as specified in the credit
facility. For purposes of calculating the maximum funded debt to
consolidated EBITDA ratio and the maximum senior debt to
consolidated EBITDA ratio, our maximum funded debt and maximum
senior debt are reduced by all cash and cash equivalents (as
defined in the credit facility) held by us in excess of
$25.0 million. As of December 31, 2007, we were in
compliance with all of its covenants. The credit facility limits
certain acquisitions, mergers and consolidations, capital
expenditures, asset sales and prepayments of indebtedness and,
subject to certain exceptions, prohibits liens on material
assets. The credit facility also limits the payment of dividends
and stock repurchase programs in any fiscal year except those
payments or other distributions payable solely in capital stock.
The credit facility provides for customary events of default and
carries cross-default provisions with all of our existing
subordinated notes, our continuing indemnity and security
agreement with our surety and all of our other debt instruments
exceeding $15.0 million in borrowings. If an event of
default (as defined in the credit facility) occurs and is
continuing, on the terms and subject to the conditions set forth
in the credit facility, amounts outstanding under the credit
facility may be accelerated and may become or be declared
immediately due and payable.
The credit facility is secured by a pledge of all of the capital
stock of our U.S. subsidiaries, 65% of the capital stock of
our foreign subsidiaries and substantially all of our assets.
Our U.S. subsidiaries guarantee the repayment of all
amounts due under the credit facility. Our obligations under the
credit facility constitute designated senior indebtedness under
our 3.75% and 4.5% convertible subordinated notes. The capital
stock and assets of certain of our regulated
U.S. subsidiaries acquired in the Merger will not be
pledged under the credit facility, and these subsidiaries will
also not be included as guarantors under the credit facility,
until regulatory approval to do so is obtained.
4.0% Convertible
Subordinated Notes
As of December 31, 2006, we had outstanding
$33.3 million aggregate principal amount of 4.0%
convertible subordinated notes due 2007 (4.0% Notes), which
matured on July 1, 2007. The outstanding principal balance
of the 4.0% Notes plus accrued interest were repaid on
July 2, 2007, the first business day after the maturity
date.
4.5% Convertible
Subordinated Notes
At December 31, 2007, we had outstanding approximately
$270.0 million aggregate principal amount of 4.5%
convertible subordinated notes due 2023 (4.5% Notes). The
resale of the notes and the shares issuable upon conversion
thereof was registered for the benefit of the holders in a shelf
registration statement filed with the SEC. The 4.5% Notes
require semi-annual interest payments on April 1 and
October 1, until the notes mature on October 1, 2023.
The 4.5% Notes are convertible into shares of our common
stock based on an initial conversion rate of 89.7989 shares
of our common stock per $1,000 principal amount of
4.5% Notes (which is equal to an initial conversion price
of approximately $11.14 per share), subject to adjustment as a
result of certain events. The 4.5% Notes are convertible by
the holder (i) during any fiscal quarter if the last
reported sale price of our common stock is greater than or equal
to 120% of the conversion price for at least 20 trading days in
the period of 30 consecutive trading days ending on the first
trading day of such fiscal quarter, (ii) during the five
business day period after any five consecutive trading day
period in which the trading price per note for each day of that
period was less than 98% of the product of the last reported
sale price of our common stock and the conversion rate,
(iii) upon our calling the notes for redemption or
(iv) upon the occurrence of specified corporate
transactions. If the notes become convertible under any of these
circumstances, we have the option to deliver cash, shares of our
common stock or a combination thereof, with the amount of cash
determined in accordance with the terms of the indenture under
which the notes were issued. During each of the quarters in 2006
and 2007, the market price condition described in
clause (i) above was satisfied, and the notes were
convertible at the option of the holder. During 2007, $21,000 in
aggregate principal amount of the 4.5% Notes were settled
in cash upon conversion by the holders. The remaining notes are
presently convertible at the
41
option of each holder, and the conversion period will expire on
March 31, 2008, but may continue or resume in future
periods upon the satisfaction of the market price condition or
other conditions.
Beginning October 8, 2008, we may redeem for cash some or
all of the 4.5% Notes at the principal amount thereof plus
accrued and unpaid interest. The holders of the 4.5% Notes
may require us to repurchase all or some of their notes at the
principal amount thereof plus accrued and unpaid interest on
each of October 1, 2008, October 1, 2013 or
October 1, 2018, or upon the occurrence of a fundamental
change, as defined by the indenture under which we issued the
notes. We must pay any required repurchases on October 1,
2008 in cash. For all other required repurchases, we have the
option to deliver cash, shares of its common stock or a
combination thereof to satisfy its repurchase obligation. If we
were to satisfy any required repurchase obligation with shares
of its common stock, the number of shares delivered will equal
the dollar amount to be paid in common stock divided by 98.5% of
the market price of our common stock, as defined by the
indenture. The right to settle for shares of common stock can be
surrendered by us. The 4.5% Notes carry cross-default
provisions with our other debt instruments exceeding
$10.0 million in borrowings, which includes our existing
credit facility.
In October 2007, we reclassified the $270.0 million
aggregate principal amount outstanding of the 4.5% Notes
into a current obligation as the holders may elect repayment of
the 4.5% Notes in cash on October 1, 2008. We have not yet
determined whether we will use cash on hand, issue equity or
incur additional debt to fund this cash obligation in the event
the holders elect repayment.
3.75% Convertible
Subordinated Notes
At December 31, 2007, we had outstanding
$143.8 million aggregate principal amount of 3.75%
convertible subordinated notes due 2026 (3.75% Notes). The
resale of the notes and the shares issuable upon conversion
thereof was registered for the benefit of the holders in a shelf
registration statement filed with the SEC. The 3.75% Notes
mature on April 30, 2026 and bear interest at the annual
rate of 3.75%, payable semi-annually on April 30 and
October 30, until maturity.
The 3.75% Notes are convertible into our common stock,
based on an initial conversion rate of 44.6229 shares of
our common stock per $1,000 principal amount of 3.75% Notes
(which is equal to an initial conversion price of approximately
$22.41 per share), subject to adjustment as a result of certain
events. The 3.75% Notes are convertible by the holder
(i) during any fiscal quarter if the closing price of our
common stock is greater than 130% of the conversion price for at
least 20 trading days in the period of 30 consecutive trading
days ending on the last trading day of the immediately preceding
fiscal quarter, (ii) upon our calling the 3.75% Notes
for redemption, (iii) upon the occurrence of specified
distributions to holders of our common stock or specified
corporate transactions or (iv) at any time on or after
March 1, 2026 until the business day immediately preceding
the maturity date of the 3.75% Notes. The 3.75% Notes
are not presently convertible, although they were convertible
during the third quarter of 2007 as a result of the satisfaction
of the market price condition described in clause (i)
above. If the 3.75% Notes become convertible under any of
these circumstances, we have the option to deliver cash, shares
of our common stock or a combination thereof, with the amount of
cash determined in accordance with the terms of the indenture
under which the notes were issued. The holders of the
3.75% Notes who convert their notes in connection with
certain change in control transactions, as defined in the
indenture, may be entitled to a make whole premium in the form
of an increase in the conversion rate. In the event of a change
in control, in lieu of paying holders a make whole premium, if
applicable, we may elect, in some circumstances, to adjust the
conversion rate and related conversion obligations so that the
3.75% Notes are convertible into shares of the acquiring or
surviving company.
Beginning on April 30, 2010 until April 30, 2013, we
may redeem for cash all or part of the 3.75% Notes at a
price equal to 100% of the principal amount plus accrued and
unpaid interest, if the closing price of our common stock is
equal to or greater than 130% of the conversion price then in
effect for the 3.75% Notes for at least 20 trading
days in the 30 consecutive trading day period ending on the
trading day immediately prior to the date of mailing of the
notice of redemption. In addition, we may redeem for cash all or
part of the 3.75% Notes at any time on or after
April 30, 2010 at certain redemption prices, plus accrued
and unpaid interest. Beginning with the six-month interest
period commencing on April 30, 2010, and for each six-month
42
interest period thereafter, we will be required to pay
contingent interest on any outstanding 3.75% Notes during
the applicable interest period if the average trading price of
the 3.75% Notes reaches a specified threshold. The
contingent interest payable within any applicable interest
period will equal an annual rate of 0.25% of the average trading
price of the 3.75% Notes during a five trading day
reference period.
The holders of the 3.75% Notes may require us to repurchase
all or a part of the notes in cash on each of April 30,
2013, April 30, 2016 and April 30, 2021, and in the
event of a change in control of Quanta, as defined in the
indenture, at a purchase price equal to 100% of the principal
amount of the 3.75% Notes plus accrued and unpaid interest.
The 3.75% Notes carry cross-default provisions with our
other debt instruments exceeding $20.0 million in
borrowings, which includes our existing credit facility.
Off-Balance
Sheet Transactions
As is common in our industry, we have entered into certain
off-balance sheet arrangements in the ordinary course of
business that result in risks not directly reflected in our
balance sheets. Our significant off-balance sheet transactions
include liabilities associated with non-cancelable operating
leases, letter of credit obligations and surety guarantees. We
have not engaged in any off-balance sheet financing arrangements
through special purpose entities, and we do not guarantee the
work or obligations of third parties.
Leases
We enter into non-cancelable operating leases for many of our
facility, vehicle and equipment needs. These leases allow us to
conserve cash by paying a monthly lease rental fee for use of
facilities, vehicles and equipment rather than purchasing them.
We may decide to cancel or terminate a lease before the end of
its term, in which case we are typically liable to the lessor
for the remaining lease payments under the term of the lease.
We have guaranteed the residual value of the underlying assets
under certain of our equipment operating leases at the date of
termination of such leases. We have agreed to pay any difference
between this residual value and the fair market value of each
underlying asset as of the lease termination date. As of
December 31, 2007, the maximum guaranteed residual value
was approximately $145.2 million. We believe 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 future significant payments will not be required.
Letters
of Credit
Certain of our vendors require letters of credit to ensure
reimbursement for amounts they are disbursing on our behalf,
such as to beneficiaries under our self-funded insurance
programs. In addition, from time to time some customers require
us to post letters of credit to ensure payment to our
subcontractors and vendors under those contracts and to
guarantee performance under our contracts. Such letters of
credit are generally issued by a bank or similar financial
institution. The letter of credit commits the issuer to pay
specified amounts to the holder of the letter of credit if the
holder demonstrates that we have failed to perform specified
actions. If this were to occur, we would be required to
reimburse the issuer of the letter of credit. Depending on the
circumstances of such a reimbursement, we may also have to
record a charge to earnings for the reimbursement. We do not
believe that it is likely that any claims will be made under a
letter of credit in the foreseeable future.
As of December 31, 2007, we had $168.6 million in
letters of credit outstanding under our credit facility
primarily to secure obligations under our casualty insurance
program. These are irrevocable stand-by letters of credit with
maturities expiring at various times throughout 2008. Upon
maturity, it is expected that the majority of these letters of
credit will be renewed for subsequent one-year periods.
43
Performance
Bonds
Many customers, particularly in connection with new
construction, require us to post performance and payment bonds
issued by a financial institution known as a surety. These bonds
provide a guarantee to the customer that we will perform under
the terms of a contract and that we will pay subcontractors and
vendors. If we fail to perform under a contract or to pay
subcontractors and vendors, the customer may demand that the
surety make payments or provide services under the bond. We must
reimburse the surety for any expenses or outlays it incurs.
Under our continuing indemnity and security agreement with the
surety and with the consent of our lenders under our credit
facility, we have granted security interests in certain of our
assets to collateralize our obligations to the surety. We may be
required to post letters of credit or other collateral in favor
of the surety or our customers in the future. Posting letters of
credit in favor of the surety or our customers would reduce the
borrowing availability under our credit facility. To date, we
have not been required to make any reimbursements to the surety
for bond-related costs. We believe that it is unlikely that we
will have to fund significant claims under our surety
arrangements in the foreseeable future. As of December 31,
2007, an aggregate of approximately $926.3 million in
original face amount of bonds issued by the surety were
outstanding. Our estimated cost to complete these bonded
projects was approximately $234.1 million as of
December 31, 2007.
Contractual
Obligations
As of December 31, 2007, our future contractual obligations
are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
Thereafter
|
|
|
Long-term debt principal
|
|
$
|
414,761
|
|
|
$
|
271,011
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
143,750
|
|
Long-term debt interest
|
|
|
37,639
|
|
|
|
14,503
|
|
|
|
5,391
|
|
|
|
5,391
|
|
|
|
5,391
|
|
|
|
5,391
|
|
|
|
1,572
|
|
Operating lease obligations
|
|
|
189,478
|
|
|
|
58,712
|
|
|
|
39,669
|
|
|
|
30,125
|
|
|
|
24,662
|
|
|
|
15,150
|
|
|
|
21,160
|
|
Committed capital expenditures for dark fiber networks under
contracts with customers
|
|
|
129,080
|
|
|
|
79,521
|
|
|
|
48,434
|
|
|
|
1,125
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
770,958
|
|
|
$
|
423,747
|
|
|
$
|
93,494
|
|
|
$
|
36,641
|
|
|
$
|
30,053
|
|
|
$
|
20,541
|
|
|
$
|
166,482
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The committed capital expenditures for dark fiber networks
represent commitments related to signed contracts with
customers. The amounts are estimates of costs required to build
the networks under contract. The actual capital expenditures
related to building the networks could vary materially from
these estimates.
Actual maturities may differ from contractual maturities because
convertible note holders may convert their notes prior to the
maturity dates.
As of December 31, 2007, we had no borrowings under our
credit facility. In addition, our multi-employer pension plan
contributions are determined annually based on our union
employee payrolls, which cannot be determined in advance for
future periods. As of December 31, 2007, the total
unrecognized tax benefit related to uncertain tax positions was
$49.3 million. We estimate that none of this will be paid
within the next twelve months.
Concentration
of Credit Risk
Quanta grants credit under normal payment terms, generally
without collateral, to its customers, which include electric
power and gas companies, telecommunications and cable television
system operators, governmental entities, general contractors,
and builders, owners and managers of commercial and industrial
properties located primarily in the United States. Consequently,
we are subject to potential credit risk related to changes in
business and economic factors throughout the United States.
However, we generally have certain
44
statutory lien rights with respect to services provided. Under
certain circumstances such as foreclosures or negotiated
settlements, we may take title to the underlying assets in lieu
of cash in settlement of receivables. Some of our customers have
experienced significant financial difficulties. These economic
conditions expose us to increased risk related to collectibility
of receivables for services we have performed. No customer
accounted for more than 10% of accounts receivable as of
December 31, 2007 or revenues for the years ended
December 31, 2005, 2006 or 2007.
Litigation
InfraSource, certain of its officers and directors and various
other parties, including David R. Helwig, the former chief
executive officer of InfraSource who became a director of Quanta
after completion of the Merger, are defendants in a lawsuit
seeking unspecified damages filed in the State District Court in
Harris County, Texas on September 21, 2005. The plaintiffs
allege that the defendants violated their fiduciary duties and
committed constructive fraud by failing to maximize shareholder
value in connection with certain acquisitions by InfraSource
Incorporated that closed in 1999 and 2000 and the acquisition of
InfraSource Incorporated by InfraSource in 2003 and committed
other acts of misconduct following the filing of the petition.
The parties settled this lawsuit in January 2008 and agreed to a
dismissal of our material claims, although the dismissal has not
yet been ordered by the court. At December 31, 2007, we had
accrued a reserve for the settlement amount.
We are 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, punitive damages, civil penalties or other
losses, or injunctive or declaratory relief. With respect to all
such lawsuits, claims and proceedings, we record reserves when
it is probable that a liability has been incurred and the amount
of loss can be reasonably estimated. We do not believe that any
of these proceedings, separately or in the aggregate, would be
expected to have a material adverse effect on our financial
position, results of operations or cash flows.
Related
Party Transactions
In the normal course of business, we enter into transactions
from time to time with related parties. These transactions
typically take the form of facility leases with prior owners of
certain acquired companies and payables to prior owners who are
now employees.
Inflation
Due to relatively low levels of inflation experienced during the
years ended December 31, 2005, 2006 and 2007, inflation did
not have a significant effect on our results.
New
Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements. SFAS No. 157
defines fair value, establishes methods used to measure fair
value and expands disclosure requirements about fair value
measurements. SFAS No. 157 is effective for financial
statements issued for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal
periods, as it relates to financial assets and liabilities, as
well as for any non-financial assets and liabilities that are
carried at fair value. SFAS No. 157 also requires
certain tabular disclosure related to results of applying
SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets and SFAS No. 142,
Goodwill and Other Intangible Assets. On
November 14, 2007, the FASB provided a one year deferral
for the implementation of SFAS No. 157 for
non-financial assets and liabilities. SFAS No. 157
excludes from its scope SFAS No. 123(R),
Share-Based Payment and its related interpretive
accounting pronouncements that address share-based payment
transactions. We do not currently have any material financial
assets and liabilities or any material non-financial assets or
liabilities that are carried at fair value on a recurring basis,
but we do have non-financial assets that are measured at fair
value on a nonrecurring basis including long term assets held
and used and goodwill. Based on the November 14, 2007
deferral of SFAS No. 157 for non-financial assets and
liabilities, we will begin following the guidance of
SFAS No. 157 with respect to our non-financial assets
and liabilities that are
45
measured at fair value on a nonrecurring basis in the quarter
ended March 31, 2009. Based on the assets and liabilities
on our balance sheet as of December 31, 2007, we do not
expect the adoption of SFAS No. 157 to have a material
impact on our consolidated financial position, results of
operations or cash flows.
In February 2007, the FASB issued SFAS No. 159,
The Fair Value Option for Financial Assets and Financial
Liabilities, including an amendment of FASB Statement
No. 115. SFAS No. 159 permits entities to
choose to measure at fair value many financial instruments and
certain other items at fair value that are not currently
required to be measured. Unrealized gains and losses on items
for which the fair value option has been elected are reported in
earnings. SFAS No. 159 does not affect any existing
accounting literature that requires certain assets and
liabilities to be carried at fair value. SFAS No. 159
is effective for fiscal years beginning after November 15,
2007. Based on the assets and liabilities on our balance sheet
as of December 31, 2007, we do not expect the adoption of
SFAS No. 159 to have any impact on our consolidated
financial position, results of operations or cash flows.
In December 2007, the FASB issued SFAS No. 160,
Non-controlling Interests in Consolidated Financial
Statements an amendment of ARB No. 51.
SFAS No. 160 addresses the accounting and reporting
framework for minority interests by a parent company.
SFAS No. 160 is effective for fiscal years, and
interim periods within those fiscal years, beginning on or after
December 15, 2008. Accordingly, we will adopt
SFAS No. 160, in the first quarter of fiscal 2009. We
are currently assessing the impact that SFAS No. 160
will have on our consolidated financial position, results of
operations and cash flows.
In December 2007, the FASB issued SFAS No. 141(R),
Business Combinations. SFAS No. 141(R) is
effective for fiscal years beginning after December 15,
2008. Earlier application is prohibited. Assets and liabilities
that arose from business combinations which occurred prior to
the adoption of SFAS No. 141(R) should not be adjusted
upon the adoption of SFAS No. 141(R).
SFAS No. 141(R) requires the acquiring entity in a
business combination to recognize all (and only) the assets
acquired and liabilities assumed in the business combination;
establishes the acquisition date as the measurement date to
determine the fair value for all assets acquired and liabilities
assumed; and requires the acquirer to disclose to investors and
other users all of the information they need to evaluate and
understand the nature and financial effect of the business
combination. As it relates to recognizing all (and only) the
assets acquired and liabilities assumed in a business
combination, costs an acquirer expects but is not obligated to
incur in the future to exit an activity of an acquiree or to
terminate or relocate an acquirees employees are not
liabilities at the acquisition date but must be expensed in
accordance with other applicable generally accepted accounting
principles. Additionally, during the measurement period, which
should not exceed one year from the acquisition date, any
adjustments that are needed to assets acquired and liabilities
assumed to reflect new information obtained about facts and
circumstances that existed as of the acquisition date that, if
known, would have affected the measurement of the amounts
recognized as of that date will be adjusted retrospectively. The
acquirer will be required to expense all acquisition-related
costs in the periods such costs are incurred other than costs to
issue debt or equity securities. SFAS No. 141(R) will
have no impact on our consolidated financial position, results
of operations or cash flows at the date of adoption, but it
could have a material impact on our consolidated financial
position, results of operations or cash flows in the future when
it is applied to acquisitions which occur in 2009 and beyond.
In June 2007, the FASB Emerging Issues Task Force issued EITF
Issue
No. 06-11,
Accounting for Income Tax Benefits of Dividends on
Share-Based Payment Awards.
EITF 06-11
requires that a realized income tax benefit from dividends or
dividend equivalent units paid on unvested restricted shares and
restricted share units be reflected as an increase in
contributed surplus and reflected as an addition to the
Companys excess tax benefit pool, as defined under
SFAS No. 123R.
EITF 06-11
is effective for fiscal years beginning after December 15,
2007, and interim periods within those fiscal years.
Accordingly, we will adopt
EITF 06-11
in the first quarter of 2008. We currently do not anticipate
declaring dividends in the near future, so
EITF 06-11
is not anticipated to have any material impact on our
consolidated financial position, results of operations or cash
flows in the near future.
In December 2007, the Securities & Exchange Commission
(SEC) published Staff Accounting Bulletin No. 110
(SAB 110). SAB 110 expresses the views of the SEC
staff regarding the use of a simplified
46
method, as discussed in SAB No. 107 (SAB 107), in
developing an estimate of expected term of plain
vanilla share options in accordance with
SFAS No. 123(R). In particular, the SEC staff
indicated in SAB 107 that it will accept a companys
election to use the simplified method, regardless of whether the
company has sufficient information to make more refined
estimates of expected term. However, the SEC staff stated in
SAB 107 that it would not expect a company to use the
simplified method for share option grants after
December 31, 2007. In SAB 110, the SEC staff states
that will continue to accept, under certain circumstances, the
use of the simplified method beyond December 31, 2007. We
are currently assessing the impact that SAB 110 will have
on our consolidated financial position, results of operations,
and cash flows.
Critical
Accounting Policies
The discussion and analysis of our financial condition and
results of operations are based on our consolidated financial
statements, which have been prepared in accordance with
accounting principles generally accepted in the United States.
The preparation of these consolidated financial statements
requires us to make estimates and assumptions that affect the
reported amounts of assets and liabilities, disclosures of
contingent assets and liabilities known to exist at the date of
the consolidated financial statements and the reported amounts
of revenues and expenses during the reporting period. We
evaluate our estimates on an ongoing basis, based on historical
experience and on various other assumptions that are believed to
be reasonable under the circumstances. There can be no assurance
that actual results will not differ from those estimates.
Management has reviewed its development and selection of
critical accounting estimates with the audit committee of our
Board of Directors. We believe the following accounting policies
affect our more significant judgments and estimates used in the
preparation of our consolidated financial statements:
Revenue Recognition. We design, install and
maintain networks for the electric power, gas,
telecommunications and cable television industries, as well as
provide various ancillary services to commercial, industrial and
governmental entities. These services may be provided 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 our
unit-based contracts, the utilization of an output-based
measurement is appropriate for revenue recognition. Under these
contracts, we recognize revenue when units are completed based
on pricing established between us and the customer for each unit
of delivery, which best reflects the pattern in which the
obligation to the customer is fulfilled. Under our
cost-plus/hourly and time and materials type contracts, we
recognize 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. These contracts provide
for a fixed amount of revenues for the entire project. Such
contracts provide that the customer accept completion of
progress to date and compensate us for services rendered,
measured in terms of units installed, hours expended or some
other measure of progress. Contract costs include all direct
material, 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
materials associated with our work are owner-furnished and are
therefore not included in contract revenues and costs. The cost
estimation process is based on the professional knowledge and
experience of our engineers, project managers and financial
professionals. Changes in job performance, job conditions and
final contract settlements are factors that influence
managements assessment of the total estimated costs to
complete those contracts and therefore, our profit recognition.
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. Provisions for the total estimated
losses on uncompleted contracts are made in the period in which
such losses are determined. If actual results significantly
differ from our estimates used for revenue recognition and claim
assessments, our financial condition and results of operations
could be materially impacted.
We may incur costs related to change orders, whether approved or
unapproved by the customer,
and/or
claims related to certain contracts. We determine whether there
is a probability that the costs will be recovered based upon
evidence such as past practices with the customer, specific
discussions or preliminary negotiations
47
with the customer or verbal approvals. We treat items as a cost
of contract performance in the period incurred if it is not
reasonably assured 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 a result of the Merger, Quanta has fiber-optic facility
licensing agreements with various customers. Revenues earned
pursuant to these fiber-optic facility licensing agreements,
including initial fees, and are recognized ratably over the
expected length of the agreements, including probable renewal
periods. Advanced billings on fiber-optic agreements are
recorded as deferred revenue on our balance sheets.
Self-Insurance. We are insured for
employers liability and general liability claims, subject
to a deductible of $1.0 million per occurrence, and for
auto liability subject to a deductible of $3.0 million per
occurrence. We are also insured for workers compensation
claims, subject to a deductible of $2.0 million per
occurrence. Additionally, we are subject to an annual cumulative
aggregate liability of up to $1.0 million on workers
compensation claims in excess of $2.0 million per
occurrence. We also have an employee health care benefits plan
for employees not subject to collective bargaining agreements,
which was subject to a deductible of $250,000 per claimant per
year until December 31, 2007. The deductible for employee
health care benefits was increased to $350,000 per claimant per
year beginning January 1, 2008.
Effective upon the Merger, InfraSource became insured under
Quantas property and casualty insurance program.
Previously, InfraSource was insured for workers
compensation, general liability and employers liability,
each subject to a deductible of $0.75 million per
occurrence. InfraSource was also insured for auto liability,
subject to a deductible of $0.5 million per occurrence.
InfraSource continued to operate its own health plan for
employees not subject to collective bargaining agreements
through December 31, 2007, which was subject to a
deductible of $150,000 per claimant per year.
Losses under all of these insurance programs are accrued based
upon our estimates of the ultimate liability for claims reported
and an estimate of claims incurred but not reported, with
assistance from third-party actuaries. However, insurance
liabilities are difficult to assess and estimate due to unknown
factors, including the severity of an injury, the determination
of our liability in proportion to other parties, the number of
incidents not reported and the effectiveness of our safety
program. The accruals are based upon known facts and historical
trends and management believes such accruals to be adequate. If
actual results significantly differ from estimates used to
calculate the liability, our financial condition, results of
operations and cash flows could be materially impacted. As of
December 31, 2006 and 2007, the gross amount accrued for
self-insurance claims totaled $117.2 million and
$152.0 million, with $73.4 million and
$110.1 million considered to be long-term and included in
other non-current liabilities. Related insurance
recoveries/receivables as of December 31, 2006 and 2007
were $10.7 million and $22.1 million, of which
$5.0 million and $11.9 million are included in prepaid
expenses and other current assets and $5.7 million and
$10.2 million are included in other assets, net.
Our casualty insurance carrier for the policy periods from
August 1, 2000 to February 28, 2003 has been
experiencing financial distress but is currently paying valid
claims. In the event that this insurers financial
situation further deteriorates, We may be required to pay
certain obligations that otherwise would have been paid by this
insurer. We estimate that the total future claim amount that
this insurer is currently obligated to pay on its behalf for the
above mentioned policy periods is approximately
$4.5 million; however, our estimate of the potential range
of these future claim amounts is between $2.1 million and
$7.8 million. The actual amounts ultimately paid by us in
connection with such claims, if any, may vary materially from
the above range and could be impacted by further claims
development and the extent to which the insurer could not honor
its obligations. We continue to monitor the financial situation
of this insurer and analyze any alternative actions that could
be pursued. In any event, we do not expect any failure by this
insurer to honor its obligations to us, or any alternative
actions that we may pursue, to have a material adverse impact on
our financial condition; however, the impact could be material
to our results of operations or cash flow in a given period.
Valuation of Intangibles and Long-Lived
Assets. SFAS No. 142 provides that
goodwill and other intangible assets that have indefinite useful
lives not be amortized but, instead, must be tested at least
annually for impairment, and intangible assets that have finite
useful lives should continue to be amortized over their
48
useful lives. SFAS No. 142 also provides specific
guidance for testing goodwill and other nonamortized intangible
assets for impairment. The first step compares the fair value of
a reporting unit to its carrying amount, including goodwill. If
the carrying amount of a reporting unit exceeds its fair value,
the second step is then performed. The second step compares the
carrying amount of the reporting units goodwill to the
fair value of the goodwill. If the fair value of the goodwill is
less than the carrying amount, an impairment loss would be
recorded in income (loss) from operations in the consolidated
statements of operations.
SFAS No. 142 does not allow increases in the carrying
value of reporting units that may result from our impairment
test; therefore, we may record goodwill impairments in the
future, even when the aggregate fair value of our reporting
units and the company as a whole may increase. Goodwill of a
reporting unit will be tested for impairment between annual
tests if an event occurs or circumstances change that would more
likely than not reduce the fair value of a reporting unit below
its carrying amount. Examples of such events or circumstances
may include a significant change in business climate or a loss
of key personnel, among others. SFAS No. 142 requires
that management make certain estimates and assumptions in order
to allocate goodwill to reporting units and to determine the
fair value of reporting unit net assets and liabilities,
including, among other things, an assessment of market
conditions, projected cash flows, cost of capital and growth
rates, which could significantly impact the reported value of
goodwill and other intangible assets. When necessary, we engage
third party specialists to assist us with our valuations. The
valuations employ a combination of present value techniques to
measure fair value. These valuations are based on a discount
rate determined by management to be consistent with industry
discount rates and the risks inherent in our current business
model. A provision for impairment could be required in a future
period if future operating results and residual values differ
from our estimates. Intangible assets with definite lives are
also reviewed for impairment if events or changes in
circumstances indicate that the carrying amount may not be
realizable.
As part of our 2006 annual test for goodwill impairment,
goodwill in the amount of $56.8 million was written off as
a non-cash operating expense associated with a decrease in the
expected future demand for the services of one of our
businesses, which had historically served the cable television
industry. This operating unit had transitioned to FTTN and FTTP
deployments for our customers and had previously forecasted
expectations to begin deployments of the broadband over power
line (BPL) technology in late 2005. However, because the
prospective BPL customers were still analyzing the costs and
benefits of using this technology at the end of 2006, management
determined the BPL work would be delayed. With the future
revenue growth related to BPL delayed, and the resulting impact
on projected cash flows reduced at December 31, 2006,
management determined that the estimated fair value of the
reporting unit was less than its carrying value and,
consequently, a goodwill impairment charge was recognized. For
this operating unit, the remaining unimpaired balance of
goodwill is $30.3 million. This operating unit, as well as
others that had previously served the cable television industry,
had successfully expanded its services to include FTTN and FTTP
services and therefore, currently operates with sufficient
cashflows to support any remaining goodwill balances.
Estimating future cash flows requires significant judgment, and
our projections may vary from cash flows eventually realized.
Changes in our judgments and projections could result in a
significantly different estimate of the fair value of reporting
units and intangible assets and could result in an impairment.
Variances in the assessment of market conditions, projected cash
flows, cost of capital, growth rates and acquisition multiples
applied could have an impact on the assessment of impairments
and any amount of goodwill impairment charges recorded. For
example, lower growth rates, lower acquisition multiples or
higher costs of capital assumptions would all individually lead
to lower fair value assessments and potentially increased
frequency or size of goodwill impairments. Any goodwill or other
intangible impairment would be included in the consolidated
statements of operations.
Our goodwill is included in multiple reporting units. Due to the
cyclical nature of our business, and the other factors described
under Risk Factors in Item 1A, the
profitability of our individual reporting units may suffer from
downturns in customer demand and other factors. These factors
may have a disproportionate impact on the individual reporting
units as compared to Quanta as a whole and might adversely
affect the fair value of the individual reporting units. If
material adverse conditions occur that impact our reporting
units, our
49
future estimates of fair value may not support the carrying
amount of one or more of our reporting units, and the related
goodwill would need to be written down to an amount considered
recoverable.
The estimated fair value of our reporting units exceeded their
carrying value for the annual goodwill impairment test at
December 31, 2007. As of December 31, 2007, we believe
the goodwill is recoverable for all of the reporting units,
however there can be no assurances that the goodwill will not be
impaired in future periods.
We review long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount may
not be realizable. If an evaluation is required, the estimated
future undiscounted cash flows associated with the asset are
compared to the assets carrying amount to determine if an
impairment of such asset is necessary. This requires us to make
long-term forecasts of the future revenues and costs related to
the assets subject to review. Forecasts require assumptions
about demand for our products and future market conditions.
Since estimating future cash flows requires significant
judgment, our projections may vary from cash flows eventually
realized. Future events and unanticipated changes to assumptions
could require a provision for impairment in a future period. The
effect of any impairment would be to expense the difference
between the fair value of such asset and its carrying value.
Such expense would be reflected in income (loss) from operations
in the consolidated statements of operations. In addition, we
estimate the useful lives of our long-lived assets and other
intangibles. We periodically review factors to determine whether
these lives are appropriate.
Current and Non-Current Accounts and Notes Receivable and
Provision for Doubtful Accounts. We provide an
allowance for doubtful accounts when collection of an account or
note receivable is considered doubtful. Inherent in the
assessment of the allowance for doubtful accounts are certain
judgments and estimates relating to, among others, our
customers access to capital, our customers
willingness or ability to pay, general economic conditions and
the ongoing relationship with the customer. Certain of our
customers, several of them large public telecommunications
carriers and utility customers, have experienced financial
difficulties in the past. Should any major customers experience
difficulties or file for bankruptcy, or should anticipated
recoveries relating to the receivables in existing bankruptcies
and other workout situations fail to materialize, we could
experience reduced cash flows and losses in excess of current
reserves. In addition, material changes in our customers
revenues or cash flows could affect our ability to collect
amounts due from them.
Stock-Based Compensation. Effective
January 1, 2006, we adopted SFAS No. 123(R)
Share-Based Payments, which requires the measurement
and recognition of compensation expense for all stock-based
awards made to employees and directors, including stock options,
restricted stock and employee stock purchases related to
employee stock purchase plans, based on estimated fair values.
The effect of expensing the fair value of stock options did not
have a material impact on our financial position or results of
operations at the time of adoption through August 2007, as the
number of unvested stock options remaining at the time of the
adoption of SFAS No. 123(R) was not significant.
However, concurrent with the InfraSource acquisition, we began
incurring compensation expense related to the InfraSource stock
options which were converted to Quanta options as of
August 30, 2007. Accordingly, our stock-based compensation
policy has been identified as critical to the accounting for our
business operations and the understanding of our results of
operations because they involve more significant judgments and
estimates used in the preparation of our consolidated financial
statements.
SFAS No. 123(R) requires companies to estimate the
fair value of stock-based awards on the grant date using an
option pricing model. We value stock-based awards using the
Black-Scholes option pricing model. The Black-Scholes model is
highly complex and dependent on key estimates by management. The
estimates with the greatest degree of subjective judgment are
the estimated lives of the stock-based awards and the estimated
volatility of our stock price. The InfraSource options which
were converted to Quanta options were valued at August 30,
2007 to determine our estimated future compensation expense
subsequent to the acquisition. Such valuation involved using the
simplified method of estimating the life of the
stock options, which is based on the average of the vesting term
and the term of the option, as a result of guidance in Staff
50
Accounting Bulletin No. 107 issued by the SEC. We
determined expected volatility using the historical method, as
we have not identified a more reliable or appropriate method to
predict future volatility.
As stock-based compensation expense recognized during the
current period is based on the value of the portion of
share-based awards that is ultimately expected to vest,
SFAS No. 123(R) requires forfeitures to be estimated
at the time of grant, or on the acquisition date in the case of
the InfraSource options converted to Quanta options, in order to
estimate the amount of stock-based awards that will ultimately
vest. The forfeiture rate used is based on historical Quanta
activity. The value of the portion of the award that is
ultimately expected to vest is expensed on a straight-line basis
over the requisite service periods in our statements of
operations. If factors change and we employ different
assumptions in the application of SFAS No. 123(R) in
future periods or if forfeitures are different than estimated,
the compensation expense that we record under
SFAS No. 123(R) in future periods may differ
significantly.
Income Taxes. We follow the liability method
of accounting for income taxes in accordance with
SFAS No. 109, Accounting for Income Taxes.
Under this method, deferred 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.
We regularly evaluate 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. We consider projected future
taxable income and tax planning strategies in making this
assessment. If actual future taxable income differs from our
estimates, we may not realize deferred tax assets to the extent
we have estimated.
We began accounting for uncertain tax positions in accordance
with FASB Interpretation No. 48 Accounting for
Uncertainty in Income Taxes, as interpretation of
SFAS No. 109, Accounting for Income Taxes
(FIN No. 48) at January 1, 2007.
FIN No. 48 prescribes a comprehensive model for how
companies should recognize, measure, present and disclose in
their financial statements uncertain tax positions taken or to
be taken on a tax return. The income tax laws and regulations
are voluminous and are often ambiguous. As such, we are required
to make many subjective assumptions and judgments regarding our
tax positions that can materially affect amounts recognized in
our consolidated balance sheets and statements of income.
Outlook
The following statements are based on our current expectations
and beliefs. These statements are forward-looking, and actual
results may differ materially.
Many utilities across the country have increased or are planning
to increase spending on their transmission and distribution
systems. As a result, we are seeing new construction, extensive
pole change outs, line upgrades and maintenance projects on many
systems and expect this trend to continue over the next several
quarters.
We also anticipate increased spending over the next decade as a
result of the Energy Policy Act of 2005 (the Energy Act), which
requires the power industry to meet federal reliability
standards for its transmission and distribution systems and
provides further incentives to the industry to invest in and
improve maintenance on its systems, although rule-making
initiatives under the Energy Act could be impacted, both in
timing and in scope, by a new presidential administration.
Additionally, we expect renewable energy mandates to result in
the need for additional transmission lines and substations
resulting from the construction of solar and wind electric
generating power plants. As a result of these and other factors,
we expect a continued shift in our services mix to a greater
proportion of high-voltage electric power transmission and
substation projects over the long term.
Several industry and market trends are also prompting customers
in the electric power industry to seek outsourcing partners,
such as Quanta. These trends include an aging utility workforce,
increased spending,
51
increasing costs and labor issues. The need to ensure available
labor resources for larger projects is also driving strategic
relationships with customers.
In the telecommunications industry, there are several
initiatives currently underway by several wireline carriers and
government organizations that provide us with opportunities, in
particular initiatives for fiber to the premises (FTTP) and
fiber to the node (FTTN). Such initiatives are underway by
Verizon and AT&T, and municipalities and other government
jurisdictions have also become active in these initiatives. We
are also experiencing increased spending by wireless
telecommunications customers on their networks, as the impact of
mergers within the wireless industry has begun to lessen. In
addition, several wireless companies have announced plans to
increase their cell site deployment plans over the next year,
including the expansion of next generation technology.
Spending in the cable television industry is beginning to
improve. Several telecommunications companies are increasing the
pace of their FTTP and FTTN projects that will enable them to
offer TV services via fiber to their customers. We anticipate
that these initiatives will serve as a catalyst for the cable
industry to begin a new network upgrade cycle to expand its
service offerings in an effort to retain and attract customers.
Our dark fiber leasing business is also experiencing growth
primarily through the expansion into additional geographic
markets, with a focus within those markets on education and
healthcare customers where secure high-speed networks are
important. We continue to see opportunities for growth both in
the markets we currently serve and new markets. To support the
growth in this business, we anticipate increased capital
expenditures.
Gas distribution installation services are driven in part by the
housing construction market. Our gas operations thus far have
been minimally impacted by recent declines in new housing
construction in certain sectors of the country. While these
operations have been challenged by lower margins overall, we are
taking steps to improve margins, including eliminating certain
low margin contracts and focusing on natural gas gathering
pipeline construction.
Historically, our customers have continued to spend through
short-term economic softness or weak recessions. A long-term or
deep recession, however, would likely have some negative impact
on our customers spending. Lower spending may not
automatically mean less revenue for us, as utilities continue
outsourcing more of their work, in part due to their aging
workforce issues. We believe that we remain the partner of
choice for utilities in need of broad infrastructure expertise,
specialty equipment and workforce resources. Furthermore, as new
technologies emerge for communications and digital services such
as voice, video and data continue to converge,
telecommunications and cable service providers are expected to
work quickly to deploy fast, next-generation fiber networks, and
we are recognized as a key partner in deploying these services.
On August 30, 2007, we consummated the Merger with
InfraSource, which enhances our resources and expands our
service portfolio through InfraSources complementary
businesses, strategic geographic footprint and skilled
workforce. We believe the combined company will be able to
better serve our customers as demand grows in their respective
industries.
We continue to evaluate other potential strategic acquisitions
of companies to broaden our customer base, expand our geographic
area of operation and grow our portfolio of services. We believe
that additional attractive acquisition candidates exist
primarily as a result of the highly fragmented nature of the
industry, the inability of many companies to expand and
modernize due to capital constraints and the desire of owners of
acquisition candidates for liquidity. We also believe that our
financial strength and experienced management team will be
attractive to acquisition candidates.
With the growth in several of our markets and our margin
enhancement initiatives, we continue to see our gross margins
generally improve. We continue to focus on the elements of the
business we can control, including cost control, the margins we
accept on projects, collecting receivables, ensuring quality
service and rightsizing initiatives to match the markets we
serve. These initiatives include aligning our workforce with our
current revenue base, evaluating opportunities to reduce the
number of field offices and evaluating our non-core assets for
potential sale. Such initiatives, together with realignments
associated with the ongoing
52
integration of InfraSource operations and any other future
acquisitions, could result in future charges related to, among
other things, severance, retention, facilities shutdown and
consolidation, property disposal and other exit costs.
Capital expenditures in 2008 are expected to be approximately
$195 million. Approximately $85 million of the
expenditures is targeted for dark fiber expansion and the
majority of the remaining expenditures will be for operating
equipment. We expect expenditures for 2008 to be funded
substantially through internal cash flows or to the extent
necessary, from cash on hand.
We believe that we are adequately positioned to capitalize upon
opportunities and trends in the industries we serve because of
our proven full-service operating units with broad geographic
reach, financial capability and technical expertise. Our
acquisition of InfraSource further enhanced these strengths.
Additionally, we believe that these industry opportunities and
trends will increase the demand for our services; however, we
cannot predict the actual timing or magnitude of the impact on
us of these opportunities and trends.
Uncertainty
of Forward-Looking Statements and Information
This Annual Report on
Form 10-K
includes forward-looking statements reflecting
assumptions, expectations, projections, intentions or beliefs
about future events that are intended to qualify for the
safe harbor from liability established by the
Private Securities Litigation Reform Act of 1995. You can
identify these statements by the fact that they do not relate
strictly to historical or current facts. They use words such as
anticipate, estimate,
project, forecast, may,
will, should, could,
expect, believe, plan,
intend and other words of similar meaning. In
particular, these include, but are not limited to, statements
relating to the following:
|
|
|
|
|
Projected operating or financial results;
|
|
|
|
The effects of any acquisitions and divestitures we may make,
including the acquisition of InfraSource;
|
|
|
|
Expectations regarding our business outlook, growth and capital
expenditures;
|
|
|
|
The effects of competition in our markets;
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|
|
|
The benefits of the Energy Policy Act of 2005;
|
|
|
|
The current economic conditions and trends in the industries we
serve; and
|
|
|
|
Our ability to achieve cost savings.
|
These forward-looking statements are not guarantees of future
performance and involve or rely on a number of risks,
uncertainties, and assumptions that are difficult to predict or
beyond our control. We have based our forward-looking statements
on our managements beliefs and assumptions based on
information available to our management at the time the
statements are made. We caution you that actual outcomes and
results may differ materially from what is expressed, implied or
forecasted by our forward-looking statements and that any or all
of our forward-looking statements may turn out to be wrong.
Those statements can be affected by inaccurate assumptions and
by known or unknown risks and uncertainties, including the
following:
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|
|
|
|
Quarterly variations in our operating results;
|
|
|
|
Our ability to achieve anticipated savings and synergies from
our Merger with InfraSource;
|
|
|
|
Unexpected costs or liabilities or other adverse impacts that
may arise as a result of our acquisition of InfraSource,
including the inability to retain key InfraSource personnel;
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|
Adverse changes in economic conditions and trends in relevant
markets;
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|
Delays or cancellations of existing projects and our ability to
effectively compete for new projects;
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|
Our dependence on fixed price contracts and the potential to
incur losses with respect to those contracts;
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|
Estimates relating to our use of
percentage-of-completion
accounting;
|
53
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Our ability to generate internal growth;
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|
Potential failure of the Energy Policy Act of 2005 to result in
increased spending on the electrical power transmission
infrastructure;
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Our ability to attract skilled labor and the retention of key
personnel and qualified employees;
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The potential shortage of skilled employees;
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Our growth outpacing our infrastructure;
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|
|
Our ability to successfully identify, complete and integrate
acquisitions, including the acquisition of InfraSource;
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|
The adverse impact of goodwill or other intangible asset
impairments;
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|
|
Estimates and assumptions in determining our financial results
and backlog;
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Beliefs and assumptions about the collectibility of receivables;
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|
Unexpected costs or liabilities that may arise from lawsuits or
indemnity claims related to the services we perform;
|
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|
|
Liabilities for claims that are not self-insured or for claims
that our casualty insurance carrier fails to pay;
|
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|
|
The financial distress of our casualty insurance carrier that
may require payment for losses that would otherwise be insured;
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|
Potential liabilities relating to occupational health and safety
matters;
|
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|
|
Cancellation provisions within our contracts and the risk that
contracts expire and are not renewed or are replaced on less
favorable terms;
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|
The inability of our customers to pay for services following a
bankruptcy or other financial difficulty;
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|
|
Our ability to obtain performance bonds;
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|
|
The impact of our unionized workforce on our operations and on
our ability to complete future acquisitions;
|
|
|
|
Our ability to continue to meet the requirements of the
Sarbanes-Oxley Act of 2002;
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|
|
|
Potential exposure to environmental liabilities;
|
|
|
|
Risks associated with expanding our business in international
markets, including losses that may arise from currency
fluctuations;
|
|
|
|
Requirements relating to governmental regulation and changes
thereto, including state and federal telecommunication
regulations affecting our dark fiber leasing business;
|
|
|
|
Rapid technological and structural changes that could reduce the
demand for the services we provide;
|
|
|
|
The cost of borrowing, availability of credit, debt covenant
compliance, interest rate fluctuations and other factors
affecting our financing and investment activities;
|
|
|
|
The potential conversion of our outstanding 4.5% Notes or
3.75% Notes into cash
and/or
common stock; and
|
|
|
|
The other risks and uncertainties as are described under
Item 1A Risk Factors in this report on
Form 10-K
and as may be detailed from time to time in our other public
filings with the SEC.
|
All of our forward-looking statements, whether written or oral,
are expressly qualified by these cautionary statements and any
other cautionary statements that may accompany such
forward-looking statements or that are otherwise included in
this report. In addition, we do not undertake and expressly
disclaim any obligation to
54
update or revise any forward-looking statements to reflect
events or circumstances after the date of this report or
otherwise.
|
|
ITEM 7A.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
We are exposed to market risks, primarily related to increases
in fuel prices and adverse changes in interest rates, as
discussed below. We do not enter into derivative transactions
for speculative purposes; however, for accounting purposes,
certain transactions may not meet the criteria for hedge
accounting. We are currently not exposed to any significant
market risks or interest rate risk from the use of derivatives.
See Currency Risk below for a discussion of
our exposure to foreign currency exchange risk from the use of
derivatives.
Interest Rate. Our exposure to market rate
risk for changes in interest rates relates to our convertible
subordinated notes. The fair market value of our fixed rate
convertible subordinated notes is subject to interest rate risk
and market risk due to the convertible feature of our
convertible subordinated notes. Generally, the fair market value
of fixed interest rate debt will increase as interest rates fall
and decrease as interest rates rise. The fair market value of
our convertible subordinated notes will also increase as the
market price of our stock increases and decrease as the market
price falls. The interest and market value changes affect the
fair market value of our convertible subordinated notes but do
not impact their carrying value. As of December 31, 2006
and 2007, the fair value of our fixed-rate debt of
$447.0 million and $413.8 million was approximately
$692.2 million and $825.6 million, based upon market
prices on or before such date.
Currency Risk. The business of our Canadian
subsidiaries is subject to currency fluctuations. We do not
expect any such currency risk to be material.
55
|
|
ITEM 8.
|
Financial
Statements and Supplementary Data
|
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
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|
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Page
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57
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59
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|
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60
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|
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61
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|
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62
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|
|
63
|
|
|
64
|
56
REPORT OF
MANAGEMENT
Managements
Report on Financial Information and Procedures
The accompanying financial statements of Quanta Services, Inc.
and its subsidiaries were prepared by management. These
financial statements were prepared in accordance with accounting
principles generally accepted in the United States, applying
certain estimates and judgments as required.
Our management, including our Chief Executive Officer and Chief
Financial Officer, does not expect that our disclosure controls
or our internal control over financial reporting will prevent or
detect all errors and all fraud. A control system, no matter how
well designed and operated, can provide only reasonable, not
absolute, assurance that the control systems objectives
will be met. The design of a control system must reflect the
fact that there are resource constraints, and the benefits of
controls must be considered relative to their costs. Further,
because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that
misstatements due to error or fraud will not occur or that all
control issues and instances of fraud, if any, within the
company have been detected. These inherent limitations include
the realities that judgments in decision-making can be faulty
and that breakdowns can occur because of simple errors or
mistakes. Controls can also be circumvented by the individual
acts of some persons, by collusion of two or more people, or by
management override of the controls. The design of any system of
controls is based in part on certain assumptions about the
likelihood of future events, and there can be no assurance that
any design will succeed in achieving its stated goals under all
potential future conditions. Over time, controls may become
inadequate because of changes in conditions or deterioration in
the degree of compliance with policies or procedures.
Managements
Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting as defined in
Rule 13a-15(f)
under the Securities Exchange Act of 1934. Our internal control
over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial
reporting and the preparation of our consolidated financial
statements for external purposes in accordance with
U.S. generally accepted accounting principles. Internal
control over financial reporting includes those policies and
procedures that (i) pertain to the maintenance of records
that in reasonable detail accurately and fairly reflect the
transactions and dispositions of the assets of the company;
(ii) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial
statements in accordance with U.S. generally accepted
accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of
management and directors of the company; and (iii) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the
companys assets that could have a material effect on the
financial statements.
Under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief
Financial Officer, we have conducted an evaluation of the
effectiveness of our internal control over financial reporting
based upon the criteria established in Internal
Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway
Commission. Based on this evaluation, our management has
concluded that our internal control over financial reporting was
effective as of December 31, 2007 to provide reasonable
assurance regarding the reliability of financial reporting and
the preparation of financial statements for external reporting
purposes in accordance with U.S. generally accepted
accounting principles.
Because of its inherent limitations, a system of internal
control over financial reporting can provide only reasonable
assurances and may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods
are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of
compliance with policies and procedures may deteriorate.
The effectiveness of Quanta Services, Inc.s internal
control over financial reporting as of December 31, 2007
has been audited by PricewaterhouseCoopers LLP, an independent
registered public accounting firm, as stated in their report
which appears herein.
57
Managements assessment of the effectiveness of our
internal control over financial reporting as of
December 31, 2007 excluded InfraSource, which was acquired
on August 30, 2007. Such exclusion was in accordance with
SEC guidance that an assessment of a recently acquired business
may be omitted in managements report on internal control
over financial reporting, provided the acquisition took place
within twelve months of managements evaluation.
Collectively, InfraSource comprised 47% of our consolidated
assets at December 31, 2007 and 13% of our consolidated
revenues for the year ended December 31, 2007. Our
disclosure controls and procedures were not materially impacted
by the acquisition.
58
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Quanta Services,
Inc.:
In our opinion, the accompanying consolidated balance sheets and
the related consolidated statements of operations, of cash flows
and of stockholders equity, present fairly, in all
material respects, the financial position of Quanta Services,
Inc. and its subsidiaries at December 31, 2007 and 2006,
and the results of their operations and their cash flows for
each of the three years in the period ended December 31,
2007 in conformity with accounting principles generally accepted
in the United States of America. Also in our opinion, the
Company maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2007,
based on criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). The
Companys management is responsible for these financial
statements, for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness
of internal control over financial reporting, included in the
accompanying Managements Report on Internal Control Over
Financial Reporting. Our responsibility is to express opinions
on these financial statements and on the Companys internal
control over financial reporting based on our integrated audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are
free of material misstatement and whether effective internal
control over financial reporting was maintained in all material
respects. Our audits of the financial statements included
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. Our audit of internal control over financial
reporting included obtaining an understanding of internal
control over financial reporting, assessing the risk that a
material weakness exists, and testing and evaluating the design
and operating effectiveness of internal control based on the
assessed risk. Our audits also included performing such other
procedures as we considered necessary in the circumstances. We
believe that our audits provide a reasonable basis for our
opinions.
As discussed in Note 2 to the accompanying consolidated
financial statements, effective January 1, 2007, the
Company adopted Financial Accounting Standards Board (FASB)
Interpretation No. 48, Accounting for Uncertainty in
Income Taxes.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (i) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of
management and directors of the company; and (iii) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
As described in Managements Report on Internal Control
Over Financial Reporting, management has excluded InfraSource
Services, Inc. from its assessment of internal control over
financial reporting as of December 31, 2007 because
InfraSource Services, Inc. was acquired by the Company in a
purchase business combination during 2007. We have also excluded
InfraSource Services, Inc. from our audit of internal control
over financial reporting. InfraSource Services, Inc. and its
related subsidiaries are wholly owned subsidiaries of the
Company and have total assets and total revenues which represent
47% and 13%, respectively, of the related consolidated financial
statement amounts as of and for the year ended December 31,
2007.
PricewaterhouseCoopers LLP
Houston, Texas
February 29, 2008
59
QUANTA
SERVICES, INC. AND SUBSIDIARIES
(In thousands, except share information)
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2007
|
|
|
ASSETS
|
Current Assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
383,687
|
|
|
$
|
407,081
|
|
Accounts receivable, net of allowances of $5,419 and $4,620,
respectively
|
|
|
507,761
|
|
|
|
719,672
|
|
Costs and estimated earnings in excess of billings on
uncompleted contracts
|
|
|
36,113
|
|
|
|
72,424
|
|
Inventories
|
|
|
28,768
|
|
|
|
25,920
|
|
Prepaid expenses and other current assets
|
|
|
34,300
|
|
|
|
79,665
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
990,629
|
|
|
|
1,304,762
|
|
Property and equipment, net of accumulated depreciation of
$296,903 and $300,178
|
|
|
276,789
|
|
|
|
532,285
|
|
Accounts and notes receivable, net of allowances of $42,953,
respectively
|
|
|
7,815
|
|
|
|
7,914
|
|
Other assets, net
|
|
|
31,981
|
|
|
|
35,078
|
|
Other intangible assets, net of accumulated amortization of
$2,156 and $20,915
|
|
|
1,448
|
|
|
|
152,695
|
|
Goodwill
|
|
|
330,495
|
|
|
|
1,355,098
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,639,157
|
|
|
$
|
3,387,832
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
Current maturities of long-term debt
|
|
$
|
34,845
|
|
|
$
|
271,011
|
|
Accounts payable and accrued expenses
|
|
|
270,897
|
|
|
|
420,815
|
|
Billings in excess of costs and estimated earnings on
uncompleted contracts
|
|
|
28,714
|
|
|
|
65,603
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
334,456
|
|
|
|
757,429
|
|
Convertible subordinated notes
|
|
|
413,750
|
|
|
|
143,750
|
|
Deferred income taxes
|
|
|
31,140
|
|
|
|
101,416
|
|
Insurance and other non-current liabilities
|
|
|
130,728
|
|
|
|
200,094
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
910,074
|
|
|
|
1,202,689
|
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies
|
|
|
|
|
|
|
|
|
Stockholders Equity:
|
|
|
|
|
|
|
|
|
Common stock, $.00001 par value, 300,000,000 shares
authorized, 119,605,047 and 172,455,951 shares issued and
117,618,130 and 170,255,631 shares outstanding, respectively
|
|
|
1
|
|
|
|
2
|
|
Limited Vote Common Stock, $.00001 par value,
3,345,333 shares authorized, and 915,805 and
760,171 shares issued and outstanding, respectively
|
|
|
|
|
|
|
|
|
Additional paid-in capital
|
|
|
1,103,331
|
|
|
|
2,423,349
|
|
Accumulated deficit
|
|
|
(351,639
|
)
|
|
|
(214,191
|
)
|
Accumulated other comprehensive income
|
|
|
|
|
|
|
3,663
|
|
Treasury stock, 1,986,917 and 2,200,320 common shares, at cost
|
|
|
(22,610
|
)
|
|
|
(27,680
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
729,083
|
|
|
|
2,185,143
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
1,639,157
|
|
|
$
|
3,387,832
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
60
QUANTA
SERVICES, INC. AND SUBSIDIARIES
(In thousands, except per share information)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
Revenues
|
|
$
|
1,842,255
|
|
|
$
|
2,109,632
|
|
|
$
|
2,656,036
|
|
Cost of services (including depreciation)
|
|
|
1,587,556
|
|
|
|
1,796,916
|
|
|
|
2,227,289
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
254,699
|
|
|
|
312,716
|
|
|
|
428,747
|
|
Selling, general and administrative expenses
|
|
|
186,411
|
|
|
|
181,478
|
|
|
|
240,508
|
|
Amortization of intangible assets
|
|
|
365
|
|
|
|
363
|
|
|
|
18,759
|
|
Goodwill impairment
|
|
|
|
|
|
|
56,812
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
67,923
|
|
|
|
74,063
|
|
|
|
169,480
|
|
Interest expense
|
|
|
(23,949
|
)
|
|
|
(26,822
|
)
|
|
|
(21,515
|
)
|
Interest income
|
|
|
7,416
|
|
|
|
13,924
|
|
|
|
19,977
|
|
Gain (loss) on early extinguishment of debt, net
|
|
|
|
|
|
|
1,598
|
|
|
|
(34
|
)
|
Other income (expense), net
|
|
|
235
|
|
|
|
425
|
|
|
|
(546
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income tax provision
|
|
|
51,625
|
|
|
|
63,188
|
|
|
|
167,362
|
|
Provision for income taxes
|
|
|
22,446
|
|
|
|
46,955
|
|
|
|
34,222
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
29,179
|
|
|
|
16,233
|
|
|
|
133,140
|
|
Discontinued operation:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operation (net of income tax expense of
$244, $688 and $1,345)
|
|
|
378
|
|
|
|
1,250
|
|
|
|
2,837
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
29,557
|
|
|
$
|
17,483
|
|
|
$
|
135,977
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
0.25
|
|
|
$
|
0.14
|
|
|
$
|
0.98
|
|
Income from discontinued operation
|
|
|
0.01
|
|
|
|
0.01
|
|
|
|
0.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
0.26
|
|
|
$
|
0.15
|
|
|
$
|
1.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average basic shares outstanding
|
|
|
115,756
|
|
|
|
117,027
|
|
|
|
135,793
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
0.25
|
|
|
$
|
0.14
|
|
|
$
|
0.87
|
|
Income from discontinued operation
|
|
|
|
|
|
|
0.01
|
|
|
|
0.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
0.25
|
|
|
$
|
0.15
|
|
|
$
|
0.89
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average diluted shares outstanding
|
|
|
116,634
|
|
|
|
117,863
|
|
|
|
167,260
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
61
QUANTA
SERVICES, INC. AND SUBSIDIARIES
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
Cash Flows from Operating Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
29,557
|
|
|
$
|
17,483
|
|
|
$
|
135,977
|
|
Adjustments to reconcile net income to net cash provided by
operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill impairment
|
|
|
|
|
|
|
56,812
|
|
|
|
|
|
Depreciation
|
|
|
55,041
|
|
|
|
49,404
|
|
|
|
55,900
|
|
Amortization of intangibles
|
|
|
365
|
|
|
|
363
|
|
|
|
18,759
|
|
Amortization of debt issuance costs
|
|
|
3,654
|
|
|
|
6,473
|
|
|
|
2,653
|
|
Loss (gain) on sale of property and equipment
|
|
|
3,515
|
|
|
|
(733
|
)
|
|
|
5,328
|
|
Gain on sale of discontinued operation
|
|
|
|
|
|
|
|
|
|
|
(2,348
|
)
|
Loss (gain) on early extinguishment of debt
|
|
|
|
|
|
|
(2,088
|
)
|
|
|
34
|
|
Provision for doubtful accounts
|
|
|
1,988
|
|
|
|
1,587
|
|
|
|
1,216
|
|
Deferred income tax provision (benefit)
|
|
|
8,797
|
|
|
|
(1,666
|
)
|
|
|
5,597
|
|
Non-cash stock-based compensation
|
|
|
4,973
|
|
|
|
6,038
|
|
|
|
9,362
|
|
Tax impact of stock-based equity awards
|
|
|
|
|
|
|
(3,875
|
)
|
|
|
(6,275
|
)
|
Changes in operating assets and liabilities, net of non-cash
transactions
|
|
|
|
|
|
|
|
|
|
|
|
|
(Increase) decrease in
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts and notes receivable
|
|
|
(80,053
|
)
|
|
|
(70,350
|
)
|
|
|
(1,037
|
)
|
Costs and estimated earnings in excess of billings on
uncompleted contracts
|
|
|
3,904
|
|
|
|
1,940
|
|
|
|
(10,212
|
)
|
Inventories
|
|
|
(6,868
|
)
|
|
|
(3,051
|
)
|
|
|
6,715
|
|
Prepaid expenses and other current assets
|
|
|
113
|
|
|
|
(739
|
)
|
|
|
(15,517
|
)
|
Increase (decrease) in
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses and other non-current
liabilities
|
|
|
55,008
|
|
|
|
48,218
|
|
|
|
(14,879
|
)
|
Billings in excess of costs and estimated earnings on
uncompleted contracts
|
|
|
2,842
|
|
|
|
14,706
|
|
|
|
24,500
|
|
Other, net
|
|
|
(406
|
)
|
|
|
118
|
|
|
|
3,467
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
82,430
|
|
|
|
120,640
|
|
|
|
219,240
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sale of property and equipment
|
|
|
12,000
|
|
|
|
9,972
|
|
|
|
27,498
|
|
Additions of property and equipment
|
|
|
(42,556
|
)
|
|
|
(48,452
|
)
|
|
|
(127,931
|
)
|
Cash paid for acquisitions, net of cash acquired
|
|
|
|
|
|
|
|
|
|
|
(20,137
|
)
|
Purchases of short-term investments
|
|
|
|
|
|
|
511,655
|
|
|
|
309,055
|
|
Proceeds from the sale of short-term investments
|
|
|
|
|
|
|
(511,655
|
)
|
|
|
(309,055
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(30,556
|
)
|
|
|
(38,480
|
)
|
|
|
(120,570
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings under credit facility
|
|
|
14,000
|
|
|
|
|
|
|
|
|
|
Payments under credit facility
|
|
|
(27,300
|
)
|
|
|
(7,500
|
)
|
|
|
|
|
Proceeds from other long-term debt
|
|
|
1,244
|
|
|
|
148,228
|
|
|
|
6,532
|
|
Payments on other long-term debt
|
|
|
(6,200
|
)
|
|
|
(142,388
|
)
|
|
|
(101,159
|
)
|
Debt issuance and amendment costs
|
|
|
(41
|
)
|
|
|
(5,966
|
)
|
|
|
|
|
Issuances of stock
|
|
|
4,284
|
|
|
|
|
|
|
|
(875
|
)
|
Tax impact of stock-based equity awards
|
|
|
|
|
|
|
3,875
|
|
|
|
6,275
|
|
Exercise of stock options
|
|
|
846
|
|
|
|
1,011
|
|
|
|
10,288
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(13,167
|
)
|
|
|
(2,740
|
)
|
|
|
(78,939
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of foreign exchange rate changes on cash and cash
equivalents
|
|
|
|
|
|
|
|
|
|
|
3,663
|
|
Net increase in cash and cash equivalents
|
|
|
38,707
|
|
|
|
79,420
|
|
|
|
23,394
|
|
Cash and cash equivalents, beginning of year
|
|
|
265,560
|
|
|
|
304,267
|
|
|
|
383,687
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year
|
|
$
|
304,267
|
|
|
$
|
383,687
|
|
|
$
|
407,081
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash (paid) received during the year for
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
(16,859
|
)
|
|
$
|
(22,686
|
)
|
|
$
|
(19,467
|
)
|
Income tax paid
|
|
|
(2,403
|
)
|
|
|
(25,667
|
)
|
|
|
(61,052
|
)
|
Income tax refunds
|
|
|
1,058
|
|
|
|
2,226
|
|
|
|
1,704
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
62
QUANTA
SERVICES, INC. AND SUBSIDIARIES
(In thousands, except share information)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Limited Vote
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
Common Stock
|
|
|
Common Stock
|
|
|
Paid-In
|
|
|
Deferred
|
|
|
Comprehensive
|
|
|
Accumulated
|
|
|
Treasury
|
|
|
Stockholders
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Compensation
|
|
|
Income
|
|
|
Deficit
|
|
|
Stock
|
|
|
Equity
|
|
|
Balance, December 31, 2004
|
|
|
116,127,551
|
|
|
$
|
1
|
|
|
|
1,011,780
|
|
|
$
|
|
|
|
$
|
1,083,795
|
|
|
$
|
(7,217
|
)
|
|
$
|
|
|
|
$
|
(398,679
|
)
|
|
$
|
(14,653
|
)
|
|
$
|
663,247
|
|
Issuances of stock under ESPP
|
|
|
674,759
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,284
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,284
|
|
Restricted stock activity
|
|
|
238,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,204
|
|
|
|
769
|
|
|
|
|
|
|
|
|
|
|
|
(2,834
|
)
|
|
|
2,139
|
|
Stock options exercised
|
|
|
111,928
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
846
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
846
|
|
Income tax benefit from long-term incentive plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,011
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,654
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,654
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29,557
|
|
|
|
|
|
|
|
29,557
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2005
|
|
|
117,153,038
|
|
|
|
1
|
|
|
|
1,011,780
|
|
|
|
|
|
|
|
1,096,794
|
|
|
|
(6,448
|
)
|
|
|
|
|
|
|
(369,122
|
)
|
|
|
(17,487
|
)
|
|
|
703,738
|
|
Conversion of Limited Vote Common Stock to common stock
|
|
|
95,975
|
|
|
|
|
|
|
|
(95,975
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adoption of SFAS 123(R)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,448
|
)
|
|
|
6,448
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock activity
|
|
|
235,040
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,038
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,123
|
)
|
|
|
915
|
|
Stock options exercised
|
|
|
134,077
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,011
|
|
Income tax benefit from long-term incentive plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,875
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,875
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,061
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,061
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,483
|
|
|
|
|
|
|
|
17,483
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2006
|
|
|
117,618,130
|
|
|
|
1
|
|
|
|
915,805
|
|
|
|
|
|
|
|
1,103,331
|
|
|
|
|
|
|
|
|
|
|
|
(351,639
|
)
|
|
|
(22,610
|
)
|
|
|
729,083
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,663
|
|
|
|
|
|
|
|
|
|
|
|
3,663
|
|
Adoption of FIN No. 48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,471
|
|
|
|
|
|
|
|
1,471
|
|
InfraSource acquisition
|
|
|
49,975,553
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
1,271,574
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,271,575
|
|
Other acquisitions
|
|
|
1,085,452
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,380
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,380
|
|
Conversion of Limited Vote Common Stock to common stock
|
|
|
155,634
|
|
|
|
|
|
|
|
(155,634
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock activity
|
|
|
348,775
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,362
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,070
|
)
|
|
|
4,292
|
|
Stock options exercised
|
|
|
1,072,087
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,288
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,288
|
|
Income tax benefit from long-term incentive plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,275
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,275
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
139
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
139
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
135,977
|
|
|
|
|
|
|
|
135,977
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2007
|
|
|
170,255,631
|
|
|
$
|
2
|
|
|
|
760,171
|
|
|
$
|
|
|
|
$
|
2,423,349
|
|
|
$
|
|
|
|
$
|
3,663
|
|
|
$
|
(214,191
|
)
|
|
$
|
(27,680
|
)
|
|
$
|
2,185,143
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
63
QUANTA
SERVICES, INC. AND SUBSIDIARIES
|
|
1.
|
BUSINESS
AND ORGANIZATION:
|
Quanta Services, Inc. (Quanta) is a leading provider of
specialized contracting services, offering
end-to-end
network solutions to the electric power, gas, telecommunications
and cable television industries. Quantas comprehensive
services include engineering, designing, installing, repairing
and maintaining network infrastructure.
On August 30, 2007, Quanta acquired, through a merger
transaction (the Merger), all of the outstanding common stock of
InfraSource Services, Inc. (InfraSource). For accounting
purposes, the transaction was effective as of August 31,
2007, and results of InfraSources operations have been
included in the consolidated financial statements subsequent to
August 31, 2007. Similar to Quanta, InfraSource provided
specialized infrastructure contracting services to the electric
power, gas and telecommunications industries primarily in the
United States. The acquisition enhanced and expanded
Quantas capabilities in its existing services and added a
dark fiber leasing business.
On August 31, 2007, Quanta sold the operating assets
associated with the business of Environmental Professional
Associates, Limited (EPA), a Quanta subsidiary. Quanta has
presented EPAs income statement for the current and prior
periods as a discontinued operation in the accompanying
consolidated statements of operations.
In the course of its operations, Quanta is subject to certain
risk factors including, but not limited to, risks related to
significant fluctuations in quarterly results; ability to
eliminate duplicative costs and realize efficiencies and
synergies related to the integration of InfraSource; additional
risks as a result of the Merger; economic downturns; project
delays or cancellations; dependence on fixed price contracts;
use of percentage-of-completion accounting; internal growth and
operating strategies; competition; impact of the Energy Policy
Act of 2005; availability of qualified employees; management of
growth; identification, completion and integration of
acquisitions; recoverability of goodwill; use of estimates and
assumptions in determining financial results and backlog;
lawsuits and indemnity claims related to projects; being
self-insured against potential liabilities or for claims that
Quantas insurance carriers fail to pay; occupational
health and safety matters; changes in, or interpretations of,
existing federal, state, local or international regulations;
capital expenditures in dark fiber leasing; replacing canceled
or completed contracts; collectibility of receivables; ability
to provide surety bonds; dependence on key personnel; unionized
workforce; the requirements of the Sarbanes-Oxley Act of 2002;
potential exposure to environmental liabilities; operations in
international markets; the pursuit of work in the government
arena; rapid technological and structural changes in the
industries Quanta serves; access to capital; convertibility of
Quantas convertible subordinated notes; and provisions in
our corporate governing documents that could make an acquisition
of Quanta more difficult.
|
|
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES:
|
Principles
of Consolidation
The consolidated financial statements of Quanta include the
accounts of Quanta and its wholly owned subsidiaries. All
significant intercompany accounts and transactions have been
eliminated in consolidation. Unless the context requires
otherwise, references to Quanta include Quanta and its
consolidated subsidiaries.
Reclassifications
Certain reclassifications have been made in prior years
financial statements to conform to classifications used in the
current year.
64
QUANTA
SERVICES, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Use of
Estimates and Assumptions
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States
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 amount 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
Quantas 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 Quantas assessment of the allowance
for doubtful accounts, valuation of inventory, useful lives of
property and equipment, fair value assumptions in analyzing
goodwill, other intangibles and long-lived asset impairments,
self-insured claims liabilities, revenue recognition under
percentage-of-completion
accounting, share-based compensation, provision for income taxes
and purchase price allocations.
Cash
and Cash Equivalents
Quanta considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
Short-Term
Investments
Quanta held no short-term investments as of December 31,
2006 or 2007; however, during 2006 and the first quarter of
2007, Quanta invested from time to time in variable rate demand
notes (VRDNs), which were classified as short-term investments
available for sale. The income from VRDNs is tax-exempt to
Quanta.
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 including, among others, the customers access to
capital, the customers willingness or ability to pay,
general economic conditions and the ongoing relationship with
the customer. Under certain circumstances such as foreclosures
or negotiated settlements, Quanta may take title to the
underlying assets in lieu of cash in settlement of receivables.
Material changes in Quantas customers revenues or
cash flows could affect its ability to collect amounts due from
them. As of December 31, 2007, Quanta had total allowances
for doubtful accounts of approximately $47.6 million.
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.
Included in accounts and notes receivable are amounts due from a
customer relating to the construction of independent power
plants. During 2006, the underlying assets which had secured
these notes receivable were sold pursuant to liquidation
proceedings and the net proceeds are being held by a trustee.
Quanta recorded allowances for a significant portion of these
notes receivable in prior periods. The final collection of
amounts owed Quanta are subject to further legal proceedings,
although after December 31, 2007 the parties reached a
settlement agreement that, if finalized as expected, will result
in the collection of the net receivable amount.
The balances billed but not paid by customers pursuant to
retainage provisions in certain contracts will be due upon
completion of the contracts and acceptance by the customer.
Based on Quantas experience with similar contracts in
recent years, the majority of the retention balances at each
balance sheet date will be
65
QUANTA
SERVICES, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
collected within the subsequent fiscal year. Current retainage
balances as of December 31, 2006 and 2007 were
approximately $39.0 million and $60.2 million and are
included in accounts receivable. Also included in accounts and
notes receivable as of December 31, 2007 are
$2.1 million in retainage balances with settlement dates
beyond the next twelve months.
Within accounts receivable, Quanta recognizes unbilled
receivables in circumstances such as when: revenues have been
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 that arise from routine lags in billing (for example,
for work completed one month but not billed until the next
month). These balances exclude 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 December 31, 2006 and 2007,
the balances of unbilled receivables included in accounts
receivable were approximately $92.9 million and
$132.3 million.
Inventories
Inventories consist of parts and supplies held for use in the
ordinary course of business and are valued by Quanta at the
lower of cost or market primarily using the
first-in,
first-out (FIFO) method.
Property
and Equipment
Property and equipment are stated at cost, and depreciation is
computed using the straight-line method, net of estimated
salvage values, over the estimated useful lives of the assets.
Leasehold improvements are capitalized and amortized over the
lesser of the life of the lease or the estimated useful life of
the asset. Depreciation and amortization expense related to
property and equipment was approximately $55.0 million,
$49.4 million and $55.9 million for the years ended
December 31, 2005, 2006 and 2007, respectively.
Expenditures for repairs and maintenance are charged to expense
when incurred. Expenditures for major renewals and betterments,
which extend the useful lives of existing equipment, are
capitalized and depreciated over the adjusted remaining useful
life of the assets. Upon retirement or disposition of property
and equipment, the cost and related accumulated depreciation are
removed from the accounts and any resulting gain or loss is
reflected in selling, general and administrative expenses.
Management reviews long-lived assets for impairment in
accordance with Statement of Financial Accounting Standards
(SFAS) No. 144, Accounting for Impairment or Disposal
of Long-Lived Assets whenever events or changes in
circumstances indicate that the carrying amount may not be
realizable. If an evaluation is required, fair value would be
determined by estimating the future undiscounted cash flows
associated with the asset and comparing it to the assets
carrying amount to determine if an impairment of such asset is
necessary. The effect of any impairment would be to expense the
difference between the fair value of such asset and its carrying
value.
Capitalized
Software
In accordance with Statement of Position (SOP)
98-1,
Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use, we capitalize costs associated
with internally developed
and/or
purchased software systems for new products and enhancements to
existing products that have reached the application development
stage and meet recoverability tests. Capitalized costs included
external direct costs of materials and services utilized in
developing or obtaining internal-use software, payroll and
payroll-related expenses for employees who are directly
associated with and devote time to the internal-use software
project and interest costs incurred, if material, while
developing internal-use software. Capitalization of such costs
begins when the preliminary project stage is complete and ceases
no later than the point at which the project is substantially
complete and ready for its intended purpose. Those capitalized
costs are amortized on a
66
QUANTA
SERVICES, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
straight-line basis over the economic useful life of the asset,
beginning when the asset is ready for its intended use.
Capitalized costs are included in property and equipment on the
consolidated balance sheets.
Other
Assets, Net
Other assets, net consist primarily of debt issuance costs,
non-current inventory, refundable security deposits for leased
properties, insurance claims in excess of deductibles that are
due from Quantas insurers.
Debt
Issuance Costs
As of December 31, 2006 and 2007, capitalized debt issuance
costs related to Quantas credit facility and convertible
subordinated notes were included in other assets, net and are
being amortized into interest expense straight-line over the
terms of the respective agreements giving rise to the debt
issuance costs which we believe approximated the effective tax
rate method. As of December 31, 2006 and 2007, capitalized
debt issuance costs were $14.9 million and
$15.8 million with accumulated amortization of
$6.6 million and $9.3 million. For the years ended
December 31, 2005, 2006 and 2007, amortization expense was
$3.6 million, $3.2 million and $2.7 million,
respectively.
Quanta incurred $4.0 million in debt issuance costs in the
second quarter of 2006 related to its issuance of its 3.75%
convertible subordinated notes. These costs were capitalized and
are being amortized over seven years until April 30, 2013,
the date of the note holders first put option as discussed
in Note 8. During the second quarter of 2006, Quanta also
capitalized $2.0 million in connection with the amendment
and restatement of its credit facility. Upon the amendment and
restatement of Quantas credit facility in 2006, the
obligations under the prior facility were terminated and related
unamortized debt issuance costs in the amount of approximately
$2.6 million were expensed in 2006 and included in interest
expense as discussed in Note 8. In addition, during the
second quarter of 2006, Quanta repurchased a portion of its 4.0%
convertible subordinated notes, and as a result, Quanta expensed
$0.7 million in unamortized debt issuance costs as interest
expense as discussed in Note 8. In the third quarter of
2007, Quanta incurred $0.9 million in costs associated with
certain amendments to the credit facility. These costs were
capitalized and, along with costs incurred in connection with
the amendment and restatement of the credit facility in the
second quarter of 2006, are being amortized until
September 19, 2012, the amended maturity date.
Goodwill
and Other Intangibles
In accordance with SFAS No. 142, Goodwill and
Other Intangible Assets, goodwill is subject to an annual
assessment for impairment using a two-step fair value-based test
with the first step performed annually at year-end, or more
frequently if events or circumstances exist that indicate that
goodwill may be impaired. The first step involves comparing the
fair value of each of Quantas reporting unit with its
carrying value, including goodwill. Fair value is determined
using a combination of the discounted cash flow, market multiple
and market capitalization valuation approaches. Significant
estimates used in the above methodologies include estimates of
future cash flows, future short-term and long-term growth rates,
weighted average cost of capital and estimates of market
multiples for each of the reportable units. If the carrying
amount of the reporting unit exceeds its fair value, the second
step is performed. The second step compares the carrying amount
of the reporting units goodwill to the fair value of the
goodwill. If the 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 that
represents an operating expense. SFAS No. 142 does not
allow increases in the carrying value of reporting units that
may result from Quantas impairment test, therefore Quanta
may record goodwill impairments in the future, even when the
aggregate fair value of Quantas reporting units and Quanta
as a whole may increase.
Quantas management follows the guidance outlined in
SFAS No. 141, Business Combinations to
identify the existence of identifiable intangible assets.
Quantas intangible assets include customer relationships,
backlog, non-compete agreements and patented rights. The value
of customer relationships is estimated
67
QUANTA
SERVICES, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
using the
value-in-use
concept utilizing the income approach, specifically the excess
earnings method. The excess earnings analysis consists of
discounting to present value the projected cash flows
attributable to the customer relationships, with consideration
given to customer contract renewals, the importance or lack
thereof of existing customer relationships to Quantas
business plan, income taxes and required rates of return. Quanta
values backlog based upon the contractual nature of the backlog
within each service line, using the income approach to discount
back to present value the cash flows attributable to the backlog.
Quanta amortizes intangible assets based upon the estimated
consumption of the economic benefits of each intangible asset or
on a straight-line basis if the pattern of economic benefits
consumption cannot be reliably estimated. Intangible assets
subject to amortization are reviewed for impairment in
accordance with SFAS No. 144 and are tested for
recoverability whenever events or changes in circumstances
indicate that the carrying amount may not be recoverable. An
impairment loss must be recognized if the carrying amount of an
intangible asset is not recoverable and its carrying amount
exceeds its fair value.
Revenue
Recognition
Quanta designs, installs and maintains networks for the electric
power, gas, telecommunications and cable television industries,
as well as provides various ancillary services to commercial,
industrial and governmental entities. These services may be
provided 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.
Under these contracts, Quanta recognizes revenue when units are
completed based on pricing established between Quanta and the
customer for each unit of delivery, 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. These contracts provide
for a fixed amount of revenues for the entire project. Such
contracts provide that the customer accept completion of
progress to date and compensate us for services rendered,
measured in terms of units installed, hours expended or some
other measure of progress. Contract costs include all direct
material, 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
materials associated with Quantas work are owner-furnished
and are therefore not included in contract revenues and costs.
The cost estimation process is based on the professional
knowledge and experience of Quantas engineers, project
managers and financial professionals. Changes in job
performance, job conditions and final contract settlements are
factors that influence managements assessment of the total
estimated costs to complete those contracts and therefore,
Quantas profit recognition. 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.
Provisions for the total estimated losses on uncompleted
contracts are made in the period in which such losses are
determined.
Quanta may incur costs subject to change orders, whether
approved or unapproved by the customer,
and/or
claims related to certain contracts. Quanta determines whether
there is a probability that the 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 a cost 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.
The current asset Costs and estimated earnings in excess
of billings on uncompleted contracts represents revenues
recognized in excess of amounts billed for fixed price
contracts. The current liability
68
QUANTA
SERVICES, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Billings in excess of costs and estimated earnings on
uncompleted contracts represents billings in excess of
revenues recognized for fixed price contracts.
As a result of the Merger, Quanta has fiber-optic facility
licensing agreements with various customers, as described below.
Revenues earned pursuant to these fiber-optic facility licensing
agreements, including any initial fees or advanced billings, are
recognized ratably over the expected length of the agreements,
including probable renewal periods. As of December 31,
2007, advanced billings on these licensing agreements were
$23.2 million and are recognized as deferred revenue with
$15.6 million considered to be long-term and included in
other non-current liabilities.
Fiber-Optic
Rentals
The dark fiber business acquired as part of the Merger
constructs and leases fiber-optic telecommunications facilities
to customers pursuant to licensing agreements, typically with
lease terms from five to twenty-five years, including certain
renewal options. Under those agreements, customers lease a
portion of the capacity of a fiber-optic facility, with the
facility owned and maintained by Quanta. Minimum future rental
revenue related to fiber-optic facility licensing agreements
expected to be received by Quanta as of December 31, 2007
are as follows (in thousands):
|
|
|
|
|
|
|
Minimum
|
|
|
|
Future
|
|
|
|
Rentals
|
|
|
Year Ending December 31
|
|
|
|
|
2008
|
|
$
|
33,033
|
|
2009
|
|
|
29,266
|
|
2010
|
|
|
22,631
|
|
2011
|
|
|
14,927
|
|
2012
|
|
|
8,550
|
|
Thereafter
|
|
|
32,534
|
|
|
|
|
|
|
Fixed non-cancelable minimum lease revenues
|
|
$
|
140,941
|
|
|
|
|
|
|
Income
Taxes
Quanta follows the liability method of accounting for income
taxes in accordance with SFAS No. 109,
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.
On January 1, 2007, Quanta adopted Financial Accounting
Standards Board (FASB) Interpretation No. 48,
Accounting for Uncertainty in Income Taxes an
Interpretation of FASB Statement No. 109
(FIN No. 48). FIN No. 48 prescribes a
comprehensive model for how companies should recognize, measure,
present and disclose in their financial statements uncertain tax
positions taken or to be taken on a tax return. As a result of
the implementation of FIN No. 48, Quanta recognized a
$1.5 million decrease in the reserve for uncertain tax
69
QUANTA
SERVICES, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
positions, which was accounted for as an adjustment to the
accumulated deficit as of January 1, 2007. Including the
effect of the $1.5 million decrease, the total amount of
unrecognized tax benefits as of the date of adoption of
FIN No. 48 was $72.5 million. Of this total,
$60.6 million, which is net of the federal benefit of state
taxes, represents the amount of unrecognized tax benefits that,
if recognized, would favorably impact the effective income tax
rate in future periods. Also, as of January 1, 2007, Quanta
had accrued $14.0 million of interest and penalties
relating to unrecognized tax benefits. Quantas continuing
practice is to recognize within the provision for income taxes
any interest
and/or
penalties related to income tax matters.
The 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 and statements of income.
Collective
Bargaining Agreements
Certain of Quantas subsidiaries are party to collective
bargaining agreements with unions representing certain of their
employees. The agreements require such subsidiaries to pay
specified wages and provide certain benefits to their union
employees. These agreements expire at various times and have
typically been renegotiated and renewed on terms that are
similar to the ones contained in the expiring agreements.
Under certain collective bargaining agreements, the applicable
Quanta subsidiary is required to make contributions to
multi-employer pension plans. Were the subsidiary to cease
participation in one or more plans, a liability could
potentially be assessed related to any underfunding of these
plans. The amount of any such assessment, were such an
assessment to be made in the future, is not subject to
reasonable estimation.
Fair
Value of Financial Instruments
The carrying values of cash and cash equivalents, accounts
receivable and accounts payable and accrued expenses approximate
fair value due to the short-term nature of those instruments.
The fair value of Quantas convertible subordinated notes
is estimated based on quoted secondary market prices for these
notes as of year-end. At December 31, 2006, the fair value
of the $33.3 million aggregate principal amount outstanding
of Quantas 4.0% convertible subordinated notes,
$33.3 million was approximately $32.8 million. The
outstanding principal balance of $33.3 million of these
notes plus accrued interest was repaid on July 2, 2007. At
December 31, 2006 and 2007, the fair value of the
$270.0 million aggregate principal amount outstanding of
Quantas 4.5% convertible subordinated notes was
approximately $496.1 million and $640.2 million. At
December 31, 2006 and 2007, the fair value of the
$143.8 million aggregate principal amount outstanding of
Quantas 3.75% convertible subordinated notes was
approximately $163.3 million and $185.4 million.
Stock-Based
Compensation
Prior to January 1, 2006, Quanta accounted for its
stock-based compensation awards under APB Opinion No. 25,
Accounting for Stock Issued to Employees. Under this
accounting method, no compensation expense was recognized in the
consolidated statements of operations if no intrinsic value of
the stock-based compensation award existed at the date of grant.
SFAS No. 123, Accounting for Stock Based
Compensation, which encouraged companies to account for
stock-based compensation awards based on the fair value of the
awards at the date they were granted, required disclosure as to
what net income and earnings per share would have been had
SFAS No. 123 been followed. Had compensation expense
for transactions under the 2001 Stock Incentive Plan (as amended
and restated March 13, 2003) (the 2001 Plan) and the 1999
Employee Stock Purchase Plan, which was terminated in 2005, been
determined consistent with SFAS No. 123, Quantas
net
70
QUANTA
SERVICES, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
income and earnings per share for the year ended
December 31, 2005 would have been reduced to the following
as adjusted amounts (in thousands, except per share information):
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
Net income
|
|
$
|
29,557
|
|
Add: stock-based employee compensation expense included in
reported net income, net of tax
|
|
|
3,034
|
|
Deduct: total stock-based employee compensation expense
determined under fair value based method for all awards, net of
tax
|
|
|
(4,591
|
)
|
|
|
|
|
|
Net income
|
|
|
|
|
As adjusted basic and diluted
|
|
$
|
28,000
|
|
Earnings per share
|
|
|
|
|
As reported basic
|
|
$
|
0.26
|
|
As reported diluted
|
|
$
|
0.25
|
|
As adjusted basic and diluted
|
|
$
|
0.24
|
|
Effective January 1, 2006, Quanta adopted
SFAS No. 123 (revised 2004), Share-Based
Payment (SFAS No. 123(R)), using the modified
prospective method of adoption, which requires recognition of
compensation expense for all stock-based compensation beginning
on the effective date. Under this method of accounting,
compensation cost for stock-based compensation awards is based
on the fair value of the awards granted, net of estimated
forfeitures, at the date of grant. Quanta values share-based
awards using the Black-Sholes option pricing model. Forfeitures
are estimated using historical activity. The resulting
compensation costs are recognized on a straight-line basis over
the service period of each award as discussed in Note 11.
In accordance with the modified prospective method of adoption,
Quanta has not adjusted consolidated financial statements for
prior periods.
Prior to the adoption of SFAS No. 123(R), Quanta
presented all tax benefits of deductions resulting from the
exercise of stock options as operating cash flows in our
consolidated statement of cash flows. SFAS No. 123(R)
requires the cash flows resulting from the tax deductions in
excess of the compensation cost recognized for those options
(excess tax benefit) to be classified as financing cash flows.
Functional
Currency and Translation of Financial Statements
The U.S. dollar is the functional currency for the majority
of Quantas operations. However, Quanta has foreign
operating subsidiaries in Canada, for which Quanta considers the
Canadian dollar to be the functional currency. Generally, the
currency in which the subsidiary transacts a majority of its
transactions, including billings, financing, payroll and other
expenditures would be considered the functional currency, but
any dependency upon the parent company and the nature of the
subsidiarys operations must also be considered. In
preparing the consolidated financial statements, Quanta
translates the financial statements of the foreign operating
subsidiaries from their functional currency into United States
dollars. Balance sheets for foreign operations are translated
into U.S. dollars at the month-end exchange rates, while
statements of operations are translated at average monthly
rates, which may result in translation gains or losses. Under
the relevant accounting guidance, the treatment of these
translation gains or losses is dependent upon managements
determination of the functional currency of each subsidiary,
involving consideration of all relevant economic facts and
circumstances affecting the subsidiary. If transactions are
denominated in the entitys functional currency, the
translation gains and losses are included as a separate
component of stockholders equity under the caption
Accumulated other comprehensive income. If
transactions are not denominated in the entitys functional
currency, the translation gains and losses are included within
the statement of operations.
71
QUANTA
SERVICES, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Comprehensive
Income
Comprehensive income includes all changes in equity during a
period except those resulting from investments by and
distributions to stockholders. As described above, Quanta
records other comprehensive income for the foreign currency
translation adjustment related to its foreign operations.
Derivatives
Quanta accounts for derivative transactions in accordance with
SFAS No. 133 Accounting for Derivatives and
Hedging Activities, as amended by SFAS Nos. 137, 138
and 149 and as interpreted by various Derivatives Implementation
Group Issues. Quanta does not enter into derivative transactions
for speculative purposes; however, for accounting purposes,
certain transactions may not meet the criteria for hedge
accounting. Accordingly, changes in fair value related to
transactions that do not meet the criteria for hedge accounting
must be recorded in the consolidated results of operations.
In June 2007, prior to the Merger, InfraSource entered into
three forward contracts to hedge anticipated purchases in
U.S. dollars by a Canadian functional currency entity. Upon
the acquisition of InfraSource, Quanta determined these forward
contracts were not cash flow hedges because the anticipated
purchases would not likely occur in the time periods
contemplated when InfraSource entered into the forward
contracts. Accordingly, changes to the fair market value of the
forward contracts have been recorded in earnings subsequent to
August 31, 2007. During the year ended December 31,
2007, a loss of approximately $0.8 million was recorded to
other expense related to these forward contracts during the
third and fourth quarters, approximately $0.7 million of
which related to two of the contracts settled in September and
November of 2007 with a combined notional amount of
approximately $7.6 million. The only contract remaining at
December 31, 2007 had a notional amount of
$1.7 million and expired in January 2008. It was settled in
January 2008 for an additional loss of approximately $37,000
that will be included in Quantas income statement in the
first quarter of 2008.
Litigation
Costs
Quanta records reserves when it is probable that a liability has
been incurred and the amount of loss can be reasonably
estimated. Costs incurred for litigation are expensed as
incurred.
New
Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements. SFAS No. 157
defines fair value, establishes methods used to measure fair
value and expands disclosure requirements about fair value
measurements. SFAS No. 157 is effective for financial
statements issued for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal
periods, as it relates to financial assets and liabilities, as
well as for any non-financial assets and liabilities that are
carried at fair value. SFAS No. 157 also requires
certain tabular disclosure related to results of applying
SFAS No. 144 and SFAS No. 142. On
November 14, 2007, the FASB provided a one year deferral
for the implementation of SFAS No. 157 for
non-financial assets and liabilities. SFAS No. 157
excludes from its scope SFAS No. 123(R),
Share-Based Payment and its related interpretive
accounting pronouncements that address share-based payment
transactions. Quanta does not currently have any material
financial assets and liabilities or any material non-financial
assets or liabilities that are carried at fair value on a
recurring basis, but Quanta does have non-financial assets that
are measured at fair value on a nonrecurring basis including
long term assets held and used and goodwill. Based on the
November 14, 2007 deferral of SFAS No. 157 for
non-financial assets and liabilities, Quanta will begin
following the guidance of SFAS No. 157 with respect to
its non-financial assets and liabilities that are measured at
fair value on a nonrecurring basis in the quarter ended
March 31, 2009. Based on the assets and liabilities on its
balance sheet as of December 31, 2007, Quanta does not
expect the adoption of
72
QUANTA
SERVICES, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
SFAS No. 157 to have a material impact on its
consolidated financial position, results of operations or cash
flows.
In February 2007, the FASB issued SFAS No. 159,
The Fair Value Option for Financial Assets and Financial
Liabilities, including an amendment of FASB Statement
No. 115. SFAS No. 159 permits entities to
choose to measure at fair value many financial instruments and
certain other items that are not currently required to be
measured at fair value. Unrealized gains and losses on items for
which the fair value option has been elected are reported in
earnings. SFAS No. 159 does not affect any existing
accounting literature that requires certain assets and
liabilities to be carried at fair value. SFAS No. 159
is effective for fiscal years beginning after November 15,
2007. Based on the assets and liabilities on Quantas
balance sheet as of December 31, 2007, Quanta does not
expect the adoption of SFAS No. 159 to have any
material impact on its consolidated financial position, results
of operations or cash flows.
In December 2007, the FASB issued SFAS No. 160,
Non-controlling Interests in Consolidated Financial
Statements an amendment of ARB No. 51.
SFAS No. 160 addresses the accounting and reporting
framework for minority interests by a parent company.
SFAS No. 160 is to be effective for fiscal years, and
interim periods within those fiscal years, beginning on or after
December 15, 2008. Accordingly, Quanta will adopt SFAS
no. 160 in the first quarter of fiscal 2009. Quanta is
currently assessing the impact that SFAS No. 160 will
have on its consolidated financial position, results of
operations and cash flows.
In December 2007, the FASB issued SFAS No. 141(R),
Business Combinations. SFAS No. 141(R) is
effective for fiscal years beginning after December 15,
2008. Earlier application is prohibited. Assets and liabilities
that arose from business combinations occurring prior to the
adoption of SFAS No. 141(R) cannot be adjusted upon
the adoption of SFAS No. 141(R).
SFAS No. 141(R) requires the acquiring entity in a
business combination to recognize all (and only) the assets
acquired and liabilities assumed in the business combination;
establishes the acquisition date as the measurement date to
determine the fair value for all assets acquired and liabilities
assumed; and requires the acquirer to disclose to investors and
other users all of the information they need to evaluate and
understand the nature and financial effect of the business
combination. As it relates to recognizing all (and only) the
assets acquired and liabilities assumed in a business
combination, costs an acquirer expects but is not obligated to
incur in the future to exit an activity of an acquiree or to
terminate or relocate an acquirees employees are not
liabilities at the acquisition date but must be expensed in
accordance with other applicable generally accepted accounting
principles. Additionally, during the measurement period, which
cannot exceed one year from the acquisition date, any
adjustments needed to assets acquired and liabilities assumed to
reflect new information obtained about facts and circumstances
that existed as of the acquisition date that, if known, would
have affected the measurement of the amounts recognized as of
that date will be adjusted retrospectively. The acquirer will be
required to expense all acquisition-related costs in the periods
such costs are incurred other than costs to issue debt or equity
securities in connection with the acquisition.
SFAS No. 141(R) will have no impact on Quantas
consolidated financial position, results of operations or cash
flows at the date of adoption, but it could have a material
impact on its consolidated financial position, results of
operations or cash flows in the future when it is applied to
acquisitions that occur in 2009 and beyond.
In June 2007, the FASB Emerging Issues Task Force issued EITF
Issue
No. 06-11,
Accounting for Income Tax Benefits of Dividends on
Share-Based Payment Awards.
EITF 06-11
requires that a realized income tax benefit from dividends or
dividend equivalent units paid on unvested restricted shares and
restricted share units be reflected as an increase in
contributed surplus and reflected as an addition to the
companys excess tax benefit pool, as defined under
SFAS No. 123(R).
EITF 06-11
is effective for fiscal years beginning after December 15,
2007, and interim periods within those fiscal years.
Accordingly, Quanta will adopt
EITF 06-11
in the first quarter of 2008. Quanta does not currently
anticipate declaring dividends in the near future, so
EITF 06-11
is not anticipated to have any material impact on Quantas
consolidated financial position, results of operations or cash
flows in the near future.
73
QUANTA
SERVICES, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In December 2007, the Securities and Exchange Commission (SEC)
published Staff Accounting Bulletin No. 110
(SAB 110). SAB 110 expresses the views of the SEC
staff regarding the use of a simplified method, as
discussed in SAB No. 107 (SAB 107), in developing
an estimate of the expected term of plain vanilla
share options in accordance with SFAS No. 123(R). In
particular, the SEC staff indicated in SAB 107 that it will
accept a companys election to use the simplified method,
regardless of whether the company has sufficient information to
make more refined estimates of the expected term. However, the
SEC staff stated in SAB 107 that it would not expect a
company to use the simplified method for share option grants
after December 31, 2007, but that it would accept, under
certain circumstances, the use of the simplified method beyond
December 31, 2007. Quanta is currently assessing the impact
that SAB 110 will have on its consolidated financial
position, results of operations and cash flows.
InfraSource
Acquisition
On August 30, 2007, Quanta acquired through the Merger all
of the outstanding common stock of InfraSource. In connection
with the acquisition, Quanta issued to InfraSources
stockholders 1.223 shares of Quanta common stock for each
outstanding share of InfraSource common stock, resulting in the
issuance of a total of 49,975,553 shares of common stock
for an aggregate purchase price of approximately
$1.3 billion. For purposes of purchase price accounting,
the value of the common shares issued was determined based on
the guidance in
EITF 99-12
Determination of the Measurement Date for the Market Price
of Acquirer Securities Issued in a Purchase Business
Combination
(EITF 99-12).
EITF 99-12 states
that the value of the common stock issued in a business
combination should be calculated using the acquirers
average common stock price a few days before and a few days
after the acquisition announcement date, which was
March 19, 2007. Accordingly, Quanta calculated the purchase
price based on the average market price of Quantas common
stock over the five trading days ended March 21, 2007 of
$24.67 per share. Concurrent with the closing of the Merger,
Quanta funded the repayment of approximately $60.5 million
of InfraSources outstanding borrowings under its credit
agreement through Quantas available cash and cash on hand
at InfraSource at the time of closing.
The following summarizes the allocation of the purchase price
and estimated transaction costs related to the InfraSource
acquisition. This allocation is based on the significant use of
estimates and on information that was available to management at
the time these consolidated financial statements were prepared.
Portions of the allocation of purchase price are preliminary.
Accordingly, the allocation will change as management continues
to assess available information, and the impact of such changes
may be material. Specifically, the valuation of the operating
unit engaged in the leasing of fiber-optic telecommunications
facilities and the associated customer leases, as well as the
values for intangible assets and deferred and other taxes are
preliminary and subject to material change based on the results
of the final evaluation.
74
QUANTA
SERVICES, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table summarizes the estimated fair values (in
thousands):
|
|
|
|
|
|
|
August 31,
|
|
|
|
2007
|
|
|
Current assets
|
|
$
|
287,819
|
|
Non-current assets
|
|
|
9,277
|
|
Property and equipment
|
|
|
213,039
|
|
Intangible assets
|
|
|
158,840
|
|
Goodwill
|
|
|
977,749
|
|
|
|
|
|
|
Total assets acquired
|
|
|
1,646,724
|
|
|
|
|
|
|
Current liabilities
|
|
|
203,051
|
|
Long-term liabilities
|
|
|
172,099
|
|
|
|
|
|
|
Total liabilities assumed
|
|
|
375,150
|
|
|
|
|
|
|
Net assets acquired
|
|
$
|
1,271,574
|
|
|
|
|
|
|
Additionally, Quanta incurred approximately $12.1 million
of costs related to the Merger.
Although they are subject to change based on final evaluations,
the preliminary amounts assigned to various intangible assets at
August 31, 2007 related to the InfraSource acquisition are
customer relationships of $95.3 million, backlog of
$50.5 million and non-compete agreements of
$13.0 million. The customer relationships are being
amortized on a straight-line basis over 15 years, backlog
is being amortized based on the estimated pattern of the
consumption of the economic benefit over a weighted average
period of 1.9 years and the non-compete agreements are
being amortized on a straight-line basis over the lives of the
underlying contracts over a weighted average period of
2.5 years.
Goodwill represents the excess of the purchase price over the
fair value of the acquired net assets. Quanta anticipates to
continue to realize meaningful operational and cost synergies,
such as enhancing the combined service offerings, expanding the
geographic reach and resource base of the combined company,
improving the utilization of personnel and fixed assets, the
elimination of duplicate corporate functions, as well as
accelerating revenue growth through enhanced cross-selling and
marketing opportunities. Quanta believes these opportunities
contribute to the recognition of the substantial goodwill.
75
QUANTA
SERVICES, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following 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 company for the periods
presented or that may be achieved by the combined company 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. The following pro forma results of operations have been
provided for the years ended December 31, 2006 and 2007 as
though the Merger had been completed as of the beginning of each
period presented (in thousands except per share amounts).
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2007
|
|
|
Revenues
|
|
$
|
3,101,937
|
|
|
$
|
3,262,382
|
|
Gross profit
|
|
$
|
465,892
|
|
|
$
|
521,024
|
|
Selling, general and administrative expenses
|
|
$
|
280,632
|
|
|
$
|
321,883
|
|
Amortization of intangible assets
|
|
$
|
40,794
|
|
|
$
|
43,243
|
|
Income from continuing operations
|
|
$
|
26,070
|
|
|
$
|
126,871
|
|
Net income
|
|
$
|
27,595
|
|
|
$
|
129,683
|
|
Earnings per share from continuing operations:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.16
|
|
|
$
|
0.75
|
|
Fully diluted
|
|
$
|
0.16
|
|
|
$
|
0.70
|
|
The pro forma combined results of operations have been prepared
by adjusting the historical results of Quanta to include the
historical results of InfraSource, the reduction in interest
expense and interest income as a result of the repayment of
InfraSources outstanding indebtedness on the acquisition
date, certain reclassifications to conform InfraSources
presentation to Quantas accounting policies and the impact
of the preliminary purchase price allocation discussed above.
The pro forma results of operations do not include any cost
savings that may result from the Merger or any estimated costs
that have been or will be incurred by Quanta to integrate the
businesses other than those already incurred in 2007. 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. For example,
Quanta recorded tax benefits in 2007 of $33.2 million
primarily due to a decrease in reserves for uncertain tax
positions. Additionally, InfraSource incurred $13.4 million
in merger-related costs prior to the Merger that have not been
eliminated in the 2007 pro forma results of operations above.
Items such as these, coupled with other risk factors that could
have affected the combined company and its operations, make it
difficult to use the pro forma results of operations to project
future results of operations.
Quanta completed three other acquisitions, which are discussed
below, during the year ended December 31, 2007. The pro
forma impact of the three other acquisitions has not been
included due to the fact that they are immaterial to
Quantas financial statements individually and in the
aggregate.
Other
Acquisitions
In January 2007, Quanta acquired a foundation drilling company
for a purchase price of $32.3 million, consisting of
$20.4 million in cash and 693,784 shares of Quanta
common stock valued at $11.9 million at the date of
acquisition on a discounted basis as a result of the restricted
nature of the shares. The acquisition allows Quanta to have
in-house capabilities to construct drilled pier foundations for
electric transmission towers and wireless telecommunication
towers. The estimated fair value of the tangible assets was
$11.3 million and consisted of current assets of
$7.3 million and property and equipment of
$4.0 million. Net tangible assets acquired were
$5.4 million after considering liabilities of
$5.9 million. The excess of the purchase price over net
tangible assets acquired was recorded as goodwill in the amount
of $20.7 million and intangible
76
QUANTA
SERVICES, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
assets in the amount of $6.2 million, consisting of
customer relationships, backlog and a non-compete agreement.
In May 2007, Quanta acquired a telecommunications company for a
purchase price (including the post-closing purchase price
adjustment for net working capital) of $4.5 million,
consisting of $3.0 million in cash and 54,560 shares
of Quanta common stock valued at $1.5 million at the date
of acquisition on a discounted basis as a result of the
restricted nature of the shares. The acquisition allows Quanta
to further expand its telecommunications business in the western
United States. The estimated fair value of the tangible assets
was $1.8 million and consisted of current assets of
$1.5 million and property and equipment of
$0.3 million. Net tangible assets acquired were
$1.5 million after considering liabilities of
$0.3 million. The excess of the purchase price over net
tangible assets acquired was recorded as goodwill in the amount
of $1.4 million and intangible assets in the amount of
$1.6 million, consisting of customer relationships, backlog
and a non-compete agreement.
In October 2007, Quanta acquired a foundation drilling company
for a purchase price (excluding a post-closing purchase price
adjustment for net working capital estimated at
$0.2 million) of $24.5 million, consisting of
$15.5 million in cash and 337,108 shares of Quanta
common stock valued at $9.0 million at the date of
acquisition on a discounted basis as a result of the restricted
nature of the shares. The acquisition allows Quanta to further
expand its foundation drilling business in connection with the
construction of electric transmission infrastructure in the
United States. The estimated fair value of the tangible assets
was $9.6 million and consisted of current assets of
$4.6 million and property and equipment of
$5.0 million. Net tangible assets acquired were
$8.5 million after considering liabilities of
$1.1 million. The excess of the purchase price over net
tangible assets acquired was recorded as goodwill in the amount
of $12.7 million and intangible assets in the amount of
$3.3 million, consisting of customer relationships, backlog
and a non-compete agreement.
|
|
4.
|
GOODWILL
AND INTANGIBLE ASSETS
|
A summary of changes in Quantas goodwill is as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
Balance at beginning of year
|
|
$
|
387,307
|
|
|
$
|
387,307
|
|
|
$
|
330,495
|
|
Impairment
|
|
|
|
|
|
|
(56,812
|
)
|
|
|
|
|
Acquisition of foundation drilling company in January 2007
|
|
|
|
|
|
|
|
|
|
|
20,651
|
|
Acquisition of telecommunication company in May 2007
|
|
|
|
|
|
|
|
|
|
|
1,417
|
|
Acquisition of InfraSource in August 2007
|
|
|
|
|
|
|
|
|
|
|
989,845
|
|
Acquisition of foundation drilling company in October 2007
|
|
|
|
|
|
|
|
|
|
|
12,690
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
387,307
|
|
|
$
|
330,495
|
|
|
$
|
1,355,098
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During 2006, as part of our annual test for goodwill impairment,
goodwill of $56.8 million was written off as a non-cash
operating expense. The goodwill impairment is associated with a
decrease in the expected future demand for the services of one
of our businesses, which has historically served the cable
television industry.
During the year ended December 31, 2007, Quanta recorded
approximately $170.0 million in other intangible assets
associated with the four acquisitions closed during that period
of time.
77
QUANTA
SERVICES, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Intangible assets are comprised of (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2007
|
|
|
Intangible assets:
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
$
|
2,100
|
|
|
$
|
104,834
|
|
Backlog
|
|
|
|
|
|
|
53,242
|
|
Non-compete agreements
|
|
|
|
|
|
|
14,030
|
|
Patented rights
|
|
|
1,504
|
|
|
|
1,504
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets
|
|
|
3,604
|
|
|
|
173,610
|
|
|
|
|
|
|
|
|
|
|
Accumulated amortization:
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
|
(1,313
|
)
|
|
|
(4,054
|
)
|
Backlog
|
|
|
|
|
|
|
(14,274
|
)
|
Non-compete agreements
|
|
|
|
|
|
|
(1,644
|
)
|
Patented rights
|
|
|
(843
|
)
|
|
|
(943
|
)
|
|
|
|
|
|
|
|
|
|
Total accumulated amortization
|
|
|
(2,156
|
)
|
|
|
(20,915
|
)
|
|
|
|
|
|
|
|
|
|
Intangible assets, net
|
|
$
|
1,448
|
|
|
$
|
152,695
|
|
|
|
|
|
|
|
|
|
|
Expenses for the amortization of intangible assets were
$0.4 million, $0.4 million and $18.8 million for
the years ended December 31, 2005, 2006 and 2007. The
weighted average amortization period for all intangible assets
as of December 31, 2007 is 10.3 years, while the
weighted average amortization periods for customer
relationships, backlog, non-compete agreements and the patented
rights are 14.6 years, 1.8 years, 2.6 years and
5.6 years, respectively. The values of the intangible
assets recorded in connection with the InfraSource Merger are
preliminary and subject to change based on the results of the
final valuation. The estimated future aggregate amortization
expense of intangible assets is set forth below (in thousands):
|
|
|
|
|
For the Fiscal Year Ended December 31,
|
|
|
|
|
2008
|
|
$
|
34,865
|
|
2009
|
|
|
16,998
|
|
2010
|
|
|
12,084
|
|
2011
|
|
|
10,940
|
|
2012
|
|
|
11,739
|
|
Thereafter
|
|
|
66,069
|
|
|
|
|
|
|
Total
|
|
$
|
152,695
|
|
|
|
|
|
|
|
|
5.
|
DISCONTINUED
OPERATION
|
On August 31, 2007, Quanta sold the operating assets
associated with the business of Environmental Professional
Associates, Limited (EPA), a Quanta subsidiary, for
approximately $6.0 million in cash. In accordance with
SFAS No. 144, Quanta has presented EPAs income
statement for the current and prior periods as a discontinued
operation in the accompanying consolidated statements of
operations. Quanta does not allocate corporate debt or interest
expense to discontinued operations. A pre-tax gain of
approximately $3.7 million was recorded in the year ended
December 31, 2007 and included as income from discontinued
operation in the consolidated income statement in such period.
78
QUANTA
SERVICES, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The amounts of revenues and pre-tax income (including the
pre-tax gain of $3.7 million in the year ended
December 31, 2007) related to EPA and included in
income from discontinued operation are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
Revenues
|
|
$
|
16,371
|
|
|
$
|
21,406
|
|
|
$
|
14,695
|
|
Income before income tax provision
|
|
$
|
622
|
|
|
$
|
1,938
|
|
|
$
|
4,182
|
|
The assets, liabilities and cash flows associated with EPA have
historically been immaterial to Quantas balance sheet and
cash flows.
|
|
6.
|
PER SHARE
INFORMATION:
|
Basic earnings per share is computed using the weighted average
number of common shares outstanding during the period, and
diluted earnings per share 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 equivalent
would be antidilutive. The amounts used to compute the basic and
diluted earnings per share for the years ended 2005, 2006 and
2007 is illustrated below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
Income for basic earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
From continuing operations
|
|
$
|
29,179
|
|
|
$
|
16,233
|
|
|
$
|
133,140
|
|
From discontinued operation
|
|
|
378
|
|
|
|
1,250
|
|
|
|
2,837
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
29,557
|
|
|
$
|
17,483
|
|
|
$
|
135,977
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding for basic earnings per
share
|
|
|
115,756
|
|
|
|
117,027
|
|
|
|
135,793
|
|
Basic earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
From continuing operations
|
|
$
|
0.25
|
|
|
$
|
0.14
|
|
|
$
|
0.98
|
|
From discontinued operation
|
|
|
.01
|
|
|
|
0.01
|
|
|
|
0.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
0.26
|
|
|
$
|
0.15
|
|
|
$
|
1.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income for diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
29,179
|
|
|
$
|
16,233
|
|
|
$
|
133,140
|
|
Effect of convertible subordinated notes under the
if-converted method interest expense
addback, net of taxes
|
|
|
|
|
|
|
|
|
|
|
12,795
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations for diluted earnings per share
|
|
|
29,179
|
|
|
|
16,233
|
|
|
|
145,935
|
|
Income from discontinued operation
|
|
|
378
|
|
|
|
1,250
|
|
|
|
2,837
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income for diluted earnings per share
|
|
$
|
29,557
|
|
|
$
|
17,483
|
|
|
$
|
148,772
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
79
QUANTA
SERVICES, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
Calculation of weighted average shares for diluted earnings
per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding for basic earnings per share
|
|
|
115,756
|
|
|
|
117,027
|
|
|
|
135,793
|
|
Effect of dilutive stock options and restricted stock
|
|
|
878
|
|
|
|
836
|
|
|
|
816
|
|
Effect of convertible subordinated notes under the
if-converted method weighted convertible
shares issuable
|
|
|
|
|
|
|
|
|
|
|
30,651
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding for diluted earnings per
share
|
|
|
116,634
|
|
|
|
117,863
|
|
|
|
167,260
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
From continuing operations
|
|
$
|
0.25
|
|
|
$
|
0.14
|
|
|
$
|
0.87
|
|
From discontinued operations
|
|
|
|
|
|
|
0.01
|
|
|
|
0.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
0.25
|
|
|
$
|
0.15
|
|
|
$
|
0.89
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31, 2005, 2006 and 2007, stock
options for approximately 0.2 million, 0.2 million and
0.1 million shares, respectively, were excluded from the
computation of diluted earnings per share because the
options exercise prices were greater than the average
market price of Quantas common stock. For the year ended
December 31, 2007, 0.4 million shares of unvested
restricted stock were excluded from the calculation of diluted
earnings per share because the grant prices were greater than
the average market price of Quantas common stock. For the
years ended December 31, 2005 and 2006, the effect of
assuming conversion of Quantas convertible subordinated
notes would be antidilutive and the underlying shares were
therefore excluded from the calculation of diluted earnings per
share.
|
|
7.
|
DETAIL OF
CERTAIN BALANCE SHEET ACCOUNTS:
|
Activity in Quantas current and long-term allowance for
doubtful accounts consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
Balance at beginning of year
|
|
$
|
52,560
|
|
|
$
|
49,519
|
|
|
$
|
48,372
|
|
Acquired through acquisitions
|
|
|
|
|
|
|
|
|
|
|
1,276
|
|
Charged to expense
|
|
|
1,988
|
|
|
|
1,587
|
|
|
|
1,216
|
|
Deductions for uncollectible receivables written off, net of
recoveries
|
|
|
(5,029
|
)
|
|
|
(2,734
|
)
|
|
|
(3,291
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
49,519
|
|
|
$
|
48,372
|
|
|
$
|
47,573
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
80
QUANTA
SERVICES, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Contracts in progress are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2007
|
|
|
Costs incurred on contracts in progress
|
|
$
|
622,144
|
|
|
$
|
1,006,935
|
|
Estimated earnings, net of estimated losses
|
|
|
65,713
|
|
|
|
159,667
|
|
|
|
|
|
|
|
|
|
|
|
|
|
687,857
|
|
|
|
1,166,602
|
|
Less Billings to date
|
|
|
(680,458
|
)
|
|
|
(1,159,781
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
7,399
|
|
|
$
|
6,821
|
|
|
|
|
|
|
|
|
|
|
Costs and estimated earnings in excess of billings on
uncompleted contracts
|
|
$
|
36,113
|
|
|
$
|
72,424
|
|
Less Billings in excess of costs and estimated
earnings on uncompleted contracts
|
|
|
(28,714
|
)
|
|
|
(65,603
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
7,399
|
|
|
$
|
6,821
|
|
|
|
|
|
|
|
|
|
|
Property and equipment consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Useful
|
|
|
December 31,
|
|
|
|
Lives in Years
|
|
|
2006
|
|
|
2007
|
|
|
Land
|
|
|
|
|
|
$
|
3,024
|
|
|
$
|
9,028
|
|
Buildings and leasehold improvements
|
|
|
5-30
|
|
|
|
14,970
|
|
|
|
29,984
|
|
Operating equipment and vehicles
|
|
|
5-25
|
|
|
|
529,456
|
|
|
|
617,654
|
|
Dark fiber and related assets
|
|
|
5-20
|
|
|
|
|
|
|
|
99,697
|
|
Office equipment, furniture and fixtures
|
|
|
3-7
|
|
|
|
24,969
|
|
|
|
34,306
|
|
Construction work in progress
|
|
|
|
|
|
|
1,273
|
|
|
|
41,794
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
573,692
|
|
|
|
832,463
|
|
Less Accumulated depreciation and amortization
|
|
|
|
|
|
|
(296,903
|
)
|
|
|
(300,178
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
|
|
|
$
|
276,789
|
|
|
$
|
532,285
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses consists of the following
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2007
|
|
|
Accounts payable, trade
|
|
$
|
107,484
|
|
|
$
|
203,774
|
|
Accrued compensation and related expenses
|
|
|
57,522
|
|
|
|
93,509
|
|
Accrued insurance
|
|
|
51,287
|
|
|
|
57,325
|
|
Accrued loss on contracts
|
|
|
876
|
|
|
|
17,553
|
|
Deferred revenues
|
|
|
4,569
|
|
|
|
15,021
|
|
Accrued interest and fees
|
|
|
4,726
|
|
|
|
4,097
|
|
Federal and state taxes payable, including contingencies
|
|
|
33,628
|
|
|
|
5,049
|
|
Other accrued expenses
|
|
|
10,805
|
|
|
|
24,487
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
270,897
|
|
|
$
|
420,815
|
|
|
|
|
|
|
|
|
|
|
81
QUANTA
SERVICES, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Quantas debt obligations consist of the following (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2007
|
|
|
4.0% convertible subordinated notes
|
|
$
|
33,273
|
|
|
$
|
|
|
4.5% convertible subordinated notes
|
|
|
270,000
|
|
|
|
269,979
|
|
3.75% convertible subordinated notes
|
|
|
143,750
|
|
|
|
143,750
|
|
Notes payable to various financial institutions, interest
ranging from 0.0% to 8.0%, secured by certain equipment and
other assets
|
|
|
1,572
|
|
|
|
1,032
|
|
|
|
|
|
|
|
|
|
|
|
|
|
448,595
|
|
|
|
414,761
|
|
Less Current maturities
|
|
|
(34,845
|
)
|
|
|
(271,011
|
)
|
|
|
|
|
|
|
|
|
|
Total long-term debt obligations
|
|
$
|
413,750
|
|
|
$
|
143,750
|
|
|
|
|
|
|
|
|
|
|
Credit
Facility
Quanta has a credit facility with various lenders that provides
for a $475.0 million senior secured revolving credit
facility maturing on September 19, 2012. Subject to the
conditions specified in the credit facility, Quanta has the
option to increase the revolving commitments under the credit
facility by up to an additional $125.0 million from time to
time upon receipt of additional commitments from new or existing
lenders. Borrowings under the credit facility are to be used for
working capital, capital expenditures and other general
corporate purposes. The entire unused portion of the credit
facility is available for the issuance of letters of credit. The
credit facility was entered into in June 2006 as an amendment
and restatement of Quantas prior credit facility and has
since been amended as described below.
During the third quarter of 2007, Quanta entered into two
amendments to the credit facility. The first amendment was
entered into in connection with the consummation of the Merger
and was closed August 30, 2007. Among other terms, the
first amendment amended the timing of (i) the requirement
of Quanta and its subsidiaries to pledge certain regulated
assets acquired in the Merger and (ii) the requirement of
Quantas regulated subsidiaries acquired in the Merger to
become guarantors under the credit facility. Additionally, the
first amendment provided an exception to the pledge of certain
licenses acquired in the Merger, added certain security
interests acquired in the Merger as permitted liens, added
certain surety bonds acquired in the Merger as permitted
indebtedness and permitted the sale of the assets of a Quanta
subsidiary. The second amendment, effective as of
September 19, 2007, increased the amount of the aggregate
revolving commitments in effect at the time from
$300.0 million to $475.0 million and extended the
maturity date to September 19, 2012. The second amendment
also permitted additional types and amounts of liens and other
encumbrances on Quantas assets, indebtedness that Quanta
can incur and investments and other similar payments that Quanta
can make. Additionally, the second amendment removed a minimum
consolidated net worth covenant, reduced certain other
restrictions and provided the opportunity for lower borrowing
rates, commitment fees and letter of credit fees under the
credit facility, which are described below. Quanta incurred
$0.8 million in costs in the third quarter of 2007
associated with these amendments to the credit facility. These
costs were capitalized and, along with costs incurred in
connection with the amendment and restatement of the credit
facility in June 2006, are being amortized until
September 19, 2012, the amended maturity date.
As of December 31, 2007, Quanta had approximately
$168.6 million of letters of credit issued under the credit
facility and no outstanding revolving loans. The remaining
$306.4 million was available for revolving loans or issuing
new letters of credit. Amounts borrowed under the credit
facility bear interest, at Quantas option, at a rate equal
to either (a) the Eurodollar Rate (as defined in the credit
facility) plus 0.875% to 1.75%, as determined by the ratio of
Quantas total funded debt to consolidated EBITDA (as
defined in the
82
QUANTA
SERVICES, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
credit facility), or (b) the base rate (as described below)
plus 0.00% to 0.75%, as determined by the ratio of Quantas
total funded debt to consolidated EBITDA. Letters of credit
issued under the credit facility are subject to a letter of
credit fee of 0.875% to 1.75%, based on the ratio of
Quantas total funded debt to consolidated EBITDA. Quanta
is also subject to a commitment fee of 0.15% to 0.35%, based on
the ratio of its total funded debt to consolidated EBITDA, on
any unused availability under the credit facility. The base rate
equals the higher of (i) the Federal Funds Rate (as defined
in the credit facility) plus
1/2
of 1% and (ii) the banks prime rate.
The credit facility contains certain covenants, including
covenants with respect to maximum funded debt to consolidated
EBITDA, maximum senior debt to consolidated EBITDA and minimum
interest coverage, in each case as specified in the credit
facility. For purposes of calculating the maximum funded debt to
consolidated EBITDA ratio and the maximum senior debt to
consolidated EBITDA ratio, Quantas maximum funded debt and
maximum senior debt are reduced by all cash and cash equivalents
(as defined in the credit facility) held by Quanta in excess of
$25.0 million. As of December 31, 2007, Quanta was in
compliance with all of its covenants. The credit facility limits
certain acquisitions, mergers and consolidations, capital
expenditures, asset sales and prepayments of indebtedness and,
subject to certain exceptions, prohibits liens on material
assets. The credit facility also limits the payment of dividends
and stock repurchase programs in any fiscal year except those
payments or other distributions payable solely in capital stock.
The credit facility provides for customary events of default and
carries cross-default provisions with all of Quantas
existing subordinated notes, its continuing indemnity and
security agreement with its surety and all of its other debt
instruments exceeding $15.0 million in borrowings. If an
event of default (as defined in the credit facility) occurs and
is continuing, on the terms and subject to the conditions set
forth in the credit facility, amounts outstanding under the
credit facility may be accelerated and may become or be declared
immediately due and payable.
The credit facility is secured by a pledge of all of the capital
stock of Quantas U.S. subsidiaries, 65% of the
capital stock of its foreign subsidiaries and substantially all
of its assets. Quantas U.S. subsidiaries guarantee
the repayment of all amounts due under the credit facility.
Quantas obligations under the credit facility constitute
designated senior indebtedness under its 3.75% and 4.5%
convertible subordinated notes. The capital stock and assets of
certain of Quantas regulated U.S. subsidiaries
acquired in the Merger will not be pledged under the credit
facility, and these subsidiaries will also not be included as
guarantors under the credit facility, until regulatory approval
to do so is obtained.
4.0% Convertible
Subordinated Notes
As of December 31, 2006, Quanta had outstanding
$33.3 million aggregate principal amount of 4.0%
convertible subordinated notes (4.0% Notes), which matured
on July 1, 2007. The outstanding principal balance of the
4.0% Notes plus accrued interest were repaid on
July 2, 2007, the first business day after the maturity
date.
4.5% Convertible
Subordinated Notes
At December 31, 2007, Quanta had outstanding approximately
$270.0 million aggregate principal amount of 4.5%
convertible subordinated notes due 2023 (4.5% Notes). The
resale of the notes and the shares issuable upon conversion
thereof was registered for the benefit of the holders in a shelf
registration statement filed with the SEC. The 4.5% Notes
require semi-annual interest payments on April 1 and
October 1, until the notes mature on October 1, 2023.
The 4.5% Notes are convertible into shares of Quantas
common stock based on an initial conversion rate of
89.7989 shares of Quantas common stock per $1,000
principal amount of 4.5% Notes (which is equal to an
initial conversion price of approximately $11.14 per share),
subject to adjustment as a result of certain events. The
4.5% Notes are convertible by the holder (i) during
any fiscal quarter if the last reported sale
83
QUANTA
SERVICES, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
price of Quantas common stock is greater than or equal to
120% of the conversion price for at least 20 trading days in the
period of 30 consecutive trading days ending on the first
trading day of such fiscal quarter, (ii) during the five
business day period after any five consecutive trading day
period in which the trading price per note for each day of that
period was less than 98% of the product of the last reported
sale price of Quantas common stock and the conversion
rate, (iii) upon Quanta calling the notes for redemption or
(iv) upon the occurrence of specified corporate
transactions. If the notes become convertible under any of these
circumstances, Quanta has the option to deliver cash, shares of
Quantas common stock or a combination thereof, with the
amount of cash determined in accordance with the terms of the
indenture under which the notes were issued. During each of the
quarters in 2006 and 2007, the market price condition described
in clause (i) above was satisfied, and the notes were
convertible at the option of the holder. During 2007, $21,000 in
aggregate principal amount of the 4.5% Notes were settled
in cash upon conversion by the holders. The remaining notes are
presently convertible at the option of each holder, and the
conversion period will expire on March 31, 2008, but may
continue or resume in future periods upon the satisfaction of
the market price condition or other conditions.
Beginning October 8, 2008, Quanta may redeem for cash some
or all of the 4.5% Notes at the principal amount thereof
plus accrued and unpaid interest. The holders of the
4.5% Notes may require Quanta to repurchase all or some of
their notes at the principal amount thereof plus accrued and
unpaid interest on each of October 1, 2008, October 1,
2013 or October 1, 2018, or upon the occurrence of a
fundamental change, as defined by the indenture under which
Quanta issued the notes. Quanta must pay any required
repurchases on October 1, 2008 in cash. For all other
required repurchases, Quanta has the option to deliver cash,
shares of its common stock or a combination thereof to satisfy
its repurchase obligation. If Quanta were to satisfy any
required repurchase obligation with shares of its common stock,
the number of shares delivered will equal the dollar amount to
be paid in common stock divided by 98.5% of the market price of
Quantas common stock, as defined by the indenture. The
right to settle for shares of common stock can be surrendered by
Quanta. The 4.5% Notes carry cross-default provisions with
Quantas other debt instruments exceeding
$10.0 million in borrowings, which includes Quantas
existing credit facility.
In October 2007, Quanta reclassified the $270.0 million
aggregate principal amount outstanding of the 4.5% Notes
into a current obligation as the holders may elect repayment of
the 4.5% Notes in cash on October 1, 2008. Quanta has not
yet determined whether it will use cash on hand, issue equity or
incur additional debt to fund this cash obligation in the event
the holders elect repayment.
3.75% Convertible
Subordinated Notes
At December 31, 2007, Quanta had outstanding
$143.8 million aggregate principal amount of 3.75%
convertible subordinated notes due 2026 (3.75% Notes). The
resale of the notes and the shares issuable upon conversion
thereof was registered for the benefit of the holders in a shelf
registration statement filed with the SEC. The 3.75% Notes
mature on April 30, 2026 and bear interest at the annual
rate of 3.75%, payable semi-annually on April 30 and
October 30, until maturity.
The 3.75% Notes are convertible into Quantas common
stock, based on an initial conversion rate of
44.6229 shares of Quantas common stock per $1,000
principal amount of 3.75% Notes (which is equal to an
initial conversion price of approximately $22.41 per share),
subject to adjustment as a result of certain events. The
3.75% Notes are convertible by the holder (i) during
any fiscal quarter if the closing price of Quantas common
stock is greater than 130% of the conversion price for at least
20 trading days in the period of 30 consecutive trading days
ending on the last trading day of the immediately preceding
fiscal quarter, (ii) upon Quanta calling the
3.75% Notes for redemption, (iii) upon the occurrence
of specified distributions to holders of Quantas common
stock or specified corporate transactions or (iv) at any
time on or after March 1, 2026 until the business day
immediately preceding the maturity date of the 3.75% Notes.
The 3.75% Notes are not presently convertible, although
they were convertible during the third quarter of 2007 as a
result of the
84
QUANTA
SERVICES, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
satisfaction of the market price condition described in
clause (i) above. If the 3.75% Notes become
convertible under any of these circumstances, Quanta has the
option to deliver cash, shares of Quantas common stock or
a combination thereof, with the amount of cash determined in
accordance with the terms of the indenture under which the notes
were issued. The holders of the 3.75% Notes who convert
their notes in connection with certain change in control
transactions, as defined in the indenture, may be entitled to a
make whole premium in the form of an increase in the conversion
rate. In the event of a change in control, in lieu of paying
holders a make whole premium, if applicable, Quanta may elect,
in some circumstances, to adjust the conversion rate and related
conversion obligations so that the 3.75% Notes are
convertible into shares of the acquiring or surviving company.
Beginning on April 30, 2010 until April 30, 2013,
Quanta may redeem for cash all or part of the 3.75% Notes
at a price equal to 100% of the principal amount plus accrued
and unpaid interest, if the closing price of Quantas
common stock is equal to or greater than 130% of the conversion
price then in effect for the 3.75% Notes for at least 20
trading days in the 30 consecutive trading day period ending on
the trading day immediately prior to the date of mailing of the
notice of redemption. In addition, Quanta may redeem for cash
all or part of the 3.75% Notes at any time on or after
April 30, 2010 at certain redemption prices, plus accrued
and unpaid interest. Beginning with the six-month interest
period commencing on April 30, 2010, and for each six-month
interest period thereafter, Quanta will be required to pay
contingent interest on any outstanding 3.75% Notes during
the applicable interest period if the average trading price of
the 3.75% Notes reaches a specified threshold. The
contingent interest payable within any applicable interest
period will equal an annual rate of 0.25% of the average trading
price of the 3.75% Notes during a five trading day
reference period.
The holders of the 3.75% Notes may require Quanta to
repurchase all or a part of the notes in cash on each of
April 30, 2013, April 30, 2016 and April 30,
2021, and in the event of a change in control of Quanta, as
defined in the indenture, at a purchase price equal to 100% of
the principal amount of the 3.75% Notes plus accrued and
unpaid interest. The 3.75% Notes carry cross-default
provisions with Quantas other debt instruments exceeding
$20.0 million in borrowings, which includes Quantas
existing credit facility.
Maturities
The maturities of long-term debt obligations as of
December 31, 2007, are as follows (in thousands):
|
|
|
|
|
Year Ending December 31
|
|
|
|
|
2008
|
|
$
|
271,011
|
|
2009
|
|
|
|
|
2010
|
|
|
|
|
2011
|
|
|
|
|
2012
|
|
|
|
|
Thereafter
|
|
|
143,750
|
|
|
|
|
|
|
|
|
$
|
414,761
|
|
|
|
|
|
|
85
QUANTA
SERVICES, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The components of the provision for income taxes are as follows
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
Federal
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
10,657
|
|
|
$
|
44,138
|
|
|
$
|
24,910
|
|
Deferred
|
|
|
9,885
|
|
|
|
(1,992
|
)
|
|
|
5,677
|
|
State
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
3,134
|
|
|
|
3,028
|
|
|
|
501
|
|
Deferred
|
|
|
(1,245
|
)
|
|
|
536
|
|
|
|
627
|
|
Foreign
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
(35
|
)
|
|
|
1,020
|
|
|
|
2,437
|
|
Deferred
|
|
|
50
|
|
|
|
225
|
|
|
|
70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
22,446
|
|
|
$
|
46,955
|
|
|
$
|
34,222
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The actual income tax provision differs from the income tax
provision computed by applying the U.S. federal statutory
corporate rate to the income before provision for income taxes
as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
Provision at the statutory rate
|
|
$
|
18,069
|
|
|
$
|
22,116
|
|
|
$
|
58,577
|
|
Increases (decreases) resulting from
|
|
|
|
|
|
|
|
|
|
|
|
|
State and foreign taxes
|
|
|
1,080
|
|
|
|
3,837
|
|
|
|
11
|
|
State tax audit settlement
|
|
|
|
|
|
|
(1,024
|
)
|
|
|
|
|
Contingency reserves, net
|
|
|
1,566
|
|
|
|
3,476
|
|
|
|
(23,113
|
)
|
FAS 142 goodwill impairment
|
|
|
|
|
|
|
19,687
|
|
|
|
|
|
Tax-exempt interest income
|
|
|
|
|
|
|
(2,577
|
)
|
|
|
(586
|
)
|
Production activity deduction
|
|
|
|
|
|
|
(606
|
)
|
|
|
(1,729
|
)
|
Non-deductible expenses
|
|
|
1,934
|
|
|
|
2,054
|
|
|
|
1,817
|
|
Valuation allowance
|
|
|
(203
|
)
|
|
|
(8
|
)
|
|
|
(755
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
22,446
|
|
|
$
|
46,955
|
|
|
$
|
34,222
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
86
QUANTA
SERVICES, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Deferred income taxes result from temporary differences in the
recognition of income and expenses for financial reporting
purposes and for tax purposes. The tax effects of these
temporary differences, representing deferred tax assets and
liabilities, result principally from the following (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2007
|
|
|
Deferred income tax liabilities
|
|
|
|
|
|
|
|
|
Property and equipment
|
|
$
|
(77,199
|
)
|
|
$
|
(93,404
|
)
|
Goodwill
|
|
|
|
|
|
|
(9,159
|
)
|
Other Intangibles
|
|
|
|
|
|
|
(59,057
|
)
|
Book/tax accounting method difference
|
|
|
(21,781
|
)
|
|
|
(24,125
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred income tax liabilities
|
|
|
(98,980
|
)
|
|
|
(185,745
|
)
|
|
|
|
|
|
|
|
|
|
Deferred income tax assets
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts and other reserves
|
|
|
7,976
|
|
|
|
16,324
|
|
Goodwill
|
|
|
16,401
|
|
|
|
|
|
Other Intangibles
|
|
|
1,129
|
|
|
|
|
|