UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
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| (Mark One) | | |
þ☑ | | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2019 | | For the fiscal year ended December 31, 2017 |
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| ☐ | | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number 001-13831
Quanta Services, Inc.
(Exact name of registrant as specified in its charter)
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| Delaware | | 74-2851603 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
2800 Post Oak Boulevard, Suite 2600
Houston, Texas77056
(Address of principal executive offices, including zip code)
(713) (713) 629-7600
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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Title of Each Classeach class | | Trading Symbol(s) | | Name of Exchangeeach exchange on Which Registeredwhich registered |
| Common Stock, $0.00001 par value | | PWR | | New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act:None
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. Yesþ☑ 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☐Noþ☑
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. Yesþ ☑ No o☐
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). Yesþ☑ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of Registrant’s 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. þ☐
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filerþ | ☑ | | | Accelerated filer o |
☐ | Non-accelerated filer o | ☐ | (Do not check if smaller reporting company) | | Smaller reporting company o |
| ☐ | | | Emerging growth companyo | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o☐
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 30, 201728, 2019 (the last business day of the Registrant’s most recently completed second fiscal quarter), the aggregate market value of the 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 $4.9$5.4 billion.
As of February 21, 2018,25, 2020, the number of outstanding shares of Common Stock of the Registrant was 153,744,728. As of the same date, 449,929 exchangeable shares of a Canadian subsidiary of the Registrant associated with one share of Series G Preferred Stock of the Registrant were outstanding and an additional 36,183 exchangeable shares of certain other Canadian subsidiaries of the Registrant were outstanding.142,508,874.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’s Definitive Proxy Statement for the 20182020 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, 20172019
INDEX
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| PART II |
| ITEM 5. | | |
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| ITEM 7. | | |
| ITEM 7A. | | |
| ITEM 8. | | |
| ITEM 9. | | |
| ITEM 9A. | | |
| ITEM 9B. | | |
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| PART III |
| ITEM 10. | | |
| ITEM 11. | | |
| ITEM 12. | | |
| ITEM 13. | | |
| ITEM 14. | | |
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| PART IV |
| ITEM 15. | | |
| ITEM 16. | | |
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PART I
ITEM 1.Business
General
Quanta Services, Inc. (Quanta) is a leading provider of specialty contracting services, offeringdelivering comprehensive infrastructure solutions primarily tofor the electric power, oilenergy and gas and communicationcommunications industries in the United States, Canada, Australia Latin America and select other international markets. The services we provide include the design, installation, upgrade, repair and maintenance of infrastructure within each of the industries we serve, such as electric power transmission and distribution networks,networks; substation facilities, renewable energy facilities,facilities; pipeline transmission and distribution systems and facilities.
We report our results under two reportable segments: (1) Electric Power Infrastructure Servicesfacilities; refinery, petrochemical and (2) Oilindustrial facilities; and Gas Infrastructure Services. This structure is generally focused on broad end-user markets for our services. Our consolidated revenues for the year ended December 31, 2017 were $9.47 billion, of which 59% was attributable to the Electric Power Infrastructure Services segmenttelecommunications and 41% was attributable to the Oil and Gas Infrastructure Services segment.
cable multi-system operator networks. We have established a presence throughout the United States, Canada, Australia and Latin America with a workforce of approximately 32,80040,300 employees as of December 31, 2017, which enables us to quickly2019 and reliably serve a diversifieddiverse customer base. We believe our reputation for safety leadership, responsiveness and performance, geographic reach, comprehensive service offering, safety leadershipofferings and financial strength have resulted in strong relationships with numerous customers, which include many of the leading companies in the industries we serve. Our ability to deploy services to customers throughout the United States, Canada, Australiaserve, and Latin America as a result of our broad geographic presence and significant scope and scale of services is particularly important to our customers who operate networks that span multiple states or regions. We believe these same factors also positionhave positioned us to continue to take advantage of other international opportunities. Representative customers include:
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l | Ameren Corporation | l | ITC Holdings Corp. |
l | American Electric Power Company, Inc. | l | Nalcor Energy |
l | ATCO Electric | l | NextEra Energy, Inc. |
l | CenterPoint Energy, Inc. | l | NiSource Inc. |
l | Duke Energy Corporation | l | PG&E Corporation |
l | Enbridge Inc. | l | Puget Sound Energy, Inc. |
l | Entergy Corporation | l | San Diego Gas & Electric Company |
l | Enterprise Products Partners L.P. | l | Southern California Edison Company |
l | Exelon Corporation | l | TransCanada Corporation |
l | Eversource Energy | l | Valero Energy Corporation |
l | FirstEnergy Corp. | l | The Williams Companies, Inc. |
We wereOur services are typically provided pursuant to master service agreements, repair and maintenance contracts and fixed price and non-fixed price installation contracts. Quanta is organized as a corporation inunder the statelaws of the State of Delaware and was formed in 1997,1997.
We report our results under two reportable segments: (1) Electric Power Infrastructure Services and since that time, we have grown organically(2) Pipeline and through strategic acquisitions.Industrial Infrastructure Services. This growth has allowed usstructure is generally focused on broad end-user markets for our services. Our consolidated revenues for the year ended December 31, 2019 were $12.11 billion, of which 59% was attributable to expand our geographic presencethe Electric Power Infrastructure Services segment and scope of services41% was attributable to the Pipeline and develop new capabilities to meet our customers’ evolving needs.Industrial Infrastructure Services segment.
We believe that our business strategies, along with our competitivesafety culture and financial strengths, are key elements in differentiatingstrength, differentiate us from our competition and position us to capitalize on future capital spending by our customers. We offer comprehensive and diverse solutions on a broad geographic scale and have a solid base of long-standing customer relationships in each of the industries we serve. We also have an experienced management team, both at the executive level and within our operating units, and various proprietary technologies that enhance our service offerings. Our strategies of expanding our portfolio of service offerings for existing and potential customers, increasing our geographic, technological and technologicaltraining capabilities, promoting best practices and cross-selling services to our existing customers, as well as continuing to maintain our financial strength, place us in the position to capitalize on opportunities and trends in the industries we serve and expand our operations to select internationalnew markets. We also continue to evaluate potential strategic acquisitions and investments to broaden our customer base, expand our geographic area of companies with strong management teamsoperations, grow our portfolio of services and good reputations and believeincrease opportunities across our financial strength and experienced management are attractive to potential acquisition targets.
operations.
Reportable Segments
The following is an overview of the types of services provided by each of our reportable segments.
Electric Power Infrastructure Services Segment
The Electric Power Infrastructure Services segment provides comprehensive network solutions to customers in the electric power industry. Services performed by the Electric Power Infrastructure Services segment generally include the design, installation, upgrade, repair and maintenance of electric power transmission and distribution infrastructure and substation facilities along with other engineering and technical services. This segment also provides emergency restoration services, including the repair of infrastructure damaged by inclement weather, the energized installation, maintenance and upgrade of electric power infrastructure utilizing unique bare hand and hot stick methods and our proprietary robotic arm technologies,techniques, and the installation of “smart grid” technologies on electric power networks. In addition, this segment designs, installs and maintainsprovides services that support the development of renewable energy generation, facilities, consisting ofincluding solar, wind, hydro power and certain types ofbackup natural gas generation facilities, and related switchyards and transmission infrastructure. To a lesser extent, theThis segment also provides comprehensive communications infrastructure services to wireline fiber and wireless carriertelecommunications companies, cable multi-system operators and other customers within the communications industry;industry (including services in connection with 5G wireless deployment); services in connection with the construction of electric power generation facilities; and the design, installation, maintenance and repair of commercial and industrial wiring;wiring. This segment also includes the majority of our postsecondary educational institution, which specializes in pre-apprenticeship training, apprenticeship training and specialized utility task training for electric workers, as well as training for the installation of traffic networkspipeline and cableindustrial and control systems for light rail lines.communications industries.
OilPipeline and GasIndustrial Infrastructure Services Segment
The OilPipeline and GasIndustrial Infrastructure Services segment provides comprehensive networkinfrastructure solutions to customers involved in the development, transportation, distribution, storage and processing of natural gas, oil and other pipeline products. Services performed by the OilPipeline and GasIndustrial Infrastructure Services segment generally include the design, installation, upgrade, repair
and maintenance of pipeline transmission and distribution systems, gathering systems, production systems, storage systems and compressor and pump stations, as well as related trenching, directional boring and mechanized welding services. In addition, this segment’s services include pipeline protection, integrity testing, rehabilitation and replacement, and the fabrication of pipeline support systems and related structures and facilities.facilities for natural gas utilities and midstream companies. We also serve the offshore and inland water energy markets, primarily providing services to oil and gas exploration platforms, including mechanical installation (or “hook-ups”), electrical and instrumentation, pre-commissioning and commissioning, coatings, shallow water pipeline installation, fabrication and marine asset repair. To a lesser extent, this segment designs, installs and maintains fueling systems, as well as water and sewer infrastructure. Through a recent acquisition, we expanded our service offerings in this segment to includeprovide high-pressure and critical-path turnaround services to the downstream and midstream energy markets and enhanced our capabilities with respect to instrumentation and electrical services, piping, fabrication and storage tank services. To a lesser extent, this segment serves the offshore energy market and designs, installs and maintains fueling systems and water and sewer infrastructure.
Financial Information Regarding Reportable Segments
For financial information about our reportable segments, refer to Note 16 of the Notes to Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data, which note is incorporated herein by reference.
Financial Information about Geographic Areas
We operate primarily in the United States; however, we derived $2.48$1.92 billion,, $1.59 $2.60 billion and $1.54$2.48 billion of our revenues from foreign operations during the years ended December 31, 20172019, 20162018 and 2015, respectively.2017. Of our foreign revenues, 79%75%, 75%76% and 85%79% were earned in Canada during the years ended December 31, 20172019, 20162018 and 2015, respectively.2017. In addition, we held property and equipment of $330.4314.1 million and $320.7304.0 million in foreign countries, primarily Canada, as of December 31, 20172019 and 20162018.
Our business, financial condition and results of operations in foreign countries may be adversely impacted by monetary and fiscal policies, currency fluctuations, regulatory requirements and other political, social and economic developments or instability. Refer to Item 1A. Risk Factors, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations and Item 7A. Quantitative and Qualitative Disclosures about Market Risk for additional information and discussion regarding the potential impact of currency rate fluctuations.
Customers, Strategic Alliances and Preferred Provider Relationships
Our customers include electric power, oil and gasenergy and communications companies, as well as commercial, industrial and governmental entities. We have a large and diverse customer base, including many of the leading companies in the industries we serve. Our 10serve, and we have developed strong strategic alliances with numerous customers and strive to develop and maintain our status as a preferred service provider to our customers. For the year ended December 31, 2019, our ten largest customers accounted for 36%34% of our consolidated revenues during the year ended December 31, 2017. Our largest customer accounted for 9% of our consolidated revenues for the year ended December 31, 2017.revenues. Representative customers include:
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| l | American Electric Power Company, Inc. | l | FirstEnergy Corp. |
| l | ATCO Electric | l | Fortis Inc. |
| l | Berkshire Hathaway, Inc. | l | National Grid plc |
| l | CenterPoint Energy, Inc. | l | NextEra Energy, Inc. |
| l | Dominion Energy, Inc. | l | PG&E Corporation |
| l | Duke Energy Corporation | l | Puget Sound Energy, Inc. |
| l | Enbridge Inc. | l | Sempra Energy |
| l | Entergy Corporation | l | Southern California Edison Company |
| l | Enterprise Products Partners L.P. | l | The Southern Company |
| l | EQT Midstream | l | TC Energy Corporation |
| l | Eversource Energy | l | Valero Energy Corporation |
| l | Exelon Corporation | l | Verizon Communications Inc. |
Although we have a centralized marketing and business development 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 revenues. Many of these customer relationships are long-standing and are maintained through a partnering approach with centralized account management, which includes project evaluation and consulting, quality performance, performance measurement and direct customer contact. Additionally, operating unit management focuses on pursuing growth opportunities with prospective customers. We also encourage operating unit management to cross-sell services of our other operating units to their customers and coordinate with our other operating units to pursue projects, especially those that are larger and more complex. We believe our ability to provide services that cover a broad spectrum of our customers’ requirements is a significant differentiator. Our corporate-level business development group supportsand regional management groups support these activities by promoting and marketing our services for existing and prospective large national accounts, as well as projects that would requireare capable of utilizing services from multiple operating units.
We are a preferred service provider for many of our customers, which means we have met minimum standards for a specific category of service, maintained a high level of performance and agreed to certain payment terms and negotiated rates. We strive to maintain preferred status as we believe it provides us an advantage in the award of future work for the applicable customer. Furthermore, many of our strategic relationships with customers take the form of strategic alliance or long-term maintenance agreements, which typically extend for an initial term of approximately two to five years and may include renewal options to extend the initial term. Strategic alliance agreements also generally state an intention to work together over a period of time and/or on specific types of projects, and many provide us with preferential bidding procedures.
Remaining Performance Obligations and Backlog
BacklogA performance obligation is a promise in a contract with a customer to transfer a distinct good or service. Our remaining performance obligations represent management’s estimate of consolidated revenues that are expected to be realized from the remaining portion of firm orders under fixed price contracts not yet completed or for which work has not yet begun, which includes estimated revenues attributable to consolidated joint ventures and variable interest entities (VIEs), revenues from funded and unfunded portions of government contracts to the extent they are reasonably expected to be realized, and revenues from change orders and claims to the extent management believes they will be earned and are probable of collection.
We have also historically disclosed our backlog, a termmeasure commonly used in our industry but not recognized under United States generally accepted accounting principles (US GAAP); however, itin the United States (GAAP). We believe this measure enables management to more effectively forecast our future capital needs and results and better identify future operating trends that may not otherwise be apparent. We believe this measure is also useful for investors in forecasting our future results and comparing us to our competitors. Our remaining performance obligations are a common measurement used in our industry.component of backlog, which also includes estimated orders under master service agreements (MSAs), including estimated renewals, and non-fixed price contracts expected to be completed within one year. Our methodology for determining backlog may not be comparable to the methodologies used by other companies.
Our backlog represents the amount of consolidated revenues that we expect to realize from future work under construction contracts, long-term maintenance contracts and master service agreements (MSAs). These estimates include revenues from the remaining portion of firm orders not yet completed and on which work has not yet begun, as well as revenues from change orders, renewal options, and funded and unfunded portions of government contracts to the extent that they are reasonably expected to occur. For purposes of calculating backlog, we include 100% of estimated revenues attributable to consolidated joint ventures and variable interest entities (VIEs). The following table presents our total backlog by reportable segment as of December 31, 2017 and 2016, along with an estimate of the backlog amounts expected to be realized within 12 months of each balance sheet date (in thousands):
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| | Backlog as of | | Backlog as of |
| | December 31, 2017 | | December 31, 2016 |
| | 12 Month | | Total | | 12 Month | | Total |
| Electric Power Infrastructure Services | $ | 4,032,379 |
| | $ | 7,359,237 |
| | $ | 3,369,373 |
| | $ | 6,657,431 |
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| Oil and Gas Infrastructure Services | 2,413,817 |
| | 3,818,470 |
| | 2,483,963 |
| | 3,092,341 |
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| Total | $ | 6,446,196 |
| | $ | 11,177,707 |
| | $ | 5,853,336 |
| | $ | 9,749,772 |
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Revenue estimates included in our backlog can be subject to change as a result of project accelerations, cancellations or delays due to various factors, including but not limited to commercial issues, regulatory requirements and adverse weather. These factors can also cause revenue amounts to be realized in periods and at levels different than originally projected. For example, during the year ended December 31, 2017, we reduced our 12-month backlog for the Oil and Gas Infrastructure Services segment by approximately $100 million as a result of a cancellation of a natural gas pipeline project, for which we received a termination fee. Generally, our customers are not contractually committed to specific volumes of services under our MSAs, and most of our contracts maycan be terminated, typically upon 30 to 90 dayson short notice even if we are not in default under the contract.default. We determine the estimated amount of backlog for work underthese MSAs by using recurring historical trends, inherent in current MSAs, factoring in seasonal demand and projected customer needs based upon ongoing communications with the customer.communications. In addition, many of our MSAs are subject to renewal, options. and these potential renewals are considered in determining estimated backlog. As a result, estimates for remaining performance obligations and backlog are subject to change based on, among other things, project accelerations; project cancellations or delays, including but not limited to those caused by commercial issues, regulatory requirements, natural disasters and adverse weather conditions; and final acceptance of change orders by customers. These factors can cause revenues to be realized in periods and at levels that are different than originally projected.
As of December 31, 20172019 and 2016,2018, MSAs accounted for 44%53% and 42%53% of our estimated 12-month backlog and 52%61% and 53%60% of total backlog. There can be no assurance as to our customers’ actual requirements or that our estimates are accurate. As discussed in Note 3 of the Notes to Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data, effective for the quarter ending March 31, 2018, we will adopt new revenue recognition guidance issued by the Financial Accounting Standards Board (FASB). Pursuant to the new guidance, we will also disclose the amount of
The following table reconciles total remaining performance obligations at each period end as a separate componentto our backlog (a non-GAAP measure) by reportable segment, along with estimates of backlog. We expectamounts expected to continue to report total backlog on a basis consistent with our current definition.be realized within 12 months (in thousands):
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| | | December 31, 2019 | | December 31, 2018 |
| | | 12 Month | | Total | | 12 Month | | Total |
| Electric Power Infrastructure Services | | | | | | | | |
| Remaining performance obligations | | $ | 2,483,109 |
| | $ | 3,957,710 |
| | $ | 2,093,461 |
| | $ | 3,045,553 |
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| Estimated orders under MSAs and short-term, non-fixed price contracts | | 2,873,446 |
| | 5,864,527 |
| | 2,467,654 |
| | 5,499,887 |
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| Backlog | | 5,356,555 |
| | 9,822,237 |
| | 4,561,115 |
| | 8,545,440 |
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| Pipeline and Industrial Infrastructure Services | | | | | | | | |
| Remaining performance obligations | | 670,707 |
| | 1,344,741 |
| | 1,003,543 |
| | 1,635,918 |
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| Estimated orders under MSAs and short-term, non-fixed price contracts | | 1,919,791 |
| | 3,837,923 |
| | 1,411,329 |
| | 2,161,275 |
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| Backlog | | 2,590,498 |
| | 5,182,664 |
| | 2,414,872 |
| | 3,797,193 |
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| Total | | | | | | | | |
| Remaining performance obligations | | 3,153,816 |
| | 5,302,451 |
| | 3,097,004 |
| | 4,681,471 |
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| Estimated orders under MSAs and short-term, non-fixed price contracts | | 4,793,237 |
| | 9,702,450 |
| | 3,878,983 |
| | 7,661,162 |
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| Backlog | | $ | 7,947,053 |
| | $ | 15,004,901 |
| | $ | 6,975,987 |
| | $ | 12,342,633 |
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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 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.competitors. We believe that as demand for our services increases, customers often consider other factors in choosing a service provider, including technical expertise and experience, safety ratings, financial and operational resources, nationwidegeographic presence, industry reputation and dependability, which we expect to benefit larger contractors such as us. In addition, competition may lessen as industry resources, such as labor supplies, approach capacity. 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 also face competition from the in-house service organizations of our existing or prospective customers, including electric power, oil and gas and engineering companies, which employ personnel who perform some of the same types of services we provide. Although these companies currently outsource a significant portion of these services, in particular services relating to larger energy transmission infrastructure projects, there can be no assurance that they will continue to do so in the future or that they will not acquire additional in-house capabilities.
EmployeesHuman Capital Resources
Employee Profile
Our operations are decentralized and labor-intensive, and therefore we rely on both management personnel and skilled labor personnel to successfully operate our business. As of December 31, 20172019, we had approximately 32,80040,300 employees, consisting of approximately 8,1009,800 salaried employees, including executive officers, professional and administrative staff, project managers and engineers, job superintendents and clericalfield personnel, and approximately 24,70030,500 hourly employees, the number of which fluctuates depending upon the number and size of the projects that are ongoing and planned at any particular time. Approximately 38%35% of our employees at December 31, 20172019 were covered by collective bargaining agreements, which require the payment of specified wages, to our union employees, the observance of certain workplace rules and the payment of certain amounts to multiemployer pension plans and employee benefit trusts. These collective bargaining agreements have varying terms and expiration dates, and the majority contain provisions that prohibit work stoppages or strikes, even during specified negotiation periods relating to agreement renewals, and provide for binding arbitration dispute resolution in the event of prolonged disagreement.
Employee Benefits and Talent Development
We provide health, welfare and benefit plans for employees who are not covered by collective bargaining agreements. We also have a 401(k) plan pursuant to which eligible U.S. 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 employee’s contribution up to 3% of that employee’s salary and 50% of each employee’s contribution between 3% and 6% of such employee’s salary, up to the maximum amount permitted by law.
We depend on our key personnel to successfully operate our business, including our executive officers, senior corporate management and management at our operating units. We focus on attraction and retention of these key personnel by offering competitive compensation packages, including employment agreements in certain circumstances, and opportunities for advancement. We have also implemented enterprise-wide talent development and succession planning programs designed to identify future and/or replacement candidates for key positions.
Employee Training and Safety
Our industry is experiencing a shortage of journeyman linemen and specialty craft labor in certain geographic areas. Furthermore, the cyclical nature of the natural gas and oil industry can create shortages of qualified labor in those markets during periods of high demand. In responseorder to take advantage of available opportunities and successfully implement our long-term strategy, we must be able to employ, train and retain the shortage and to attract qualified employees,necessary skilled personnel. As a result, we support and utilize various training and educational programs and have developed additional company-wide and project-specific employee training and educational programs.
We own and operate Northwest Lineman College, which provides training programs as describedfor the electric power, pipeline and industrial and communications industries and specializes in further detail below.
Training, Quality Assurancepre-apprenticeship training, apprenticeship training and Safety
Performancespecialized utility task training for electric workers. We have also continued to invest in our internal education and training capabilities, including the expansion of our services requirestraining facility to add training for beginning linemen, lead and cable splicing and directional drilling to our existing energized electric power and pipeline integrity training as well as a new formed gas distribution technician program. This facility provides classroom and on-the-job training programs and allows us to train employees in a controlled environment without the usechallenges of equipmentlimited structure access and exposure to hazardous conditions. 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 injury. In response to these inherent hazards and as part of our commitment to employee safety, our operating units have established safety programs, policies and procedures requiring that employees complete prescribed training and service programs prior to starting work. utility constraints.
Additionally, we have implemented an enterprise-wide Automated External Defibrillator (AED) program, which provides AEDsentered into strategic relationships with universities, the military and unions in order to all ofdevelop our crews and training to enhance life safety response measures. Ourworkforce. For example, our operating units performing more sophisticated and technical jobs utilize, when applicable, training programs provided by the International Brotherhood of Electrical Workers/National Electrical Contractors Associations (IBEW/NECA) Apprenticeship Program, training programs sponsored by the four trade unions administered by the Pipe Line Contractors Association (PLCA), apprenticeship training programs sponsored by the Canadian Union of Skilled Workers (CUSW) or our equivalent programs. Under the IBEW/NECA Apprenticeship Program, all journeyman linemen are required to complete classroom
education and on-the-job training, as well as extensive testing and certification. Certain of our operating units have established apprenticeship training programs approved by the U.S. Department of Labor that prescribe equivalent training requirements for employees who are not otherwise subject to the requirements of the IBEW/NECA Apprenticeship Program. Similarly, the CUSW offers apprenticeship training for construction and maintenance electricians and powerline technicians that requires classroom education and on-the-job training. In addition, the Laborers International Union of North America, the International Brotherhood of Teamsters, the United Association of Plumbers and Pipefitters and the International Union of Operating Engineers have training
programs specifically designed for developing and improving the skills of their members who work in the pipeline construction industry. Our operating units also share best practices for training and educational programs.
Performance of our services requires the use of heavy equipment and exposure to inherently hazardous conditions. In response to these inherent hazards and as part of our commitment to the safety of our employees, customers and third parties, our corporate and operating unit management personnel have established safety programs, policies and safety policies.
We have also continued to invest in our internal educationprocedures and training capabilities. We recently expandedrequirements for our training facilityemployees both before they begin work and on an ongoing basis. For example, we have implemented an enterprise-wide Automated External Defibrillator (AED) program, which provides AEDs to add training for beginning linemen, lead and cable splicing and directional drilling in addition toall of our existing energized electric power and pipeline training. This facility helps us facilitate classroom and on-the-job training programs and allows us to train employees in a controlled environment without the challenges of limited structure access and utility constraints. Additionally, we recently acquired Northwest Lineman College, which has four campuses across the United States and specializes in pre-apprenticeship training, apprenticeship training and specialized utility task training. We expect these capabilities to support future demand for qualified labor in the industries we serve and provide a platform for the development of additional educationalcrews and training programs.to enhance life safety response measures. Our operating units also share best practices for safety policies and practices.
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. As we continue to expand our comprehensive engineering, procurement and construction offerings, the cost of materials may become a proportionately larger component of our consolidated cost of services. We do not anticipate experiencing any significant procurement difficulties, as we purchase our required materials from a variety of sources. However, a number of factors that we may not be able to predict or control could result in increased costs for these materials, including general market and political conditions and global trade relationships. For example, recent changes in U.S. policies related to global trade and tariffs, as well as retaliatory trade measures implemented by other countries, have resulted in uncertainty regarding the availability and pricing of certain commodities and materials important to our and our customers’ businesses, including steel and aluminum.
Regulation
Our operations are subject to various federal, state, local and international laws and regulations including:
licensing, permitting and inspection requirements applicable to contractors, electricians and engineers;
regulations relating to worker safety and environmental protection;
permitting and inspection requirements applicable to construction projects;
wage and hour regulations;
regulations relating to transportation of equipment and materials, including licensing and permitting requirements;
building and electrical codes; and
special bidding, procurement and other requirements on government projects.
We believe that we haveare in compliance with all the licenses requiredmaterial licensing and regulatory requirements that are necessary to conduct our operations and that we are in substantial compliance with applicable regulatory requirements.operations. Our failure to comply with applicable regulations could result in substantial fines or revocation of our operating licenses, as well as give rise to termination or cancellation rights under our contracts or disqualify us from future bidding opportunities. See Risks Related to Regulation and Compliance in Item 1A. Risk Factors of this Annual Report on Form 10-K (Annual Report) for further information regarding regulations applicable to our business.
Environmental Matters and Climate ChangeClimate-Related Impacts
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, 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, liability can be imposed for cleanup of previously owned or operated properties or currently owned properties at which hazardous substances or wastes were discharged or disposed of by a former owner or operator, 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 also interfere with ongoing operations or adversely affect our ability to sell or lease the property or use it as collateral for financing. In addition, we could be held liable for significant penalties and damages under certain environmental laws and regulations or be subject to revocation of certain licenses or permits, which could materially and adversely affect our business, results of operations and cash flows. Our contracts with customers may also impose liability on us for environmental issues that arise through the performance of our services.
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 that we are in substantial compliance with our environmental obligations and that any such obligations will not have a material adverse effect on our business or financial performance.
TheWhile the potential impact of climate changeclimate-related changes on our operations is highly uncertain. Climateuncertain, management considers climate-related risks and opportunities in connection with its long-term strategic planning and short-term deployment of resources. For example, climate change may result in, among other things, increasing temperatures, rising sea levels and changes in rainfall patterns, stormto patterns and intensity of wildfires, hurricanes, other storms and temperature levels.severe weather-related events and natural disasters. As discussed elsewhere in this Annual Report, on Form 10-K, including in Item 1A. Risk Factors, our operating results are significantly influenced by weather, and significantthese changes in historical weather patterns could significantly impact our future operating results. For example, if climate change results in drier weather and more accommodating temperatures over a greater period of time, we may be able to increase our productivity, which could positively impact our revenues and gross margins. Conversely, if climate change results in aA greater amount of rainfall, snow, ice or other less accommodating weather conditions, we could experience reduced productivity, which could negatively impact our revenues and gross margins. Further, whileas well as an increase in severe weather events and natural disasters, could reduce our productivity or result in project delays or cancellations. However, an increase in certain of these events, such as hurricanes, tropical storms, wildfires, blizzards and ice storms, can create a greater amount of emergency restoration service work it often also canand increase customer spending on modernization and other infrastructure improvements (e.g., fire hardening programs in California and the western United States). Additionally, changes in climate could result in delays ormore accommodating weather patterns for greater periods of time in certain areas, which may enable us to increase our productivity. Climate change may also affect the conditions in which we operate, and in some cases, expose us to potentially increased liabilities associated with those environmental conditions. For example, severe drought and high wind speeds in the western United States have increased the risk of wildfires during certain portions of the year, which in turn has exposed us and other negative consequencescontractors to increased risk of liability in connection with our operations in those locations. These conditions have also resulted in increased costs for our existing projects, which could negatively impact our financial results. Climatewildfire-related third-party insurance and reduced the amount insurance carriers are willing to make available under such policies.
Concerns about climate change could also have a negative impact on theresult in potential new regulations, regulatory actions or requirements to fund energy efficiency activities, any of which could affect our customers and/or demand for our services. For example, any decrease in demand for fossil fuels which in turn could negatively impact demand for certain of our pipeline and industrial services.
We also maintain a large fleet and a significant amount of construction machinery, all of which could be negatively impacted by new regulations related to greenhouse gas emissions from such sources. Furthermore, technological advancements, in response to regulatory changes or otherwise, could negatively impact our customers’ businesses or alter the services our customers require, which could in turn reduce demand for our services. However, these same regulatory and technological changes could necessitate new or expanded power generation and transmission infrastructure, which could provide additional opportunities for us.
Risk Management and Insurance
We are insured for employer’s liability, workers’ compensation, auto liability and general liability claims. Under these programs, the deductible for employer’s liability is $1.0 million per occurrence, the deductible for workers’ compensation is $5.0 million per occurrence, and the deductibles for auto liability and general liability are $10.0 million per occurrence. We manage and maintain a portion of our casualty risk through our wholly-owned captive insurance company, which insures all claims up to the amount of the applicable deductible of our third-party insurance programs. In connection with our casualty insurance programs, we are required to issue letters of credit to secure our obligations. We also have employee health care benefit plans for most employees not subject to collective bargaining agreements, of which the primary plan is subject to a deductible of $0.4$0.5 million per claimant per year.
Losses under all of these insurance programs are accrued based upon our estimate of the ultimate liability for claims reported and an estimate of claims incurred but not reported, with assistance from third-party actuaries. These insurance liabilities are difficult to assess and estimate due to unknown factors, including the severity of an injury, the extent of damage, the determination of our liability in proportion to other parties and the number of incidents not reported. The accruals are based upon known facts and historical trends, and management believes such accruals are adequate.
We renew our insurance policies on an annual basis, and therefore deductibles and levels of insurance coverage may change in future periods. In addition, insurers may cancel our coverage or determine to exclude certain items from coverage, or we may elect not to obtain certain types or incremental levels of insurance if we believe thatbased on the potential benefits considered relative to the cost of such insurance, or coverage may not be available at reasonable and competitive rates. For example, due to obtain suchthe increased occurrence and future risk of wildfires in the western United States, Australia and other areas in recent years, insurers have reduced coverage exceeds any additional benefits.limits and increased the cost of insurance coverage for those events. In any such event, our overall risk exposure would increase, which could negatively affect our results of operations, financial condition and cash flows.
Seasonality and Cyclicality
Our revenues and results of operations can be subject to seasonal and other variations. These variations are influenced by, among other things, weather, customer spending patterns, bidding seasons, receipt of required regulatory approvals, permits and rights of way, project timing and schedules, and holidays. Please read the section entitled Seasonality; Fluctuations of Results; Economic ConditionsSignificant Factors Impacting Results included in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Website Access and Other Information
Our website address is www.quantaservices.com. Interested parties 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 Investors & Media/Financial Info/Investor Relations / SEC Filings or through the website of the Securities 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 each of our Audit Committee, Compensation Committee, Governance and Nominating Committee and Investment Committee are posted on our website under the heading Investors & Media/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. Free copies of these items may be obtained from our website. We will also make available to any stockholder, without charge, copies of our Annual Report on Form 10-K as filed with the SEC. For copies of this or any other Quanta publication, stockholders may submit a request in writing to Quanta Services, Inc., Attn: Corporate Secretary, 2800 Post Oak Blvd., Suite 2600, Houston, TXTexas 77056, or by phone at 713-629-7600.(713) 629-7600.
Investors and others should note that we announce material financial information and make other public disclosures of information regarding Quanta through SEC filings, press releases, public conference calls, and our website. We also utilize social media to communicate this information, and it is possible that the information we post on social media could be deemed material.
Accordingly, we encourage investors, the media and others interested in our company to follow Quanta, and review the information we post, on the social media channels listed on our website in the Investors & Media/Relations / Social Media section.
This Annual Report, on Form 10-K, our website and our social media channels contain information provided by other sources that we believe is reliable. We cannot provide assurance that the information obtained from other sources is accurate or complete. No information on our website or our social media channels is incorporated by reference herein.
ITEM 1A.Risk Factors
Our business is subject to a variety of risks and uncertainties, including, but not limited to, the risks and uncertainties described below. The matters described below are not the only risks and uncertainties facing our company. Additionalcompany, and 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, results of operations and cash flows couldcan be negatively affected, the value of securities we have issued could be adversely affected, resulting in stockholders and purchasers losing part or all of their investment, and we may not be able to achieve our goalsstrategic initiatives or expectations. 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. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Risks Related to Our Industries and Operating Our Business
Our operating results may vary significantly from quarter to quarter.
Our business can be highly cyclical and is subject to seasonalseasonality and other variationsfactors that can result in significant differences insignificantly different operating results from quarter to quarter. For example, we typically experience lower grossquarter, and operating margins during winter months due to lower demand fortherefore our servicesresults in any particular quarter may not be indicative of future results. Our quarterly results have been and more difficult operating conditionsmay in the Northern hemisphere. Additionally, our quarterly results mayfuture be materially and/or adversely affected by:by, among other things:
the timing and volume of work we perform and our performance with respect to ongoing projects;
project delays, reductions in project scope, project terminations or cancellations and increases in project costs, including as a result of, among other things, natural disasters, adverse weather conditions or events, legal challenges or permitting, regulatory or environmental processes, project performance, customer capital constraints, claimed force majeure events or protests or other political activity;
adverse weather conditions or events;processes;
variations in the size, scope, costs and margins of ongoing projects we perform and the mix of our customers, contracts and business during any particular quarter;
increases in construction, design, engineering or procurement costs;business;
fluctuations in regional, national or global economic, political and market conditions and demand for our services;on a regional, national or global basis;
pricing pressures resulting fromas a result of competition;
changes in the budgetary spending patterns or strategic plans of customers andor federal, state, provincial and local governments;
disruptions
liabilities and costs incurred in our customers’ strategic plansoperations that are not covered by, or that are in excess of, our third-party insurance, including significant liabilities that arise from the inherently hazardous conditions of our operations (e.g., explosions, fires) and which could occur as a result of emerging technologies;
be exacerbated by the magnitude of work performed under change orders and the timing of their recognition;geographies in which we operate;
disputes with customers or delays relating to billing and payment terms under our contracts and change orders, and our ability to successfully negotiate and obtain payment or reimbursement under our contracts and change orders;
payment risk associated with the financial condition of customers, including customers affected by the volatility of natural gas and oil prices or that have filed for bankruptcy protection;
the resolution of, or unexpected or increased costs associated with, pending or threatened litigation,legal proceedings, indemnity obligations, multiemployer pension plan obligations (e.g., withdrawal liability) or other claims asserted against us;
liabilities associated with multiemployer pension plans in which our employees participate, including with respect to any withdrawal therefrom;
significant fluctuations in foreign currency exchange rates;
changes in accounting pronouncements that require us to account for items differently;
liabilities and costs experienced in our operations that are not covered by third-party insurance;
payment risk associated with the financial condition of our customers, including those customers affected by the volatility of natural gas and oil prices;
the termination or expiration of existing customer agreements;
changes in bondingrestructuring, severance and lien requirements applicable to existingother costs associated with winding down certain operations and new customer agreements;
implementation of various information technology systems, which could temporarily disrupt day-to-dayexiting markets, including our Latin American operations;
the recognition of tax impacts related to changes in tax laws or uncertain tax positions;
the timing and magnitude of costs we incur to support growth internally or through acquisitions or otherwise;
the timing and integration of acquisitions and the magnitude of the related acquisition and integration costs; and
estimates and assumptions in determining our financial results, remaining performance obligations and backlog, including the timing and significance of impairments of long-lived assets, equity or other investments, receivables, goodwill or other intangible assets.assets;
Accordingly, our operating resultssignificant fluctuations in any particular quarter may not be indicativeforeign currency rates;
the recognition of tax impacts related to changes in tax laws or uncertain tax positions; and
the results that can be expected for any other quartertiming and magnitude of costs we incur to support growth internally or for the entire year.through acquisitions or otherwise.
Negative economic and market conditions, including continued low oil and natural gas production volumes and prices, maycan adversely impact our customers’ future spending as well as payment for our services and, as a result, our operations and growth.services.
Stagnant or declining economic conditions, including a prolonged economic downturn or recession, as well as significant events that have an impact on financial or capital markets, can adversely impact the demand for our services and result in the delay, reduction or cancellation of certain projects. In addition, economic and market conditions specifically affectingA number of factors can adversely affect the industries we serve, including, among other things, financing conditions, potential bankruptcies and global and U.S. trade relationships and other geopolitical events. A reduction in cash flow or the lack of availability of debt or equity financing for our customers could adversely affectresult in a reduction in our customers’ spending for our services and also impact the ability of our customers to pay amounts owed to us, which could have a material adverse effect on our business, financial condition, results of operations and cash flows. A number of factors, including financing conditions and potential bankruptcies in the industries we serve or a prolonged economic downturn or recession, could adversely affect our customers and their ability or willingness to fund capital expenditures in the future or pay for past services. Consolidation, competition, capital constraints or negative economic conditions in the electric power, oil and gasenergy or communications industries maycan also result in reduced spending by, or the loss of, one or more of our customers.
Our OilPipeline and GasIndustrial Infrastructure Services segment is exposed to risks associated with the oil and gas industry. These risks, which are not subject to our control, include the volatility and cyclical nature of natural gas and oil prices and production, the resulting effect ondevelopment of and consumer demand for alternative energy sources, and legislative and regulatory actions, as well as public opinion, regarding the services we provide,impact of fossil fuels on the climate and a slowdown in the development or discovery of natural gas and/or oil reserves.environment. Specifically, lower natural gasprices and oil pricesproduction volumes, or perceived risk thereof, can result in decreased or delayed spending by our customers, in our Oilincluding with respect to larger pipeline and Gas Infrastructure Services segment.industrial projects. In particular, capital spending by explorationaddition, the 2020 U.S. presidential and production companies and midstream companies has generally declined in the last few years. Any future decline in prices, or perceived risk thereof,congressional elections may result in our customers reducing or delaying capital spendinga change in administration and control of Congress with the potential consequence of increased restrictions on larger pipeline projects,oil and gas gatheringproduction activities, which could have a material adverse effect on the oil and compressor systems and related infrastructure, resulting in less demand for our services.gas industry. If the profitability of our OilPipeline and GasIndustrial Infrastructure Services segment were to decline, our overall financial position, results of operations and cash flows could also be adversely affected. Additionally, declinesa decline in natural gas and oil prices, and a resulting decline inproduction or the development of resource plays and oil and natural gas production, couldcan negatively impact certain portions of our Electric Power Infrastructure Services segment. For example, the low price of oil has had an adverse impact on the Canadian economy, which has impacted demand for some of our electric power services in Canada.
Further, many of our customers finance their projects through the incurrence of debt or the issuance of equity. During depressed markets, our customers may be unable to access capital markets or otherwise obtain financing for budgeted capital expenditures. A reduction in cash flow or the lack of availability of debt or equity financing for our customers could result in a reduction in our customers’ spending for our services and may also impact the ability of our customers to pay amounts owed to us, which could have a material adverse effect on our business, financial condition, results of operations, cash flows and our ability to grow.
A variety of issues outside of our control could affect the timing of and our performance on projects, which may result in additional costs to us, reductions or delays in revenues, or the payment of liquidated damages.damages or project termination.
Our business is dependent in part upon projects that can be cyclical in nature and are subject to risks of delay.delay or cancellation. The timing of or failure to obtain contracts, delays in awards of, start dates for or completion of projects and the cancellations of projects couldcan result in significant periodic fluctuations in our business, financial condition, results of operations and cash flows.
Many of our projects involve challenging engineering, permitting, procurement and construction phases that may occur over extended time periods, sometimes several years. Weyears, and we have encountered and may alsoin the future encounter difficultiesproject delays or project performance issues as a result of, among other things:
delays in the delivery or management of design or engineering information, equipment or materials to be completedmaterials;
schedule changes;
natural disasters, including wildfires, earthquakes and significant weather events (e.g., hurricanes, tropical storms, tornadoes, floods, droughts, blizzards and extreme temperatures);
adverse weather conditions (e.g., prolonged rainfall or procured by us,snowfall, early thaw in Canada and the customernorthern United States, other unseasonable weather patterns);
our or a third party; delays or difficulties in equipment and material delivery; schedule changes; delays due to our or our customers’customer’s failure to timely obtain permits or rights of way or meet other permitting, regulatory or environmental requirements or permitting conditions; weather-related delays;
difficult terrain and site conditions where delivery of materials and availability of labor are impacted or where there is exposure to harsh and hazardous conditions;
protests, legal challenges or other political activity;activity or opposition to a project;
changes in permitting and regulatory requirements during the course of our work; and
other factors. Projectsfactors such as terrorism, military action and public health crises (including the outbreak of the recent coronavirus);
additional complexity, timing uncertainty or extended bidding, regulatory and permitting processes associated with the projects where we provide engineering, procurement and construction services present additional performance risks due to the amount of work and complexity involved. The bidding processes for these projects can also be longer, often taking six to nine months, and regulatory and permitting delays on these projects tend to be more challenging and cause more timing uncertainty.(EPC) services.
In addition, we contract with third-party suppliers and subcontractors to assist us with the completion of contracts. Anycontracts, and approximately 15% to 20% of our work is subcontracted to other service providers. A delay or failure to perform by suppliers or by subcontractors in the completion of their portion of the project maycan result in delays in the overall progress of the project or cause us to incur additional costs. A failure by us to properly manage and invest in our equipment fleet could also negatively impact project performance and our financial condition, results of operations and cash flows. We also may encounter project delays due to local opposition to a project, which may include injunctive actions or other legal proceedings or public protests or other political activity.
Many of these difficulties and delays are beyond our control and couldcan negatively impact our ability to complete the project in accordance with the originalrequired delivery schedule or achieve our anticipated margin on the project. Delays and additional costs may be substantial and not recoverable from third parties, and in some cases, we may be required to compensate the customer for such delays. InFurthermore, in certain circumstances we guarantee project completion or performance by a scheduled date. Failuredate, and failure to meet any of our schedulesthe schedule or performance requirements could alsocan result in additional costs or penalties, including liquidated damages, and suchdamages. Such amounts could exceed expected project profit. In extreme cases, the above-mentioned factors could cause project cancellations, and we may not be abledelay or performance difficulties can result in project cancellation by a customer or damage to replace such projects with similar projects or at all. Such delays or cancellations may impact our reputation or relationshipsrelationship with customers,a customer, which can adversely affectingaffect our ability to secure new contracts, and couldcontracts. Additional costs or penalties, a reduction in our productivity or efficiency or a project termination in any given period can have a material adverse effect on our business, financial condition, results of operations and cash flows. For example, as discussed in further detail in Legal Proceedings within Note 14 of the Notes to Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data, the termination of a telecommunications project in Peru resulted in a $79.2 million charge to earnings in the second quarter of 2019.
Our revenues and profitability can be exposed to potential risk if our customers encounter financial difficulties or file bankruptcy or disputes arise with our customers.
Our contracts often require us to satisfy or achieve certain milestones in order to receive payment, or in the case of cost-reimbursable contracts, provide support for billings in advance of payment. As a result, we can incur significant costs or perform significant amounts of work prior to receipt of payment. We face difficulties collecting payment and sometimes failed to receive payment for such costs in circumstances where our customers do not proceed to project completion, terminate or cancel a contract, default on their payment obligations, or dispute the adequacy of our billing support. We have in the past brought, and may in the future bring, claims against our customers related to the payment terms of our contracts. For example, we have filed an international arbitration proceeding against the customer in connection with the terminated telecommunications project in Peru, which seeks to recover, among other things, amounts related to a net receivable position of approximately $120 million as of December 31, 2019. For additional information on this matter, see Legal Proceedings within Note 14 of the Notes to Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data. A failure to promptly recover on these types of claims can have a negative impact on our financial condition, results of operations and cash flows, and any such claims may harm our relationships with our customers.
Slowing economic conditions in the industries we serve can also impair the financial condition of our customers and hinder their ability to pay us on a timely basis or at all. Further, to the extent a customer files bankruptcy, payment of amounts owed can be delayed and certain payments we receive prior to the filing of the bankruptcy petition may be avoided and returned to the customer’s bankruptcy estate. For example, in January 2019, PG&E Corporation and Pacific Gas and Electric Company (collectively, PG&E), one of our largest customers, filed for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code, as amended, which impacted the collection of approximately $165 million of pre-petition receivables. See Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Concentrations of Credit Risk for additional information on this matter. Additionally, many of our customers for larger projects are project-specific entities that do not have significant assets other than their interests in the project and could be more likely to encounter financial difficulties relating to their businesses. We ultimately may be unable to collect amounts owed to us by customers experiencing financial difficulties or
in bankruptcy, and accounts receivable from such customers may become uncollectible and ultimately have to be written off, which could have an adverse effect on our future financial condition, results of operations and cash flows.
Our business is labor intensive,subject to operational hazards, including, among others, wildfires and explosions, that can result in significant liabilities and that may be exacerbated by certain geographies and locations where we perform services, and we may not be insured against all potential liabilities.
Due to the nature of services we provide and the conditions in which we and our customers operate, our business is subject to operational hazards and accidents that can result in significant liabilities. These operational hazards include, among other things, electricity, fires, explosions, leaks, collisions, mechanical failures, and damage from severe weather conditions and natural disasters. Furthermore, certain of our customers operate energy- and communications-related infrastructure assets in locations and environments that increase the likelihood and/or severity of these operational hazards, including as a result of changes in climate and other factors in recent years. In particular, we perform a significant amount of services, including operational, consulting and other services, for customers that operate electrical power, natural gas and communications infrastructure assets in the western United States, Australia and other locations that have recently experienced, and have a higher risk of, wildfires. For example, certain of Quanta’s operating units perform inspection, consulting, repair, maintenance and other services for utilities and other customers that operate electric power and other infrastructure in California and other areas in the western United States, including recent inspection of, and other services relating to, the electrical transmission and distribution infrastructure operated by PG&E in California. PG&E and certain other utility customers have been determined to be or are potentially responsible for catastrophic wildfires that have occurred in recent years. Quanta’s operating units have received document hold requests and subpoenas in connection with these events. We are not a party to any pending legal proceeding relating to such wildfires at this time, and no related claims asserting liabilities against Quanta or its operating units have been filed. However, there is no assurance that claims will not be filed in the future.
We also often perform services in locations that are densely populated and that have higher value property and assets, such as California and metropolitan areas, which can increase the impact of any of these hazards or other accidents we experience. We recently acquired The Hallen Construction Co., Inc. (Hallen), a company that specializes in underground gas and electric distribution and transmission services and operates in metropolitan areas throughout the northeastern United States, including New York City, New York. This acquisition, including certain assumed liabilities associated with its pre-acquisition operations, which are described further in Note 14 of the Notes to Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data, increases our potential exposure to certain of these hazards and accidents.
Events arising from operational hazards and accidents have resulted in significant liabilities to us in the past and may expose us to significant claims and liabilities in the future. These claims and liabilities can arise through indemnification obligations to customers, our negligence or otherwise, and because our services in certain instances are integral to the operation and performance of our customers’ infrastructure, such claims and liabilities can arise even if our operations are not the cause of the harm. Our exposure to liability can also extend for a number of years after we complete our services, and potential claims and liabilities arising from significant accidents and events can take a number of years and significant legal costs to ultimately resolve.
Potential liabilities include, among other things, claims associated with personal injury, including severe injury or loss of life, and significant damage to property, equipment and the environment, and other claims discussed above and can lead to suspension of operations, adverse effects to our safety record and reputation and/or material legal costs and liabilities. In addition, if any of these events or losses related thereto are found to be the result of our or our customer’s activities or services, we could be subject to government enforcement actions or regulatory penalties, litigation and/or civil or governmental actions, including investigations, citations and fines. Insurance coverage may not be available to us or may be insufficient to cover the cost of any of these liabilities and legal costs. If we are not fully insured or indemnified against such liabilities and legal costs or a counterparty fails to meet its indemnification obligations to us, it could materially and adversely affect our business, financial condition, results of operations and cash flows. Further, to the extent our reputation or safety record is adversely affected, demand for our services could decline or we may not be able to bid for certain work.
Unavailability or cancellation of third-party insurance coverage would increase our overall risk exposure, as well as disrupt our operations, and estimates of losses covered by our insurance policies could prove incorrect.
We maintain insurance coverage from third-party insurers as part of our overall risk management strategy and because some of our contracts require us to maintain specific insurance coverage limits. We are insured for, among other things, employer’s liability, workers’ compensation, auto liability and general liability claims, but such insurance is subject to deductibles and limits and may be canceled or may not cover all of our losses. We manage and maintain a portion of our casualty risk through our wholly-owned captive insurance company, which insures all claims up to the amount of the applicable deductible of our third-party insurance programs. In connection with our casualty insurance programs, we are required to issue letters of credit to secure our obligations. Our insurance policies include various coverage requirements, including the requirement to give appropriate notice, and coverage could be denied if we fail to comply with those requirements.
Additionally, our insurance coverages may not be sufficient or effective under all circumstances or against all claims and liabilities asserted against us, and if we are not fully insured against such claims and liabilities, it could expose us to significant liabilities and materially and adversely affect our business, financial condition, results of operations and cash flows. We also renew our insurance policies on an annual basis, and therefore deductibles and levels of coverage offered by third parties may change in future periods. For example, due to the increased occurrence in recent years and future risk of wildfires in California and other areas in the western United States, Australia and other locations, insurers have reduced coverage limits and increased the cost of insurance coverage for those events. As a result, we expect our level of insurance coverage for wildfire events will decrease at the time of our annual insurance renewal in the spring of 2020, and such level may not be sufficient to cover potential losses. In addition, our third party insurers could decide to further reduce or exclude coverage for wildfires in the future. There can also be no assurance that any of our other existing third-party insurance coverages will be renewed at their current levels or at all or that any future coverage will be available at reasonable and competitive rates. Our third-party insurers could also fail, cancel our coverage or otherwise be unable or unwilling to provide us with adequate insurance coverage. Adverse changes in our insurance coverage could increase our exposure to uninsured losses, which could have a negative effect on our business, financial condition, results of operations and cash flows or result in a disruption of our operations.
Losses under our insurance programs are accrued based upon our estimate of the ultimate liability for claims reported and an estimate of claims incurred but not reported, with assistance from third-party actuaries. These insurance liabilities are difficult to assess and estimate due to unknown factors, including the severity of an injury, the extent of damage, the determination of our liability in proportion to other parties and the number of incidents not reported. If we experience claims or costs above our estimates, our business, financial condition, results of operations and cash flows could be materially and adversely affected.
Our business is labor-intensive, and we may be unable to attract and retain qualified employees or we may incur significant costs in the event we are unable to efficiently manage our workforce.
Our ability to maintainefficiently manage our productivitybusiness and profitabilityachieve our strategic initiatives is limited by our ability to employ, train and retain the necessary skilled personnel. We may not be ablepersonnel, which is subject to maintain an adequately skilled labor force necessary to operate efficiently and to support our growth strategy. For instance, we may experience shortagesa number of qualified journeyman linemen, who are integral to the provision of transmission and distribution services under our Electric Power Infrastructure Services segment.risks. The commencement of new, large-scale infrastructure projects or increased demand for infrastructure improvements, as well as the aging electric utility workforce, has reduced and may also further reduce the pool of skilled workers, including qualified journeyman lineman, available for our Electric Power Infrastructure Services segment. With respect to us. In addition, in our OilPipeline and GasIndustrial Infrastructure Services segment, there is limited availability of experienced supervisors and foremen that can oversee larger diameter pipepipeline projects. The cyclical nature of the natural gas and oil industry can also create shortages of qualified labor during periods of high demand and production. A shortage in the supply of these skilled personnel as well as equipment operators and welders, creates competitive hiring markets andthat may result in increased labor expenses. Additionally, if we are unablehave incurred, and expect to hire employees with the requisite skills, we may also be forcedcontinue to incur, significant education and training expenses. Labor shortages or increased labor costs could impair our abilityexpenses in order to maintain our business or grow our revenues or profitability.recruit and train employees.
Furthermore, theThe uncertainty of contract award timing and project delays can also present difficulties in managing our workforce size. InabilityOur inability to efficiently manage our workforce may require us to incur costs resulting from excess staff, reductions in staff, or redundancies that could have a material adverse impact on our business, financial condition, results of operations and cash flows.
Our failureThe loss of, or reduction in business from, one or a few customers could have a material adverse effect on our business.
A few customers have in the past and may in the future account for a significant portion of our revenues. For example, our ten largest customers accounted for 34% of our consolidated revenues for the year ended December 31, 2019. Although we have long-standing relationships with many of our significant customers, a significant customer may unilaterally reduce or discontinue business with us at any time or merge or be acquired by a company that decides to reduce or discontinue business with us. PG&E, one of our largest customers, has filed for bankruptcy, and other significant customers may file for bankruptcy protection or cease operations, which could also result in reduced or discontinued business with us. The loss of business from a significant customer could have a material adverse effect on our business, financial condition, results of operations and cash flows.
We may fail to adequately recover on contract change orders or claims brought by us against customers related to payment terms and costs could materially and adversely affect our financial position, results of operations and cash flows.customers.
We have in the past brought, and may in the future bring, claims against our customers related to, among other things, the payment terms of our contracts and change orders relating to our contracts.customers. These types of claims occur due to, among other things, customer- ordelays caused by customers and third party-caused delays orparties and changes in project scope, which maycan result in additional cost, which may orcosts that may not be recovered until the claim is resolved. Under these circumstances,While we generally negotiate with the customer for additional
compensation; however, we are subject to the risk that compensation, we may be unable to obtain, through negotiation, arbitration, litigation or otherwise, adequate amounts to compensate us for the additional work or expenses incurred. Litigation or arbitration with respect to payment terms under contracts and change ordersthese matters is generally lengthy and costly, involves significant uncertainty as to timing and mayamount of any resolution, and can adversely affect our relationship with existing or potential customers, and it is often difficult to predict the timing or amount of any claim resolution. A failure to obtain adequate and prompt compensation for these matters could require us to record a reduction to revenues and gross profit recognized in prior periods under the percentage-of-completion accounting method. Any such adjustments could be substantial. We may alsocustomers. Furthermore, we can be required to invest significant working capital to fund cost overruns while the resolution of a claim is pending, which could adversely affectpending. Failure to obtain adequate and prompt compensation for these matters can result in a reduction of revenues and gross profit recognized in prior periods or the recognition of a loss. Any such reduction or loss can be substantial and can have a material adverse effect on our business, financial condition, results of operations and cash flows.
Regulatory and environmental requirements affecting any of the industries we serve may lead to less demand for our services.
Because the vast majority of our revenue is derived from a few industries, the regulatory and environmental requirements affecting those industries have a material effect on our business, and increased regulatory and environmental requirements in those industries could adversely affect our business, financial condition, results of operations and cash flows. Customers in the industries we serve also face heightened regulatory and environmental requirements and stringent permitting processes that impact their projects, which could result in delays, reductions and cancellations of some of their projects. These regulatory factors have resulted in decreased demand for our services in the past, and they may continue to do so in the future, potentially impacting our business, financial condition, results of operations, cash flows and our ability to grow.
Our failure to accurately estimate project costs or successfully execute a project could result in reduced profits or losses that could adversely affect our business, financial condition, results of operations and cash flows.losses.
We currently generate, someand expect to continue generating, a significant portion of our revenues under fixed price contracts, including contracts for projects where we provide engineering, procurementEPC services (e.g., large electric transmission and construction (EPC) services. We expect to generate a greater amount of revenues under these types of contracts in the future as anticipated larger and more complex projects, such as electric power transmission lines and mainline pipeline projects, become a more significant aspect of our business.
facility and terminal projects). Under these contracts, we assume risks related to project estimates and execution, and project revenues, profitability and costs can vary, sometimes substantially, from our original projections due to a variety of factors, including:
unforeseen circumstances or project modifications not included in our cost estimates or covered by our contract for which we cannot obtain adequate compensation, including concealed or unknown environmental, geological or geographical conditions;site conditions and technical problems such as design or engineering issues;
failure to accurately estimate project costs;costs or accurately establish the scope of our services;
unanticipated technical problems, including designfailure to coordinate performance of subcontractors, suppliers and other third parties or engineering issues;delays and failure to perform by such parties;
inability to meet project schedule requirements or achieve guaranteed performance or quality standards with regardfor a project, which can result in increased costs or the payment of liquidated damages to engineering, construction or project management obligations;the customer;
failure to properly make judgments in accordance with applicable professional standards including(e.g., engineering standards;standards);
changes in the cost of equipment, commodities, materials or labor;
unanticipated costs or claims due to delays or failure to perform by customers, partners, subcontractors, suppliers or other third parties;
contract termination or suspension and our inability to obtain reimbursement;reimbursement for services performed, costs incurred or expected profit;
delays or productivity issues caused by adverse weather conditions, significant weather events or severe weather events;other natural disasters;
delays and additional costs associated with obtaining required permits or approvals;
changes in laws or regulations;
delays and additional costs attributable to legal challenges and protests and other political activity; and
quality issues, including those requiring rework or replacement;replacement.
Additionally, we may be required to pay liquidated damages under certain of our contracts if we fail to meet schedule or performance requirements. These factors and events maycan result in reputational harm or cause actual revenues and gross profits for a project to differ from what we originally estimated, resulting in reduced profitability or losses on projects. Such differences could be materialcan materially and could have a significant impact onadversely affect our business, financial condition, results of operations and cash flows.
Our use of percentage-of-completion accountingChanges in estimates related to revenues and costs associated with our contracts with customers could result in a reduction or elimination of previously reported revenues, and profits.a reduction of profits or the recognition of losses.
As discussed in Item 7. Management’s 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. Financial Statements and Supplementary Data, a significant portion of our revenues are recognized using the percentage-of-completion method of accounting, utilizing the cost-to-cost method. This accounting method is generally accepted forFor fixed price contracts and is used because management considers expended costs to be the best available measure of progress on these contracts. The percentage-of-completion accounting practicecertain unit-price contracts, we use results in the recognition of contract revenuesrecognize revenue as performance obligations are satisfied over time 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. Contractprofitability, as discussed in further detail in Note 2 of the Notes to Consolidated Financial Statements included in Item 8. Financial Statements and Supplementary Data. Changes in contract estimates are recognized on a cumulative catch-up basis in the period in which the revisions to the estimates are made, and contract losses are recognized in full when losses are determined to be probable and can be reasonably estimated,estimated. Variable consideration amounts, including performance incentives, early pay discounts and penalties, may also cause changes in contract profit estimates are adjusted based on an ongoing review of contract performance and profitability. Further, a substantial portion of our contracts contain cost and performance incentives. Penalties are recorded when known or finalized, which generally occurs during the latter stages of the contract.estimates. In addition, we record cost recoveryrecognize amounts associated with change orders and/or claims as revenue when we believe recoveryit is probable that the contract price will be adjusted and the amountsamount of any such adjustment can be reasonably estimated. Actual collectionestimated, which can result in the recognition of claims couldcosts prior to the recognition of the related revenue. Furthermore, actual amounts collected in connection with change orders can differ from estimated amountsamounts.
Consequently, the timing for recognition of revenues and profit or loss and any subsequent changes in estimates is uncertain and could result in a reduction or an elimination of previously recognizedreported revenues and earnings. In certain circumstances, it is possible thator profits or the recognition of losses on the associated contract. Any such adjustments could be significant.
Our revenuessignificant and profitability may be exposed to potential risk if a contract is terminated or canceled, our customers encounter financial difficulties or disputes arise with our customers.
Our contracts often require us to satisfy or achieve certain milestones in order to receive payment for the work performed, or in the case of cost-reimbursable contracts, provide support for billings in advance of receiving payment. As a result, we may incur significant costs or perform significant amounts of work prior to receipt of payment. If any of our customers do not proceed with the completion of projects, terminate or cancel a contract with us or default on their payment obligations, or if disputes arise with our customers with respect to the adequacy of billing support, we may face difficulties in collecting payment of amounts due to us for costs previously incurred. We have in the past brought, and may in the future bring, claims against our customers related to the payment terms of our contracts. A failure to promptly recover on these types of claims could have a negativematerial adverse impact on our financial condition, results of operations and cash flows. Additionally, any such
During the ordinary course of our business, we are subject to lawsuits, claims and other legal proceedings.
We have in the past been, and may harmin the future be, named as a defendant in lawsuits, claims and other legal proceedings that arise in the ordinary course of our future relationships with our customers.
business. These actions seek, among other things, compensation for alleged personal injury (including claims for loss of life), workers’ compensation, employment discrimination, sexual harassment, workplace misconduct, wage and hour claims and other employment-related damages, compensation for breach of contract, negligence or gross negligence or property damage, environmental liabilities, multiemployer pension plan withdrawal liabilities, punitive damages, consequential damages, and civil penalties or other losses or injunctive or declaratory relief. In addition, many ofwe generally indemnify our customers for larger projectsclaims related to the services we provide and actions we take under our contracts, and, in some instances, we are project-specific entities that do notallocated risk
through our contract terms for actions by our customers, subcontractors or other third parties. Because our services in certain instances can be integral to the operation and performance of our customers’ infrastructure, we have significant assets other than their interests in the projectbeen and may encounter financial difficulties relatingbecome subject to their businesses. Itlawsuits or claims for any failure of the systems that we work on, even if our services are not the cause of such failures. We could also be subject to civil and criminal liabilities, which could be material. Insurance coverage may not be available or may be difficultinsufficient for these lawsuits, claims or legal proceedings. The outcome of any allegations, lawsuits, claims or legal proceedings, as well as any public reaction thereto, is inherently uncertain and could result in significant costs, damage to collectour brands or reputation and diversion of management’s attention from our business. Payments of significant amounts, owed to us by these customers,even if reserved, could materially and if we are unable to do so, it could have an adverse effect onadversely affect our futurebusiness, reputation, financial condition, results of operations and cash flows.
Our operating results could be negatively affected by weather conditions For details on our existing litigation, claims and the nature of our work environment.
We perform substantially all of our services outdoors. As a result, adverse weather conditions or events, such as extreme heat or cold, rainfall, snowfall, wind, an early thaw in Canada and the northern partsother legal proceedings, refer to Note 14 of the U.S.,Notes to Consolidated Financial Statements in Item 8. Financial Statements and hurricanes or other storms, may affect our productivity or may temporarily prevent us from performing services. The effect of weather delays on projects that are under fixed price arrangements may be greater if we are unable to adjust the project schedule for such delays. As a result, adverse weather conditions or events, such as extreme heat or cold, rainfall, snowfall, wind, an early thaw in Canada or the United States, and hurricanes or other storms, may affect our productivity or may temporarily prevent us from performing services. Furthermore, our work is performed under a variety of conditions, including but not limited to, difficult terrain and difficult site conditions where delivery of materials and availability of labor are impacted or where there is exposure to harsh and hazardous conditions. A reduction in our productivity and efficiency in any given period or our inability to meet guaranteed schedules may adversely affect our financial condition, results of operations and cash flows.Supplementary Data.
We may be unsuccessful at generating internal growth, which could adversely affect our financial condition, results of operations and cash flows.business.
Our ability to generate internal growth will be affected by, among other factors, our ability to:
expand the range of services we offer to customers to address their evolving infrastructure needs;
attract new customers;
increase the number of projects performed for existing customers;
hire and retain qualified employees;
expand geographically, including internationally; and
address the challenges presented by stringent regulatory, environmental and permitting requirements and difficult economic or market conditions that may affect us or our customers.
In addition, our customers may cancel, delay or reduce the number or size of projects available to us for a variety of reasons, including capital constraints or inability to meet regulatory requirements. Many of the factors affecting our ability to generate internal growth are beyond our control, and we cannot be certain that our strategies for achieving internal growth will be successful. Inability to successfully generate internal growth may adversely affect our financial condition, results of operations and cash flows. Our ability to generate internal growth will be affected by, among other factors, our ability to:
expand the range of services we offer to customers to address their evolving infrastructure needs;
attract new customers;
increase the number of projects performed for existing customers;
hire and retain qualified employees;
expand geographically; and
address regulatory, environmental and permitting requirements and economic or market conditions that affect us or our customers.
Many of our contracts may be canceled or suspended on short notice or may not be renewed upon completion or expiration, and we may be unsuccessful in replacing our contracts, which could adversely affect our business.
Our customers have in the past and may in the future cancel, delay or reduce the number or size of projects available to us for a variety of reasons, including capital constraints or inability to meet regulatory requirements. Furthermore, many of our customers may cancel or suspend our contracts on short notice, typically 30 to 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 generally have no obligation to assign a specific amount of work to us. Our financial condition, results of operations and cash flows can be negatively impacted if any of the following occur:
our customers cancel or suspend contracts having significant value;
we fail to renew a significant number of our existing contracts;
we complete a significant number of non-recurring projects and cannot replace them with similar projects;
the anticipated volume of work under an existing master service agreement is not assigned to us;
we are not the successful bidder on our existing contracts that are subject to re-bid in the future; or
we fail to reduce operating and overhead expenses consistent with any decrease in our revenues.
Our business is highly competitive, and competitive pressures, technological advancements and other market conditions could negatively affect our business, financial condition, results of operations and cash flows.business.
The specialty contracting business is served by numerous companies, from small, owner-operated private companies someto large multi-national, public companies and several large regional companies. Relatively few barriers prevent entry into some areas of our business, and as a result, any organization that has adequate financial resources and access to technical expertise may become one of our competitors.
In addition, some of our competitors have significant financial, technical and marketing resources. We cannot be certain that ourOur competitors do notmay have or will notmay 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 enhance our competitive position within the specialty contracting business or maintain our current customer base. Certain of our competitors may have lower overhead cost structures, and therefore may be able to provide the required services at lower rates than us. We also face competition from the in-house service organizations of our existing or prospective customers. Service providers in the industries we servecustomers, which are capable of performing, or acquiring businesses that perform, some of the same types of services we provide, andprovide. These customers may also face pressure or be compelled by regulatory or other requirements to self-perform an
increasing amount of the services we currently perform for them. Therefore, we cannot be certain that our existing or prospective customers will continue to outsource these services in the future.
Furthermore, a substantial portion of our revenues is directly or indirectly dependent on winningupon obtaining new contracts. The timing of project awards is unpredictable and often involves complex and lengthy negotiations and bidding processes. These processes could beare impacted by a wide variety of factors, including price, governmental approvals, financing contingencies, commodity prices, environmental conditions and overall market and economic conditions. The competitive environment we operate in couldcan also affect the timing of contract awards and the commencement or progress of work under awarded contracts. For example, based on rapidly changing competition dynamics, we have experienced, and may in the future experience, more competitive pricing in certain markets, such as the smaller scale transmission and distribution electric power market. Our bids also may not be successful due to, among other things, a potential customer’s perception of our ability to perform the work or the technological advantages held by our competitors. Additionally, changing competitive pressures could present difficulties in matching workforce size with available contract awards. As a result, the competitive environment we operate in couldcan have a material adverse effect on our business, financial condition, results of operations and cash flows and could cause our results of operations and cash flows to fluctuate significantly from quarter to quarter.significantly.
Technological advancements that compete withand other factors may alter our customers’ businessesexisting operating model or alter the services our customersthey require, which may also result in reduced demand for our services. For example,In addition, market changes in technology, particularly with respect to efficient battery storage or the emergence of new, developing or alternative sources of power generation, may result in less demand for existing sources of power generation and for natural gas and oil, whichwithin our customers’ industries could result in less demand for the services we provide.
Changes in government spending and legislative actions and initiatives relating to renewable energy and electric power may adversely affectimpact their future demand for our services.
Demand for our services, may not result from renewable energy initiatives. While many states currently have mandatessuch as a reduction in place that require specified percentages of power to be generated from renewable sources, those mandates could be reduced or made optional, thereby reducing, delaying or eliminating renewable energy development. Additionally, renewable energy is generally more expensive to produce than energy from traditional sources and may require additional power generation sources as backup. The locations of renewable energy projects are often remote and are not viable unless new or expanded transmission infrastructure to transport the power to demand centers is economically feasible. Furthermore, funding for renewable energy
initiatives is uncertain and in the past has been constrained by the availability of credit. These factors could result in fewer renewable energy projects than anticipated and a delay in the construction of these projects and related infrastructure, which could negatively impact our business.
Other current and potential legislative or regulatory initiatives may not result in increased demand for our services. Examples include legislationhydrocarbons or regulationsplastics that require utilities to meet reliability standards, ease siting and right-of-way issues for the construction of transmission lines, and encourage installation of new electric power transmission and renewable energy generation facilities. It is notnegatively impacts certain whether existing legislation will create sufficient incentives for new projects, when or if proposed legislative initiatives will be enacted or whether any potentially beneficial provisions will be included in the final legislation.
There are also a number of legislative and regulatory proposals and global, non-binding agreements that address greenhouse gas emissions, which are in various phases of discussion or implementation. The outcome of these pending federal and state proposals and possible future legislative and regulatory proposals resulting from any global agreement could negatively affect the operations of our customers through costs of compliance or restraintscustomers. Our future success will depend, in part, on projects, which could reduce their demand for our services.
Our business is subject to operational hazards, and we may not be insured against certain potential liabilities.
Our business is subject to significant operational hazards due to the nature of services provided by our workforce and the conditions in which they operate. These hazards include electricity, fires, explosions, mechanical failures and weather-related incidents. Our offshore operations are subject to additional risks, including blowouts, collisions, vessels sinking or capsizing and damage from severe weather conditions. In addition, we have significant operations in California and other locations that have recently experienced and have a higher risk of wildfires. These hazards could cause personal injury and severe damage to property, equipment and the environment and could lead to suspension of operations and/or legal liabilities. We also often operate in densely populated urban areas, which could increase the impact of any of these hazards or other accidents we experience. If we are not fully insured or indemnified against such liabilities or a counterparty fails to meet its indemnification obligations to us, it could materially and adversely affect our business, financial condition, results of operations and cash flows. Further, any such liabilities or accidents could adversely affect our safety record, which could impact our ability to bid on certain work.
We are insured for employer’s liability, workers’ compensation, auto liabilityanticipate and general liability claims, but such insurance is subjectadapt to deductiblesthese changes to our customers’ existing operating model in a cost-effective manner and limitsto offer services that meet customer demands and may be canceled or may not cover all of our losses. Under these programs, the deductible for employer’s liability is $1.0 million per occurrence, the deductible for workers’ compensation is $5.0 million per occurrence, and the deductibles for auto liability and general liability are $10.0 million per occurrence. We manage and maintain a portion of our casualty risk through our wholly-owned captive insurance company, which insures all claims up to the amount of the applicable deductible of our third-party insurance programs. In connection with our casualty insurance programs, we are required to issue letters of credit to secure our obligations. We also have employee health care benefit plans for most employees not subject to collective bargaining agreements, of which the primary plan is subject to a deductible of $0.4 million per claimant per year. Our insurance policies include various coverage requirements, including the requirement to give appropriate notice.evolving industry standards. If we fail to comply with these requirements,adapt successfully to any change or obsolescence or incur significant expenditures in adapting to such change, our coverage could be denied.
Losses under all of these insurance programs are accrued based upon our estimate of the ultimate liability for claims reported and an estimate of claims incurred but not reported, with assistance from third-party actuaries. These insurance liabilities are difficult to assess and estimate due to unknown factors, including the severity of an injury, the extent of damage, the determination of our liability in proportion to other parties and the number of incidents not reported. The accruals are based upon known facts and historical trends, and management believes such accruals are adequate. If we were to experience insurance claims or costs significantly above our estimates, our business,businesses, financial condition, results of operations and cash flows could be materially and adversely affected.
Unavailability or cancellation of third-party insurance coverage would increase our overall risk exposure as well as disrupt our operations.
We maintain insurance coverage from third-party insurers as part of our overall risk management strategy and because some of our contracts require us to maintain specific insurance coverage limits. However, there can be no assurance that our insurance coverages will be sufficient or effective under all circumstances or against all claims and liabilities asserted against us. Additionally, we renew our insurance policies on an annual basis, and therefore deductibles and levels of coverage offered by third parties may change in future periods. There can be no assurance that any of our existing third party insurance coverage will be renewed upon the expiration of the coverage period or that future coverage will be affordable at the required limits. In addition, our third-party insurers could fail, suddenly cancel our coverage or otherwise be unable to provide us with adequate insurance coverage. For example, should our insurers determine to exclude coverage for wildfires in the future, we could be exposed to significant liabilities and a potential disruption of our operations. If our risk exposure increases as a result of adverse changes in our insurance coverage, we could be subject to increased claims and liabilities that could negatively affect our business, 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 that arise in the ordinary course of our business. These actions may seek, among other things, compensation for alleged personal injury, workers’ compensation, employment discrimination and other employment-related damages, breach of contract, property damage, environmental liabilities, multiemployer pension plan withdrawal liabilities, punitive damages, consequential damages, and 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, and, in some instances, we may be allocated risk through our contract terms for actions by our customers, subcontractors or other third parties. Because our services in certain instances may be integral to the operation and performance of our customers’ infrastructure, we have been and 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. Insurance coverage may not be available or may be insufficient for these lawsuits, claims or legal proceedings. The outcome of any of these lawsuits, claims or legal proceedings could result in significant costs and diversion of management’s attention from our business. Payments of significant amounts, even if reserved, could materially and adversely affect our business, reputation, financial condition, results of operations and cash flows. For details on our existing litigation and claims, refer to Note 15 of the Notes to Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data.
Many of our contracts may be canceled or suspended on short notice or may not be renewed upon completion or expiration, and we may be unsuccessful in replacing our contracts in such events, which may adversely affect our financial condition, results of operations and cash flows.
We could experience a decrease in our revenues, net income and liquidity if any of the following occur:
our customers cancel or suspend a significant number of contracts or contracts having significant value;
we fail to renew a significant number of our existing contracts;
we complete a significant number of non-recurring projects and cannot replace them with similar projects; or
we fail to reduce operating and overhead expenses consistent with any decrease in our revenues.
Many of our customers may cancel or suspend our contracts on short notice, typically 30 to 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 generally 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, which will be more likely if customer spending decreases due to, for example, unfavorable economic conditions. 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 are subject to re-bid in the future.
The nature of our business exposes us to potential liability for warranty, engineering and other claims, which could materially and adversely affect our business and results of operations.related claims.
Under our contracts with customers, we typically provide warranties for theour services and materials we provide, guaranteeing the work performed against, among other things, defects in workmanship, and may agree to indemnify our customers for losses related to our services. The length of the warranty periods we agree to vary and maycan extend for several years. As much of the work we perform is inspected by our customers for any defects in construction prior to acceptance of the project, the warranty claims that we have historically received have not been substantial. Additionally, materials used in construction are often provided by the customer or are warranted against defects by the supplier. However,years, and certain projects maycan have longer warranty periods and include facility performance warranties that may beare broader than the warranties we generally provide. In these circumstances, if warranty claims occur, we areWarranties generally requiredrequire us to re-perform the services and/or repair or replace the warranted item and any other facilities impacted thereby, at our sole expense, and we could also be responsible for other damages if we are not able to adequately satisfy our warranty obligations. In addition, we maycan be required under contractual arrangements with our customers to warrant any defects or failures in materials we provide. While we generally require the materials suppliers to provide us warranties that are consistent with those we provide to our customers, if any of these suppliers default on their warranty obligations to us, we may incur costs to repair or replace the defective materials. Costs incurred as a result of warranty claims could adversely affect our business, financial condition, results of operations and cash flows.
Furthermore, our business involves professional judgments regarding the planning, design, development, construction, operations and management of electric power transmission, communications and pipeline infrastructure. Because our projects are
often technically complex, our failure to make judgments and recommendations in accordance with applicable professional standards, including engineering standards, could result in damages. A significantly adverse or catastrophic event at a project site or completed project resulting from the services we performed could result in significant professional or product liability, personal injury (including claims for loss of life) or property damage claims or other claims against us, as well as reputational harm. These liabilities could exceed our insurance limits or could impact our ability to obtain third-party insurance in the future. In addition,future, and customers, subcontractors or suppliers who have agreed to indemnify us against any such liabilities or losses might refuse or be unable to pay us. An uninsured claim, either in part or in whole, if successful and ofAs a material magnitude,result, these claims could have a substantialmaterial adverse impact on our business, financial condition, results of operations and cash flows.
We can incur liabilities or suffer negative financial or reputational impacts relating to occupational health and safety matters.
Our operations are inherently hazardous and 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 serious accidents, including fatalities, and we anticipate that our operations may result in additional serious accidents in the future. As a result of these events, we could be subject to substantial penalties, criminal prosecution or civil litigation, including claims for bodily injury or loss of life, that could result in substantial costs and liabilities. In addition, if our safety record were to substantially deteriorate over time or we were to suffer substantial penalties or criminal prosecution for violation of health and safety regulations, our customers could cancel our contracts and elect to procure future services from other providers. Unsafe work sites also have the potential to increase employee turnover, increase the costs of projects for our clients, and raise our operating costs. Any of the foregoing could have a material adverse impact on our business, financial condition, results of operations and cash flows.
Disruptions to our information technology systems or our failure to adequately protect critical data, sensitive information and technology systems could materially affect our business financial condition, results of operations and cash flows or result in harm to our reputation.
We userely on information technology in substantially all aspects of our business operations. We rely heavily on computer, information, and communications technology and related systems to manage our operations and other business processes and to protect sensitive company information. Furthermore, weWe also collect and retain personally identifiable and other sensitive information about our customers, stockholders, vendors and employees, all of which expect that we will adequately protect such information.
Cyber-attacks Breaches or disruptions of our information systems can result from, among other things, cyber-attacks, theft, inadvertent exposure of sensitive information, acts of terrorism, storms or other natural phenomena, information technology solution failures or network disruptions, and any such cyber-attacks or breaches can go unnoticed for some period of time. An intrusion into the information systems of a business we acquire may also ultimately compromise our systems. Furthermore, some of the energy infrastructure systems on which we work may be considered to be strategic targets, and therefore at greater risk of cyber-attacks or acts of terrorism against us, our customers and/or our vendors orthan other breachestargets. Cyber-attacks can result in compromises of our data securitypayment systems, monetary losses, inability to access our systems, delays in processing transactions or reporting financial results, the disclosure or misappropriation of confidential or proprietary company information (including for the purpose of transacting in our stock), or the release of customer, stockholder, vendor or employee data. An attack could also cause service disruptiondisruptions to our internal systems or, in extreme circumstances, infiltration into, damage to or loss of control of our customers’ energy infrastructure systems, whichsystems. Any such breach or disruption could subject us to significant liabilities, cause damage to our reputation or customer relationships, or result in regulatory investigations or other actions by governmental authorities. Further, strategic targets, such as energy-related assets, may be at greater risk of cyber-attacks or acts of terrorism than other targets. Cyber-attacks
We also continue to implement information technology solutions that require substantial financial and physical security risks, such as stormspersonnel resources. There is no guarantee that we will realize economic or other natural phenomena, IT solution failures, network disruptions, theft and other breaches of data security, could also disrupt our operations by causing, among other things, delays in the processing of transactions or the reporting of financial results or the unintentional disclosure of company information (including confidential or proprietary information), and such cyber-attacks could go unnoticed for some period of time. A significant theft, loss, misappropriation, or inadvertent release of customer, stockholder or employee data by cyber-attack or otherwise could also adversely impact our reputation andintended benefits from these systems. Furthermore, failure to properly implement these systems could result in significant costs, finessubstantial disruptions to our business, including with respect to coordinating and litigation.processing our normal business activities and financial reporting and testing and recording certain data necessary to provide oversight of our disclosure controls and procedures and effective internal controls over our financial reporting, as well as other unforeseen problems.
While management has taken steps to address these concerns by implementing network security and internal control measures, thereAny deterioration in the quality or reputation of our brands, which can be no assurance thatexacerbated by the above events will not occur,effect of social media or significant media coverage, could have an adverse impact on our business or reputation.
Our brands and suchour reputation are among our most important assets. The success of our business and our ability to attract and retain customers depends on brand recognition and reputation. Such dependence makes our business susceptible to reputational damage and to competition from other companies. A variety of events could haveresult in damage to our reputation or brands, some of which are outside of our control, including:
acts or omissions that adversely affect our business such as a material adverse effect oncrime, scandal, cyber-related incident, litigation or other negative publicity;
failure to successfully perform a high-profile project;
actual or potential involvement in a catastrophic fire, explosion or similar event; or
actual or perceived responsibility for a serious accident or injury.
Intensifying media coverage, including the considerable expansion in the use of social media over recent years, has increased the volume and speed at which negative publicity arising from these events can be generated and spread, and we may be unable to timely respond to, correct any inaccuracies in, or adequately address negative perceptions arising from such media coverage. If the reputation or perceived quality of our brands decline, our business, financial condition, results of operations, or cash flows could be adversely affected and cash flows. Furthermore,we could lose the continuing and evolving threat of cyber-attacks has resulted in increased regulatory focus on prevention. To the extent we face increased regulatory requirements, we may be required to expend significant additional resources to meet such requirements.
The loss of one or a few customers could have a material adverse effect on us.
A few customers have in the past and may in the future account for a significant portionconfidence of our revenues in any one year or over a period of several consecutive years. Although we have long-standing relationships with many of our significant customers, our customers may unilaterally reduce or discontinue their contracts with us at any time. The loss of business from a significant customerwhich could have a material adverse effect on our business, financial condition, results of operations and cash flows.
Backlog may not be realized or may not result in profits.
Backlog is not a term recognized under US GAAP; however, it is a common measurement used in our industry. Our methodology for determining backlog may not be comparable to the methodologies used by other companies. For a discussion of how we calculate backlogadversely affect demand for our business, please see Backlog in Item 1. Business.
Furthermore, 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 or reduction in scope of one or more contracts or projects by a customer or for other reasons could significantly reduce the revenues and profit we actually receive from contracts included in backlog. In the event of a project cancellation or reduction in scope, we may be reimbursed for certain costs but would not have a contractual right to the total revenues reflected in our backlog. The backlog we obtain in connection with companies we acquire may not be as large as we believed and may not result in the revenues or profits we expected at the time of acquisition. In addition, projects that are delayed may remain in backlog for extended periods of time. All of these uncertainties are heightened by negative economic conditions and their impact on our customers’ spending, as well as the effects of regulatory requirements and weather conditions. Consequently, our estimates of backlog may not be accurate, and we may not be able to realize our estimated backlog.
services.
Our financial results are based upon estimates and assumptions that may differ from actual results.
In preparing our consolidated financial statements in conformity with US GAAP, several estimates and assumptions are used by management to report the assets, liabilities, revenues and expenses recognized during the periods presented and to determine the contingent assets and liabilities known to exist as of the date of the financial statements.expenses. These estimates and assumptions are necessary because certain information used in the preparation of our financial statements is dependent on future events, cannot be calculated with a high degree of precision from available data or cannot be 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 used primarilyFor example, we utilize estimates in our assessment of the allowance for doubtful accounts, valuation of inventory, useful lives of assets, fair value assumptions in analyzing goodwill, other intangibles and long-lived asset impairments, equity and other investments, loan receivables, purchase price allocations, acquisition-related contingent consideration liabilities, liabilities for insurance and other claims and guarantees, multiemployer pension plan withdrawal liabilities, revenue recognition for construction contracts inclusive of contractual change orders and claims, share-based compensation, operating results of reportable segments, provision (benefit) for income taxes and the calculation of uncertain tax positions. Actual results for all estimates couldcan differ materially from the estimates and assumptions that we use which couldand have a material adverse effect on our financial condition, results of operations and cash flows.
Our inability
Additionally, our remaining performance obligations and backlog are difficult to successfully executedetermine with certainty. Customers often have no obligation under our acquisition strategy 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 complementcontracts to assign or enhance our business. The number of acquisition targets that meet our criteriarelease work to us, and many contracts may be limited. We may also face competition for acquisition opportunities, and other potential acquirers may offer more favorable termsterminated on short notice. Cancellation or have greater financial resources available for potential acquisitions. This competition may further limit our acquisition opportunities and our ability to grow through acquisitions or could raise the pricesreduction in scope of acquisitions and make them less accretive, or possibly not accretive, to us. Failure to consummate future acquisitions could negatively affect our growth strategies. Additionally, the acquisitions we complete may involve significant cash expenditures, the incurrence or assumption of debt or burdensome regulatory requirements, and any acquisition may ultimately have a negative impact on our business, financial condition, results of operations and cash flows.
We may be unsuccessful at integrating businesses that either we have acquired or that we may acquire in the future, which maycontract can significantly reduce the anticipated benefit from acquired businesses.
As a partrevenues and profit we receive. Consequently, our estimates of our business strategy, we have acquired,remaining performance obligations and backlog may seek to acquire in the future, companies that complement or enhance our business. The success of this strategy will depend on our ability to realize the anticipated benefits from the acquired businesses, such as the expansion of our existing operations, elimination of redundant costsnot be accurate, and capitalizing on cross-selling opportunities. To realize these benefits, however, we must successfully integrate the operations of the acquired businesses with our existing operations. Integrating our acquired businesses involves a number of special risks, including:
failure of an acquired business to achieve the results we expect;
diversion of our management’s attention from operational and other matters;
difficulties integrating the operations and personnel of an acquired business;
additional financial reporting and accounting challenges associated with integrating an acquired business;
inability to retain key personnel of an acquired business;
risks associated with unanticipated events or liabilities associated with the operations of an acquired business;
loss of business due to customer overlap or other factors;
risks and liabilities arising from the prior operations of an acquired business, such as performance, operational, safety, workforce compliance or tax issues, some of which we may not have discovered during our due diligence and may not be covered by indemnification obligations; and
potential disruptions of our business.
We cannot be sure that we will be able to successfully complete the integration process without substantial costs, delays, disruptions or other operational or financial problems. If we do not implement proper overall business controls,realize our decentralized operating strategy could result in inconsistent operatingestimated remaining performance obligations and financial practices at the companies we acquire. Additionally, failure
to successfully integrate acquired businesses could adversely impact our business, financial condition, results of operations and cash flows.
Our investments expose us to risks and may result in conflicts of interest that could adversely impact our business or result in reputational harm.
We have entered into strategic relationships and investment arrangements with various partners, including customers and infrastructure investors, through which we have invested and intend to invest in infrastructure assets. We expect this activity to continue in the future, both through direct investments by us and investments through the partnership structure we formed with select infrastructure investors that provides up to $1.0 billion of available capital, including approximately $80.0 million from Quanta. Wholly owned subsidiaries of Quanta serve as the general partner of this partnership and as a separately operated registered investment adviser that manages the invested capital.
These types of investments may expose us to increased risks, including poor performance by the infrastructure projects in which we have invested due to, among other things, difficult market or economic conditions or slowdowns (which may occur across one or more industries, sectors or geographies) or changes to the supply or demand and fluctuations in the price of commodities. That negative performance could result in lower investment returns for us and our customers and infrastructure investors, as well as a decline in value or total loss of our investments and the possible sale of our investments at values below our initial projections, including at a loss, all of which could adversely affect our business, financial condition, results of operations and cash flows. Additionally, poor performance by our investments, in particular investments through our capital partnership structure, could result in reputational harm to Quanta that impairs our ability to raise or participate in raising new funds for future investment opportunities, which in turn could adversely affect our ability to secure certain future projects. Further, our relationship with a customer that partners with us in a poorly performing investment could become impaired, which may negatively impact our ability to continue providing services to that customer.
Conflicts of interest may also exist or arise for us in relation to our investment partners as a result of our capital partnership structure or the structure of our other investment arrangements. For example, in these structures, Quanta may be the contractor for a project as well as an equity investor and the manager of investments in that project. In those instances, conflicts of interest may exist for such things as contractor pricing and the handling of contractor change orders and other claims. While we have taken certain actions that we believe minimize or address these and other anticipated conflicts of interest, including through internal management practices and the terms of our agreements with investment partners, our failure to properly manage such conflicts of interest could expose us to liability or harm our relationships with investment partners, which could impact our business, financial condition, results of operations and cash flows or cause reputational harm to Quanta.backlog.
Our results of operations couldand financial condition may be adversely affected as a result of asset impairments.
Our results of operations and financial condition couldmay be adversely affected by impairments to goodwill, other intangible assets, receivables, long-lived assets or investments. For example, when we acquire a business, we record goodwill in an amount equal to the amount we paid for the business minus the fair value of the net tangible assets and other intangible assets of the acquired business. Goodwill and other intangible assets that have indefinite useful lives cannot be amortized, but instead must be tested at least annually for impairment. For additional description on this impairment, testing, please readas described in Note 2 of the Notes to Consolidated Financial Statements in Item 7. Management’s Discussion8. Financial Statements and Analysis of Financial Condition and Results of Operations - Critical Accounting PoliciesSupplementary Data. We have recorded impairments in the past, and any future impairments including impairments of goodwill, intangible assets, long-lived assets or investments, could have a material adverse effect on our financial condition and results of operations for the period in which the impairment is recognized. For example, during the fourth quarters of 2019 and 2018, we recorded $13.9 million and $49.4 million of asset impairment charges primarily related to the winding down and exit of certain oil-influenced operations and assets. Additionally, we have concluded to pursue an orderly exit of our Latin American operations, which could result in asset impairments related to those operations during 2020 or in subsequent years.
In addition, we enter into various types of investment arrangements in the normal course of business, each having unique terms and conditions. These investments may include equity interests we hold in business entities, including general or limited partnerships, contractual joint ventures or other forms of equity or profit participation. These investments may also include our participation in different finance structures such as the extension of loans to project specific entities, the acquisition of convertible notes issued by project specific entities or other strategic financing arrangements. Our equity method investments are carried at original cost and are included in “Other assets, net” in our consolidated balance sheet and are adjusted for our proportionate share of the investees’ net income (loss) and distributions. Equity investments are reviewed for impairment by assessing whether there has been a decline in the fair value of the investment below the carrying amount and whether that decline is considered to be other than temporary. In making this determination, factorstemporary as described in Note 2 of the Notes to Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data.
Our inability to successfully execute our acquisition strategy 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. The number of acquisition targets that meet our criteria may be limited. We may also face competition for acquisition opportunities, and other potential acquirers may offer more favorable terms or have greater financial resources available for potential acquisitions. This competition may further limit our acquisition opportunities or raise the prices of acquisitions and make them less accretive, or possibly not accretive, to us. Failure to consummate future acquisitions could negatively affect our growth strategies. Additionally, our past acquisitions have involved, and our future acquisitions may involve, significant cash expenditures, the incurrence or assumption of debt and the assumption of burdensome regulatory requirements and liabilities. For example, in the Hallen acquisition, we assumed certain contingent liabilities associated with Hallen’s pre-acquisition operations, which are described further in Note 14 of the Notes to Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data. As a result, past or future acquisitions may ultimately have a negative impact on our business, financial condition, results of operations and cash flows.
The success of our acquisition strategy also depends on our ability to successfully integrate the operations of the acquired businesses with our existing operations and realize the anticipated benefits from the acquired businesses, such as the expansion of our existing operations, elimination of redundant costs and capitalizing on cross-selling opportunities. Our ability to recoverintegrate and realize benefits can be negatively impacted by, among other things:
failure of an acquired business to achieve the carrying amountresults we expect;
diversion of our management’s attention from operational and other matters or other potential disruptions to our existing business;
difficulties incorporating the investmentoperations and personnel, or inability to retain key personnel, of an acquired business;
additional financial reporting and accounting challenges associated with an acquired business;
unanticipated events or liabilities associated with the inabilityoperations of an acquired business;
loss of business due to customer overlap or other factors; and
risks and liabilities arising from the investee to sustain future earnings capacity are evaluated in determining whetherprior operations of an impairment has occurredacquired business, such as performance, operational, safety, workforce or other compliance or tax issues, some of which we may not have discovered or accurately estimated during our due diligence and shouldmay not be recognized.
covered by indemnification obligations or available insurance.
We extend creditcannot be sure that we will be able to customers for purchases ofsuccessfully complete the integration process without substantial costs, delays, disruptions or other operational or financial problems. Failure to successfully integrate acquired businesses could adversely impact our services and may enter into longer-term deferred payment arrangements or provide other financing or investment arrangements with certain of our customers, which subjects us to potential credit or investment risk that could, if realized, adversely affect ourbusiness, financial condition, results of operations and cash flows.
We grant credit, generally without collateral, to our customers, which include electric power utilities, oil and gas companies, communications providers, governmental entities, general contractors, and builders, owners and managers of renewable energy facilities and commercial and industrial properties located primarily in the United States, Canada, Australia and Latin America. We may also agree to allow our customers to defer payment on projects until certain milestones have been met or until the projects are substantially completed, and customers typically withhold some portion of amounts due to us as retainage. In addition, we may provide other forms of financing to our customers or make investments in our customers’ projects, typically in situations where we also provide services in connection with the projects. Our payment arrangements subject us to potential credit risk related to changes in business and economic factors affecting our customers, including material changes in our customers’ revenues or cash flows. These changes may also reduce the value of any financing or equity investment arrangements we have with our customers. Many of our customers have been negatively impacted by uncertain economic conditions in recent years, and some may experience financial difficulties (including bankruptcies) that could impact our ability to collect amounts owed to us or impair the value of our investments in them.
If we are unable to collect amounts owed to us, our cash flows would be reduced, and we could experience losses if those amounts exceed current allowances. We would also recognize losses with respect to any investments that are impaired as a result of our customers’ financial difficulties. The risk of loss may increase for projects where we provide services and make a financing or equity investment. Losses experienced could materially and adversely affect our financial condition, results of operations and cash flows.
The loss of key personnel could disrupt our business.
We depend on the continued efforts of our executive officers and senior management, including the management at each of our operating units. Although we typically enter into employment agreements with our executive officers and other key employees for initial terms of one to three years and subsequent one-year renewal options, 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.
Our business growth could outpace the capability of our decentralized management infrastructure.structure.
We cannot be certain that our management infrastructurestructure will be adequate to support our operations as they expand. For example, the ability to internally communicate, coordinate and execute business strategies, plans and tactics may be negatively impacted by our increasing size and complexity. A decentralized structure places significant control and decision-making powers in the hands of our operating unit management. This contributes to the risk that we may be slower or less able to identify or react to problems affecting key business matters than we would in a more centralized environment. The lack of timely access to information may also impact the quality of decision making by management. Our decentralized organization creates the possibility thatcan also result in our operating subsidiaries assumeassuming excessive risk without appropriate guidance from our centralized legal, accounting, safety, tax, treasury and insurance functions as to the potential overall impact.functions. Future growth could also impose significant additional responsibilities on members of our senior management, including the need to recruit and integrate new senior level managers and executives. Wewe cannot be certain that we will be able to recruit, integrate and retain such additionalnew senior level 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.
The loss of key personnel could disrupt our business.
We may be required to contribute cash to meetdepend on the continued efforts of our underfunded obligations in certain multiemployer pension plans.
Our collective bargainingexecutive officers and senior management, including the management at each of our operating units. Although we typically enter into employment agreements generally require us to participate with other companies in multiemployer pension plans. To the extent those plans are underfunded, the Employee Retirement Income Security Act of 1974, as amended by the Multiemployer Pension Plan Amendments Act of 1980, may subject us to substantial liabilities under those plans if we withdraw from them or they are terminated or experience a mass withdrawal. For example, we have been involved in several litigation matters associated with our withdrawal from the Central States, Southeastexecutive officers and Southwest Areas Pension Plan (the Central States Plan), certainother key employees for initial terms of which were settled in the fourth quarter of 2017. For additional information on the Central States Plan matters, please see Collective Bargaining Agreements in Note 15 of the Notesone to Consolidated Financial Statements in Item 8. Financial Statementsthree years and Supplementary Data.
In addition, the Pension Protection Act of 2006 added special funding and operational rules generally applicable to plan years beginning after 2007 for multiemployer plans that are classified as “endangered,” “seriously endangered” or “critical” status based on multiple factors (including, for example, the plan’s funded percentage, cash flow position and whether it is projected to experience a minimum funding deficiency). Plans in these classifications must adopt measures to improve their funded status
through a funding improvement or rehabilitation plan, as applicable, which may require additional contributions from employers (which may take the form of a surcharge on benefit contributions) and/or modifications to retiree benefits. Certain plans to which we contribute or may contribute in the future are in “endangered,” “seriously endangered” or “critical” status. The amount of additional funds, if any, that we may be obligated to contribute to these plans in the future cannot be estimated due to uncertainty of the future levels of work that require the specific use of union employees covered by these plans, as well as the future contribution levels and possible surcharges on contributions applicable to these plans.
Our unionized workforce and related obligations could adversely affect our operations.
As of December 31, 2017, approximately 38% of our employees were covered by collective bargaining agreements. Although the majority of the collective bargaining agreements prohibit strikes and work stoppages, certain of our unionized employees have participated in strikes and work stoppages in the past, andsubsequent renewal options, we cannot be certain that strikes or work stoppagesany individual will not occurcontinue in the future. Strikes or work stoppagessuch capacity for any particular period of time. The loss of key management personnel, as well as our inability to attract, develop and retain qualified employees that can succeed key personnel, could negatively impact our ability to manage our business.
Our investments expose us to risks and may result in conflicts of interest that could adversely impact our business or result in reputational harm.
We have entered into strategic relationships and investment arrangements with ourvarious partners, including customers and could causeinfrastructure investors, through which we have invested and intend to invest in infrastructure assets. We expect this activity to continue in the future and for additional information on our recent investment activity, see Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Recent Acquisitions, Investments and Divestitures.
These types of investments expose us to lose businessincreased risks, including poor performance by the infrastructure projects in which we have invested due to, among other things, difficult market or economic conditions or slowdowns (which may occur across one or more industries, sectors or geographies) or changes to the supply or demand and experiencefluctuations in the price of commodities. That negative performance could result in lower investment returns, a decline in revenues. Our ability to complete future acquisitions also could be adversely affected becausevalue or total loss of our union status for a variety of reasons. For instance, our union agreements may be incompatible withinvestments or 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 multiemployer pension plans to which an acquired company historically contributed or presently contributes.
Approximately 62%possible sale of our employees are not unionized. Certaininvestments at values below our initial projections, including at a loss, all of our customers require or prefer a non-union workforce, and they may reduce the amount of work assigned to us if our non-union labor crews become unionized, which could negativelyadversely affect our business, financial condition, results of operations and cash flows. Additionally, poor performance of our investments or poor or incomplete performance by our capital partnership structure formed with select infrastructure investors could result in reputational harm to Quanta that impairs our ability to participate in future investment opportunities, which in turn could adversely affect our ability to secure certain future projects. For example, in October 2019, due to certain management changes, our capital partnership investment structure with select investors entered into a 180-day period during which the investors and Quanta will evaluate the partnership, at the end of which the investors or Quanta may elect to end the investment period for any future investments or dissolve the partnership. Further, our relationship with a customer or investor that partners with us in a poorly performing investment could become impaired, which may negatively impact our ability to continue providing services to that customer.
WeConflicts of interest may incur liabilitiesalso exist or suffer negative financial or reputational impacts relatingarise for us in relation to occupational healthour investment partners as a result of the structure of our investment arrangements. For example, in these structures, Quanta can be the contractor for a project as well as an equity investor and safety matters.
Our operations are inherently dangerouspossibly the manager of investments in that project. In those instances, conflicts of interest can exist for such things as contractor pricing and subject to extensive lawsthe handling of contractor change orders and regulations relating to the maintenance of safe conditions in the workplace.other claims. 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 assurancetaken certain actions that we will avoid significant liability exposure. Although we have taken what we believe are appropriate precautions, we have suffered fatalities inminimize or address these and other anticipated conflicts of interest, including through internal management practices and the past and may suffer additional fatalities in the future. Serious accidents, including fatalities, may subjectterms of our agreements with investment partners, our failure to properly manage such conflicts of interest can expose us to substantial penalties, civil litigationliability or criminal prosecution. Claims for damages to persons, including claims for bodily injury or loss of life, could result in substantial costs and liabilities. In addition, ifharm our safety record were to substantially deteriorate over time or we were to suffer substantial penalties or criminal prosecution for violation of health and safety regulations, our customers could cancel our contracts and elect to procure future services from other providers. Unsafe work sites also have the potential to increase employee turnover, increase the costs of projects for our clients, and raise our operating costs. Any of the foregoing could result in financial loss,relationships with investment partners, which could have a material adverse impact on our business, financial condition, results of operations and cash flows.
Risks associated with operating in international markets could restrict our abilityflows or cause reputational harm to expand globally and harm our business and prospects.
Although our international operations are presently conducted primarily in Canada, Australia and Latin America, we also perform work in other foreign countries and expect that the number of countries in which we operate and the amount of work we perform in foreign countries could increase over the next few years. Economic conditions, including those resulting from wars, civil unrest, acts of terrorism and other conflicts or volatility in global markets, may adversely affect our customers, their demand for our services and their ability to pay for our services. In addition, our international operations include business and transactions for which we are paid in local currency. Payments to us in currencies other than the U.S. dollar may exceed our local currency needs, leading to the accumulation of excess local currency, which, in certain instances, may be subject to temporary blocking, costly taxes or tariffs, or other difficulties if we attempt to convert those amounts to U.S. dollars.
There are also numerous other risks inherent in conducting business internationally, including, but not limited to, potential instability in international markets, changes in applicable regulatory requirements, foreign currency fluctuations, political, economic and social conditions in foreign countries, expropriation or nationalization of our assets, foreign legal systems and cultural practices dissimilar from those we are familiar with, and complex U.S. and foreign tax regulations and other laws and international treaties. These risks could restrict our ability to provide services to international customers, operate our international business profitably or fund our strategic objectives, and our overall business, financial condition, results of operations and cash flows could be negatively impacted by our foreign activities.
Compliance with and changes in tax laws could adversely affect our performance.
We are subject to extensive tax liabilities imposed by multiple jurisdictions, including income taxes, indirect taxes (excise/duty, sales/use, gross receipts, and value-added taxes), payroll taxes, franchise taxes, withholding taxes, and ad valorem taxes. New tax laws, treaties and regulations and changes in existing tax laws, treaties and regulations are continuously being enacted or proposed and could result in significant changes to the tax rate on our earnings, which could have a material impact on our earnings and cash flows from operations. For example, the Tax Cuts and Jobs Act of 2017 (the Tax Act), enacted in December 2017, made numerous changes to U.S. federal corporate tax laws that are anticipated to impact our effective tax rate in future periods. In addition, significant judgment is required in determining our worldwide provision for income taxes. In the ordinary course of our business, there are many transactions and calculations where the ultimate tax determination is uncertain. We are regularly under audit by tax authorities, and our tax estimates and tax positions could be materially affected by many factors, including the final outcome of tax audits and related litigation, the introduction of new tax accounting standards, legislation, regulations and related interpretations, our global mix of earnings, the realizability of deferred tax assets and changes in uncertain tax positions. A significant increase in our tax rate could have a material adverse effect on our profitability and liquidity.
We could be adversely affected by our failure to comply with the laws applicable to our foreign activities, including the U.S. Foreign Corrupt Practices Act and other similar worldwide anti-bribery laws.
The U.S. Foreign Corrupt Practices Act (FCPA) and similar anti-bribery laws in other jurisdictions prohibit U.S.-based companies and their intermediaries from making improper payments to non-U.S. officials for the purpose of obtaining or retaining business. We pursue opportunities in certain parts of the world that experience government corruption, and in certain circumstances, compliance with anti-bribery laws may conflict with local customs and practices. Our policies mandate compliance with all applicable anti-bribery laws. Further, we require our partners, subcontractors, agents and others who work for us or on our behalf to comply with the FCPA and other anti-bribery laws. Although we have policies and procedures designed to ensure that we, our employees, our agents and others who work with us in foreign countries comply with the FCPA and other anti-bribery laws, there is no assurance that such policies or procedures will protect us against liability under the FCPA or other laws for actions taken by our agents, employees and intermediaries. If we are found to be liable for FCPA violations (either due to our own acts or inadvertence, or due to the acts or inadvertence of others), we could be subject to severe criminal or civil penalties or other sanctions, which could have a material adverse effect on our reputation, business, financial condition, results of operations, and cash flows. In addition, detecting, investigating and resolving actual or alleged FCPA violations is expensive and could consume significant time and attention of our senior management.Quanta.
Our participation in joint ventures exposes us to liability and/or harm to our reputation for failures of our partners.
As part of our business, weWe have entered into joint venture arrangements and likely will continue to do so. The purpose of these joint ventures is typically to combine skills and resources to allow for the bidding and performance of particular projects. Success on these jointly performed projects can be adversely affected by the performance of our joint venture partners, over whom we may have little or no control. Differences in opinions or views between us and our joint venture partners couldmay result in delayed decision-making or failure to agree on material issues that couldmay adversely affect the business and operations of our joint ventures. Additionally, the failure by a joint venture partner to successfully perform or comply with applicable laws, regulations or client requirements could negatively impact our business.
We and our joint venture partners are generally jointly and severally liable for all liabilities and obligations of oura joint ventures. venture.
If a joint venture partner fails to perform or is financially unable to bear its portion ofsatisfy required capital contributions or other obligations, including liabilities stemming from claims or lawsuits, we could be required to make additional investments, provide additional services or pay more than our proportionate share of a liability to make up for our partner’stheir shortfall. Further, if our partners experience cost overruns or project performance issues that we are unable to adequately address, the customer may terminate the project, which could result in legal liability to us, harm our reputation and reduce our profit or increase our loss on a project.
We areextend credit to customers for purchases of our services and enter into other arrangements with certain of our customers, which subjects us to potential credit or investment risk.
We grant credit, generally without collateral, to our customers, which include utilities, energy companies, communications providers, governmental entities, general contractors, and builders, owners and managers of renewable energy facilities and commercial and industrial properties located primarily in the processUnited States, Canada, Australia and Latin America. In certain circumstances, we also allow our customers to defer payment until certain project milestones have been met or until a project is substantially completed, and customers typically withhold some portion of implementing information technology (IT) solutions, which could temporarily disrupt day-to-day operations at certain operating units.
We continueamounts due to implement comprehensive IT solutions thatus as retainage until a project is complete. In addition, we believe will allow for the interface between functions such as accounting and finance, human resources, operations, and fleet management. Continued development and implementation of the IT solutions will require substantial financial and personnel resources. While the IT solutions are intended to improve and enhance our information systems, implementation of new information systems at each operating unit exposes us to the risks of start-up of the new system and integration of that system with our existing systems and processes, including possible disruption of our financial reporting. There is no guarantee that we will realize economic or other intended benefits from continued development and implementation of the IT solutions. Additionally, the IT solutions may not be developed or implemented as timely or as
accurately as planned. Failure to properly implement the IT solutions could result in substantial disruptions to our business, including coordinating and processing our normal business activities, testing and recording of certain data necessary to provide oversight over our disclosure controls and procedures and effective internal controls over our financial reporting, and other unforeseen problems.
Our dependence on suppliers, subcontractors and equipment manufacturers could expose us to risk of loss in our operations.
On certain projects, we rely on suppliers to obtain the necessary materials and subcontractors to perform portions of our services. We also rely on equipment manufacturers to provide us with the equipment required to conduct our operations. Limitations on the availability of suppliers, subcontractors or equipment manufacturers could negatively impact our operations, particularlyhave provided in the event we rely on a single or small number of providers. The risk of a lack of available suppliers, subcontractors or equipment manufacturerspast and may be heightened as a result of market and economic conditions. To the extent we cannot engage subcontractors or acquire equipment or materials, our operations could be negatively impacted. Additionally, successful completion of our contracts may depend on whether our subcontractors successfully fulfill their contractual obligations. If our subcontractors fail to perform their contractual obligations as a result of financial or other difficulties, or if our subcontractors fail to meet the expected completion dates or quality standards or fail to comply with applicable laws, we may be required to incur additional costs or provide additional services in order to make up such shortfall.
An increase in the prices of certain materials used in our business could adversely affect our business.
For certain contracts, including where we have assumed responsibility for procuring materials for a project, we are exposed to market risk of increases in certain commodity prices of materials, such as copper and steel, which are used as components of supplies or materials utilized in all of our operations. We are also exposed to increases in energy prices, particularly as they relate to gasoline prices for our rolling-stock fleet of approximately 40,000 units. While we believe we can increase our prices to adjust for some price increases in commodities, there can be no assurance that price increases of commodities, if they were to occur, would be recoverable. Additionally, some of our fixed price contracts do not allow us to adjust our prices and, as a result, increases in material or fuel costs could reduce our profitability with respect to such projects.
We may not have access in the future other forms of financing to sufficient fundingour customers or make investments in our customers’ projects. These payment arrangements subject us to finance desired growthpotential credit risk related to changes in business and operations.
If we cannot secure future funds or financing on acceptable terms, we may be unable to supporteconomic factors affecting our future operations or growth strategy. We use cash for acquisitions, investmentscustomers, and internal growth projects, and the timing and size of these efforts cannot be readily predicted and may be substantial. The use of cash on hand, cash from operations and cash from our current credit facility to fund these efforts limits our financial flexibility and may increase our need to seek capital through additional debt or equity financings. We also rely on financing companies to fund the leasing of certain of our trucks and trailers, support vehicles and specialty construction equipment. Credit market conditions may cause certain of these financing companies to restrict or withhold access to capital for us to fund the leasing of additional equipment. A widespread lack of available capital to fund the leasing of equipment could negatively impact our future operations.
Our credit agreement contains significant restrictions, includingcustomers have experienced financial covenants and other restrictions ondifficulties (including bankruptcy) in recent years, which has impacted our ability to borrowcollect amounts under the agreement and limitations on our abilityowed to incur additional debt or conduct certain types of preferred equity financings. Our ability to increase the current commitments under our credit facility is also dependent upon additional commitments from our lenders. Furthermore, if we are permitted under our credit facility to seek additional debt or equity financings, we cannot be certain they will be available to us on acceptable terms or at all, as banks are often restrictive in their lending practices, and additional debt financing may include covenants that further limit our operational and financial flexibility.us. If we are unable to borrow undercollect such amounts, or retain amounts paid to us, our cash flows would be reduced, and we could experience losses if those amounts exceed current credit agreement or secure otherallowances. Business and economic factors resulting in financial difficulties (including bankruptcy) for our customers can also reduce the value of any financing or ifequity investment arrangements we have with our lenders become unablecustomers. The risk of loss may increase for projects where we provide services and make a financing or unwilling to fund their commitments to us, we may not be able to access the capital needed to fundequity investment. Losses experienced as a result of these credit and investment risks could materially and adversely affect our growthfinancial condition, results of operations and operations. For additional information on the terms of our credit facility, please read Item 7. Management’s Discussioncash flows.
Risks associated with operating in international markets and Analysis of Financial Condition and Results of Operations - Debt Instruments - Credit Facility.
Additionally, the market price of our common stock may change significantly in response to various factors, including events beyond our control, whichU.S. territories could impactrestrict our ability to utilize capitalexpand globally and harm our business and prospects.
Our overall business, financial condition, results of operations and cash flows can be negatively impacted by our activities and operations outside the continental United States, including our international operations and operations in U.S. territories. Although these operations are presently conducted primarily in Canada, Australia and Latin America, we also perform work in other foreign countries and U.S. territories and the number of locations we perform work in could increase in the future. Changes in economic conditions, including those resulting from wars and other conflicts, civil unrest, public health crises, such as the recent coronavirus, acts of terrorism, or volatility in global markets, may adversely affect demand for our services and our customers’ ability to obtain funds. A variety of eventspay for our services. In addition, at times we are paid for work outside the United States in currencies other than the U.S. dollar. Such payments may cause the market priceexceed our local currency needs, and, in certain instances, those amounts may be subject to temporary blocking, taxes or tariffs, and we may experience difficulties if we attempt to convert such amounts to U.S. dollars.
There are numerous other risks associated with operating in international markets, including, but not limited to, changes in applicable regulatory requirements; foreign currency exchange fluctuations; political, economic and social instability; expropriation or nationalization of our common stockassets and operations; unfamiliar foreign legal systems and business practices; and complex U.S. and foreign tax regulations and other laws and international treaties. For example, as discussed in further detail in Legal Proceedings within Note 14 of the Notes to fluctuate significantly,Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data, the termination of a telecommunications project in Peru resulted in a $79.2 million charge to earnings in the second quarter of 2019. Furthermore, we may incur significant costs associated with an unsuccessful attempt to enter a new market, or we may enter a new market that ultimately proves to be unprofitable or has an otherwise adverse effect on our business. We may also incur significant costs or liabilities associated with winding down or exiting an existing market. For example, we have determined to pursue an orderly exit of our Latin American operations, which could result in significant costs or asset impairments during 2020 or in subsequent years.
Additionally, uncertain or changing economic and political conditions may make it difficult for our clients, our vendors, and us to accurately forecast and plan future business activities. For example, recent changes in U.S. policies related to global trade and tariffs, as well as retaliatory trade measures implemented by other countries have resulted in uncertainty surrounding the global economy. Increases in the cost of certain materials, including overall market conditions or volatility, a shortfall in our operating resultssteel and aluminum, resulting from those anticipated, negative financial resultsthese and other trade policies may also impact customer spending. We cannot predict the outcome of these or other unfavorable information relatingsimilar events, nor can we predict the timing, strength or duration of any economic recovery or downturn worldwide or within our customers’ specific markets. These risks could restrict our ability to provide services to international customers, operate our market peersinternational business profitably or the other risks described in this Annual Report on Form 10-K.
fund our strategic objectives, which could negatively impact our overall business, financial condition, results of operations and cash flows.
Fluctuating foreign currency exchange rates may have a greaternegatively impact on our financial results.
The volume of services we provide internationally varies from year to year and our reported financial condition, results as we expand into international markets.
of operations and cash flows are exposed to the effects of fluctuating exchange rates. For the year ended December 31, 2017,2019, we
derived $2.48$1.92 billion, or 26.2%15.9%, of our consolidated revenues from foreign operations, the substantial majority of which was earned in Canada Australia and Latin America.Australia. The functional currencies for our foreign operations are typically the currency of the country in which the foreign operating unit is located. Accordingly, our financial performance is subject to fluctuation due to changes in foreign currency exchange rates relative to the U.S. dollar. As the U.S. dollar strengthens against foreign currencies, our translation of foreign currency denominated revenues or expenses will result in lower U.S. dollar denominated revenues and expenses. Conversely, if the U.S. dollar weakens against foreign currencies, the translation of these foreign currency denominated revenues or expenses will result in increased U.S. dollar denominated revenues and expenses. For example, during the year ended December 31, 2017,2019, foreign revenues increaseddecreased by approximately $53$57 million in comparison with the year ended December 31, 20162018 as a result of moreless favorable foreign currency exchange rates due primarily to the U.S. dollar weakeningstrengthening against the Canadian and Australian dollars. Also, during the year ended December 31, 2016, foreign revenues decreased by approximately $41 million in comparison with the year ended December 31, 2015 as a result of less favorable foreign currency exchange rates dueFurthermore, to the U.S. dollar strengthening against the Canadian and Australian dollars.
We intend to expandextent the volume of services that we provide internationally. As a result,internationally increases, our reported financial condition, results of operations and cash flows maycould be further exposed to the effects thatof fluctuating exchange rates haverates.
Limitations on the processavailability of translatingsuppliers, subcontractors and equipment manufacturers that we depend on could adversely affect our business.
We rely on suppliers to obtain the financial statementsnecessary materials and subcontractors to perform portions of our internationalservices. We also rely on equipment manufacturers to provide us with the equipment required to conduct our operations. Limitations on the availability of suppliers, subcontractors or equipment manufacturers could negatively impact our operations, particularly in the event we rely on a single or small number of providers. The risk of a lack of available suppliers, subcontractors or equipment manufacturers can be heightened as a result of market, regulatory or economic conditions. For example, utilities in certain states, in order to receive certain funding, may expect us to engage a specified percentage of suppliers that meet diversity-ownership requirements, which can further limit our pool of available suppliers in those areas. Additionally, successful completion of our contracts can depend on whether our subcontractors successfully fulfill their contractual obligations. If our subcontractors fail to perform their contractual obligations, fail to meet the expected completion dates or quality standards or fail to comply with applicable laws, we may be required to incur additional costs or provide additional services to mitigate such shortcomings.
An increase in the prices of certain materials used in our business or fuel prices could adversely affect our business.
Under certain contracts, including where we have assumed responsibility for procuring materials for a project, we are exposed to price increases for materials such as copper and steel, which are used as components of supplies or materials utilized in all of our operations. In addition, our customers’ capital budgets can be negatively impacted by an increase in prices of certain materials. Prices could be materially impacted by general market conditions and other factors, including global trade relationships. For example, recent changes to U.S. policies related to global trade and tariffs, as well as retaliatory trade measures implemented by other countries, have resulted in uncertainty concerning availability and pricing of certain commodities and goods important to our and our customers’ businesses, including steel and aluminum. We are also exposed to increases in energy prices, including as they relate to fuel prices for our large rolling-stock fleet of approximately 49,700 units. Furthermore, some of our fixed price contracts do not allow us to adjust our prices and, as a result, increases in material or fuel costs could reduce our profitability with respect to such projects.
Our intellectual property rights may be unenforceable or become obsolete.
We utilize a variety of intellectual property rights while performing our services. We view our portfolio of proprietary energized services tools and techniques and other process and design technologies as competitive strengths, which we believe differentiate our service offerings. We also license certain technologies from third parties, and there is a risk that our relationships with such licensors may terminate or expire or may be interrupted or harmed. We may not be able to successfully preserve these intellectual property rights in the future, and these rights could be invalidated, circumvented or challenged. In addition, the laws of some foreign countries in which our services may be sold do not protect intellectual property rights to the same extent as the laws of the United States. If we are unable to protect and maintain our intellectual property rights, or if intellectual property challenges or infringement proceedings succeed against us, our ability to differentiate our service offerings could be reduced. Further, if our intellectual property rights or work processes become obsolete, we may not be able to differentiate our service offerings and some of our competitors may be able to offer more attractive services to our customers, which could materially and adversely affect our business, financial condition, results of operations and cash flows.
Increasing scrutiny and changing expectations from investors and our customers with respect to our environmental, social and governance practices may impose additional costs on us or expose us to new or additional risks.
Investors and other interested constituencies have focused increasingly on the remeasurementenvironmental, social and governance (ESG) practices of transactionscompanies. While we have programs and initiatives in place related to our ESG practices, investors may decide to reallocate capital or to not commit capital as a result of their assessment of our practices. In addition, our customers may require that we implement certain additional ESG procedures or standards before they will continue to do business with us. A failure to comply with investor or customer expectations and standards, which are evolving, or if we are perceived to not denominatedhave responded appropriately to the growing concern for ESG issues, regardless of whether there is a legal requirement to do so, could also cause
reputational harm to our business and could have a material adverse effect on us. In addition, organizations that provide information to investors on corporate governance and related matters have developed ratings processes for evaluating companies on their approach to ESG matters, and unfavorable ratings of Quanta or our industries may lead to negative investor sentiment and the diversion of investment to other companies or industries, which could have a negative impact on our stock price and our costs of capital.
Risks Related to Regulation and Compliance
Regulatory requirements applicable to our industries and changes in current and potential legislative and regulatory initiatives may adversely affect demand for our services.
Because the vast majority of our revenue is derived from a few industries, the federal, state, provincial and local regulations affecting those industries, including, among other things, environmental, safety, and permitting requirements, have a material effect on our business. In recent years, our customers have faced heightened regulatory requirements and increased regulatory enforcement, which have resulted in delays, reductions in scope and cancellations of projects. Furthermore, certain regulatory requirements applicable to our customers are also required of us when we contract with such customers, and our inability to meet those requirements could also result in decreased demand for our services. Increased regulatory requirements have negatively impacted us and our customers and decreased demand for our services in the past, and may do so in the future, which can adversely affect our business, financial condition, results of operations and cash flows.
Concerns about climate-related issues could potentially result in new legislation, regulation, regulatory actions or other requirements at the local, state or federal level, any of which could negatively affect our customers and decrease demand for their services, result in increased costs associated with our operations, or impact the prices we charge our customers. For example, requirements to reduce, or taxes on the production and/or consumption of, fossil fuels could negatively impact the hydrocarbon production volumes of our customers, which could in turn negatively impact demand for our services. New regulations addressing greenhouse gas emissions from mobile sources could also significantly increase our costs in light of our large rolling-stock fleet. In addition, if our operations are perceived to result in high greenhouse gas emissions, our reputation could suffer.
Additionally, current and potential legislative or regulatory initiatives may not result in incremental increased demand for our services, including legislation and regulation that mandate percentages of power to be generated from renewable sources, require utilities to meet reliability standards, and encourage installation of new electric power transmission and renewable energy generation facilities. While these actions and initiatives have positively impacted demand for our services in the past, it is not certain whether they will continue to do so in the future. It is also uncertain as to whether proposed legislative initiatives that could be beneficial for our industries, including those designed to ease regulatory and permitting requirements, will be enacted.
Our unionized workforce and related obligations may adversely affect our operations.
As of December 31, 2019, approximately 35% of our employees were covered by collective bargaining agreements. For a variety of reasons, our unionized workforce could adversely impact relationships with our customers and adversely affect our business, financial condition, results of operations and cash flows. For instance, although the majority of the collective bargaining agreements prohibit strikes and work stoppages, certain of our unionized employees have participated in strikes and work stoppages in the past, and we cannot be certain that strikes or work stoppages will not occur in the future. Our ability to complete future acquisitions also could be adversely affected because of our union status, including because our union agreements may be incompatible with the union agreements of a business we want to acquire or because a business we want to acquire may not want to become affiliated with a union-based company. Additionally, certain of our customers require or prefer a non-union workforce, and they may reduce the amount of work assigned to us if our non-union labor crews become unionized.
Our collective bargaining agreements generally require us to participate with other companies in multiemployer pension plans. To the extent a plan is underfunded, we may be subject to substantial liabilities if we withdraw or are deemed to withdraw from the plan or the plan is terminated or experiences a mass withdrawal. For example, we have been involved in several litigation matters associated with our withdrawal from the Central States, Southeast and Southwest Areas Pension Plan, certain of which were settled in 2017. Further, special funding and operational rules are generally applicable to multiemployer plans that are classified as “endangered,” “seriously endangered” or “critical” status based on multiple factors (including, for example, the plan’s funded percentage, cash flow position and whether it is projected to experience a minimum funding deficiency). Plans in these classifications must adopt measures to improve their funded status, which may require additional contributions from employers (e.g., a surcharge on benefit contributions) and/or modifications to retiree benefits. Certain plans to which we contribute or may contribute in the future are in “endangered,” “seriously endangered” or “critical” status, and we may be obligated to contribute material amounts to these plans in the future, which could negatively impact our business, financial condition, results of operations and cash flows.
We could be adversely affected by our failure to comply with the laws applicable to our foreign activities.
Applicable U.S. and non-U.S. anti-corruption laws, including but not limited to the U.S. Foreign Corrupt Practices Act (FCPA), prohibit us from, among other things, corruptly making payments to non-U.S. officials for the purpose of obtaining or retaining business. We pursue opportunities in certain parts of the world that experience government corruption, and in certain circumstances, compliance with these laws may conflict with local customs and practices. Our policies mandate compliance with all applicable anti-corruption laws and our procedures and practices are designed to ensure that our employees and intermediaries comply with these laws. However, there can be no assurance that such policies, procedures and practices will protect us from liability under the FCPA or other similar laws for actions or inadvertences by our employees or intermediaries. Liability for such actions or inadvertences could result in severe criminal or civil fines, penalties, forfeitures, disgorgements or other sanctions. This in turn could have a material adverse effect on our reputation, business, financial condition, results of operations, and cash flows. In addition, detecting, investigating and resolving actual or alleged violations of such laws can be expensive and can consume significant time and attention of our senior management, in-country management, and other personnel.
Compliance with and changes in tax laws could adversely affect our performance.
We are subject to extensive tax liabilities imposed by multiple jurisdictions, including income taxes, indirect taxes (excise/duty, sales/use, gross receipts, and value-added taxes), payroll taxes, franchise taxes, withholding taxes, and ad valorem taxes. New tax laws, treaties and regulations and changes in existing tax laws, treaties and regulations are continuously being enacted or proposed, which can result in significant changes to the tax rate on our earnings and have a material impact on our earnings and cash flows from operations. In addition, significant judgment is required in determining our worldwide provision for income taxes. In the ordinary course of our business, there are many transactions and calculations where the ultimate tax determination is uncertain. We are regularly under audit by tax authorities, and our tax estimates and tax positions could be materially affected by many factors, including the final outcome of tax audits and related litigation, the introduction of new tax accounting standards, legislation, regulations and related interpretations, our global mix of earnings, our ability to realize deferred tax assets and changes in uncertain tax positions. A significant increase in our tax rate can have a material adverse effect on our profitability and liquidity.
Our failure to comply with environmental laws and regulations could result in significant liabilities and increased costs.
Our operations are subject to various environmental laws and regulations, including those dealing with the handling and disposal of waste products, PCBs, fuel storage, water quality 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. We perform work, including directional drilling, in and around environmentally sensitive areas such as rivers, lakes and wetlands. Due to the inconsistent nature of the terrain and water bodies, it is possible that such work may cause the release of subsurface materials that contain contaminants in excess of amounts permitted by law, potentially exposing us to remediation costs and fines. We also own and lease facilities that contain above- and below-ground fuel storage tanks. If these tanks were to leak, we could be responsible for remediation costs and fines. The obligations, liabilities, fines and costs associated with these and other events can be material and could have a material adverse impact on our business, financial condition, results of operations and cash flows. Moreover, 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.
In certain instances, we have obtained indemnification and other rights from third parties (including predecessors or lessors) for such obligations and liabilities; however, these indemnities may not cover all of our costs and indemnitors may not pay amounts owed to us. Further, in connection with an acquisition, we cannot be certain that we identify all potential environmental liabilities relating to any acquired business when we are negotiating an indemnification right.
Certain regulatory requirements applicable to us and certain of our subsidiaries could materially impact our business.
We are subject to various specific regulatory regimes and requirements that could result in significant compliance costs and liabilities. As a public company, we are subject to the corporate governance and financial reporting units’ functional currencies.requirements of The Sarbanes-Oxley Act of 2002, including requirements for management to report on our internal controls over financial reporting and for our independent registered public accounting firm to express an opinion on the operating effectiveness of our internal control over financial reporting. Our internal controls over financial reporting was effective as of December 31, 2019; however, there can be no assurance that our internal controls over financial reporting will be determined to be effective in future years. Failure to maintain effective internal controls or to identify significant internal control deficiencies in acquired businesses (both prior acquisitions and future acquisitions) could result in a decrease in the market value of our publicly traded securities, a reduced ability to obtain debt and equity financing, a loss of customers, fines or penalties, and/or additional expenditures to meet the requirements or remedy any deficiencies.
One of our subsidiaries has registered as an investment adviser with the SEC under the U.S. Investment Advisers Act of 1940, as amended (the Advisers Act). The Advisers Act and the rules promulgated thereunder impose substantive and material restrictions and requirements on the operations of this subsidiary, including certain fiduciary duties that apply to its relationships with its advisory clients. The SEC has broad administrative powers to institute proceedings and impose sanctions for violations of the Advisers Act, ranging from fines and censures to termination of an adviser’s registration. This subsidiary is also subject to periodic SEC examinations and other requirements, including, among other things, maintaining an effective compliance program, recordkeeping and reporting requirements, disclosure requirements and complying with anti-fraud prohibitions. The failure of our subsidiary to comply with the requirements of the Advisers Act could result in fines, suspensions of individual employees or other sanctions against our subsidiary that could have a material adverse effect on us. Even if an investigation or proceeding does not result in a fine or sanction or if a fine or sanction imposed against our subsidiary or its employees were small in monetary amount, the adverse publicity relating to an investigation, proceeding or imposition of these fines or sanctions could harm our reputation and have a material adverse effect on us.
Our wholly-owned captive insurance company is a registered insurance broker with the Texas Department of Insurance, and therefore is subject to various rules and regulations and required to meet certain capital requirements, which can result in additional use of our resources.
We own and operate a postsecondary educational institution that specializes in pre-apprenticeship training, apprenticeship training and specialized utility task training for electric workers, as well as training for the pipeline and industrial and communications industries. In order to operate, each of the institution’s campuses must be authorized by the state education agency where the campus is located, and the level of regulatory oversight varies substantially by state and can be extensive. If any of our campuses fail to comply with state licensing requirements, they may be unable to offer their programs and forced to close, which could result in harm to our reputation or negatively impact our ability to train skilled personnel that can be utilized to support our industry. Additionally, because our institution operates in a highly regulated industry, it is subject to compliance reviews and lawsuits or claims by government agencies and third parties. If the results of these reviews or proceedings are unfavorable to us, we may be required to pay significant monetary damages or be subject to fines, limitations on the operations of the institution, injunctions or other penalties. The postsecondary educational institution is also accredited by the Accrediting Commission of Career Schools and Colleges. Loss of accreditation could result in reputational harm or student-initiated litigation or negatively impact our ability to train skilled personnel that can be utilized to support our business.
We collect and retain information about our customers, stockholders, vendors and employees. New legislation and regulatory requirements, as well as contractual commitments, affect how we must store, use, transfer and process the confidential information of our employees, customers, vendors and stockholders. For example, the California Consumer Privacy Act (the CCPA) was signed into law in 2018 and largely took effect in January 2020. The CCPA, among other things, contains new disclosure obligations for businesses that collect personal information about California residents and enhanced consumer protections for those individuals, and provides for statutory fines for data security breaches or other CCPA violations. Meanwhile, over fifteen other states have considered privacy laws like the CCPA. These laws, as well as other new or changing legislative, regulatory or contractual requirements concerning data privacy and protection, could require us to expend significant additional compliance costs, and any failure to comply with such requirements can result in significant liability or harm to our reputation.
Opportunities within the government arena could subject us to increased regulation and costs and may pose additional risks relating to future funding and compliance.
Most government contracts are awarded through a regulated competitive bidding process, which can often be more time consuming than the bidding process for non-governmental projects. Additionally, involvement with government contracts could require a significant amount of costs to be incurred before any revenues are realized. We are also subject to numerous procurement rules and other public sector regulations when we contract with certain governmental agencies, 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 contractor’s performance under its contracts, cost structure and compliance with applicable laws, regulations and standards. If a government agency determines that costs were improperly allocated to specific contracts, such costs will not be reimbursed or a refund of previously reimbursed costs may be required. If a government agency alleges or proves improper activity, civil and criminal penalties could be imposed and serious reputational harm could result. Many government contracts must be appropriated each year, and without re-appropriation we would not realize all of the potential revenues from any awarded contracts.
Additionally, U.S. government shutdowns or any related under-staffing of the government departments or agencies that interact with our business could result in program cancellations, disruptions and/or stop work orders, could limit the government’s ability to effectively progress programs and make timely payments, and could limit our ability to perform on our existing U.S. government contracts and successfully compete for new work.
Immigration laws, including our inability to verify employment eligibility and restrictions on movement of our foreign employees, could adversely affect our business or reputation.
We employ a significant number of employees, and while we utilize processes to assist in verifying the employment eligibility of potential new employees so that we maintain compliance with applicable laws, it is possible some of our employees may be unauthorized workers. In addition, we utilize certain non-immigrant visas to allow us to temporarily transfer certain of our foreign employees to the United States. The employment of unauthorized workers or failure to comply with the requirements of these non-immigrant visas could subject us to fines, penalties and other costs, as well as result in adverse publicity that negatively impacts our reputation and brand and may make it more difficult to hire and retain qualified employees. Furthermore, to the extent we are subject to penalties that prevent the future transfer of our foreign employees to the United States, we may incur additional costs to hire and train new employees. Immigration laws have also been an area of considerable political focus in recent years, and, from time-to-time, the U.S. government considers or implements changes to federal immigration laws, regulations or enforcement programs. Changes in immigration or work authorization laws may increase our obligations for compliance and oversight, which could subject us to additional costs and potential liability and make our hiring and employee transfer processes more cumbersome, or reduce the availability of potential employees.
We may incur additional healthcare costs.
The costs of employee health care insurance in the U.S. has increased in recent years due to rising health care costs, legislative changes, and general economic conditions. We cannot predict what other health care legislation or regulations will be implemented at the federal or state level, including whether the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 will be repealed and/or replaced, or the impact of any such future legislation or regulations. A continued increase in health care costs or related costs could have a material adverse effect on our business, financial condition, results of operations and cash flows.
Risks Related to Financing Our Business
We may not have access in the future to sufficient funding to finance desired growth and operations.
If we cannot secure future funds or financing on acceptable terms or generate sufficient cash flow, we may be unable to support our future operations or growth strategy. The timing of our funding needs and the size of our operations and strategic initiatives that require capital cannot be readily predicted and may be substantial. The use of cash on hand, cash from operations and cash from our senior secured credit facility to fund these initiatives can limit our financial flexibility and increase our need to seek capital through additional debt or equity financings. We also rely on financing companies to fund the leasing of certain of our equipment, and credit market conditions may restrict access to capital for the leasing of additional equipment. A lack of available capital to fund the leasing of equipment could negatively impact our future operations.
The credit agreement for our senior secured credit facility contains certain restrictions, including financial covenants and other restrictions on our ability to borrow amounts under the agreement and limitations on our ability to incur additional debt or conduct certain types of preferred equity financings. Our ability to increase the current commitments under our senior secured credit facility is also dependent upon additional commitments from our lenders. Furthermore, if we are permitted to seek additional debt or equity financings, we cannot be certain they will be available to us on acceptable terms or at all, as banks are often restrictive in their lending practices, and additional debt financing may include covenants that further limit our operational and financial flexibility. If we are unable to borrow under our senior secured credit facility or secure other financing or if our lenders become unable or unwilling to fund their commitments to us, we may not be able to access the capital needed to fund our growth and operations. For additional information on the terms of our senior secured credit facility, please read Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Debt Instruments - Credit Facility.
Additionally, the market price of our common stock has fluctuated significantly in the past, and may fluctuate significantly in the future, in response to various factors, including events beyond our control, which could impact our ability to utilize capital markets to obtain funds. A variety of events may cause the market price of our common stock to fluctuate significantly, including overall market conditions or volatility, actual or perceived negative financial results or other unfavorable information relating to us or our market peers, and the other risks described in this Annual Report.
Our variable rate indebtedness subjects us to interest rate risk, which could cause our debt service obligations to increase significantly.risk.
Borrowings under our credit facility are at variable rates of interest and expose us to interest rate risk. If interest rates increase, our debt service obligations on the variable rate indebtedness will increase even thoughif the amount borrowed remains the same, and our net income and cash flows, including cash available for servicing our indebtedness, will correspondingly decrease. Our weighted average interest rate on our variable rate debt for the year ended December 31, 20172019 was 2.7%3.8%. The annual effect on our pretax earnings of a hypothetical 50 basis point increase or decrease in variable interest rates would be approximately $3.3$6.7 million based on our December 31, 20172019 balance of variable rate debt.
Additionally, to address the transition in financial markets away from the London Interest Bank Offered Rate (LIBOR) by the end of 2021, our senior secured credit facility agreement includes provisions related to the replacement of LIBOR with a LIBOR Successor Rate (as defined in the credit agreement for such facility). Changing to an alternative interest rate may lead to additional volatility in interest rates and could cause our debt service obligations to increase significantly. If no LIBOR Successor Rate has been determined at the time certain circumstances are present, the lenders’ obligation to make or maintain loans based on a Eurocurrency rate could be suspended, and loans in U.S. dollars would default to the Base Rate (as described in Senior Secured Credit Facility within Note 8 of the Notes to Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data) rather than a rate using the Eurocurrency Rate. If this were to occur, our available liquidity and cash flows could be negatively impacted.
We may be unable to compete for or work on certain projects if we are not able to obtain surety bonds, letters of credit or bank guarantees.
A portion of our business depends on our ability to provide surety bonds, letters of credit, bank guarantees or other financial assurances. 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 sureties’ assessment of our operating and financial risk, could cause our surety providers and lenders to decline to issue or renew, or substantially reduce the amount of, bid or performance bonds for our work and could increase our costs associated with collateral. These actions could be taken on short notice. If our surety providers or lenders were to limit or eliminate our access to bonding, letters of credit or guarantees, our alternatives would include seeking capacity from other sureties and lenders or finding more business that does not require bonds or that allows for other forms of collateral for project performance, such as 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 certain assets to collateralize our obligations to our sureties and lenders. 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 bonds. If we were to experience an interruption or reduction in the availability of bonding capacity as a result of these or other reasons, we may be unable to compete for or work on certain projects that require bonding.
Our failureability to comply with environmental lawsaccess capital markets could result in significant liabilities.be limited.
Our operations are subjectFrom time 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,time, we may be liable for fines and damages, and we may be unableneed to access capital markets to obtain reimbursement fromfinancing. Our ability to access capital markets for financing could be limited by, among other things, our existing capital structure, our credit ratings, the parties providing the incorrect information. We perform work in and around environmentally sensitive areas such as rivers, lakes and wetlands. In addition, we perform directional drilling operations below certain environmentally sensitive terrains and water bodies. Due to the inconsistent naturestate of the terrain and water bodies, it is possible that such directional drilling may cause a surface fracture, resulting ineconomy, 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 that 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 negatively impact our business, financial condition, results of operations and cash flows. In certain instances, we have obtained indemnification or covenants from third parties (including predecessors or lessors) for such clean-up and other obligations and liabilities. However, such third-party indemnities or covenants may not cover allhealth of our costsindustries, and the indemnitors may not pay amounts owedliquidity of the capital markets. Many of the factors that affect our ability to us, and such unanticipated obligations or liabilities, or future obligations and liabilities, may have a material adverse effect onaccess capital markets are outside of our business, financial condition, results of operations and cash flows. Further, we cannotcontrol. No assurance can be certaingiven that we will be able to identify or be indemnified for all potential environmental liabilities relating to any acquired business.
There are also other legislative and regulatory proposals to address greenhouse gas emissions. These proposals, if enacted, could result in potential new regulations, additional charges to fund energy efficiency activities, or other regulatory actions. Any of these actions could result in increased costs associated with our operations and impact the prices we charge our customers. For example, if new regulations are adopted regulating greenhouse gas emissions from mobile sources such as cars and trucks, we could experience a significant increase in environmental compliance costs in light of our large rolling-stock fleet. In addition, if our operations are perceived to result in high greenhouse gas emissions, our reputation could suffer.
Certain regulatory requirements applicableaccess capital markets on terms acceptable to us and our subsidiaries may result in significant compliance costs and liabilities.
We are subjectwhen required to various regulatory regimes and requirements that could result in significant compliance costs and liabilities. As a public company, we are subject to the corporate governance and financial reporting requirements of The Sarbanes-Oxley Act of 2002, including requirements for management to report on our internal controls over financial reporting and for our independent registered public accounting firm to express an opinion on the operating effectiveness of our internal control over financial reporting. As of December 31, 2017, 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. Failure to maintain effective internal controls or to identify significant internal control deficiencies in acquired businesses (both prior acquisitions and future acquisitions) could result in a decrease in the market value of our publicly traded securities, a reduced ability to obtain debt and equity financing, a loss of customers, or penalties and additional expenditures to meet the requirements.
One of our subsidiaries has registered as an investment adviser with the SEC under the U.S. Investment Advisers Act of 1940, as amended (the Advisers Act). The Advisers Act and the rules promulgated thereunder impose substantive and material restrictions and requirements on the operations of this subsidiary, including certain fiduciary duties that apply to its relationships with its advisory clients. The SEC has broad administrative powers to institute proceedings and impose sanctions for violations of the Advisers Act, ranging from fines and censures to termination of an adviser’s registration. This subsidiary is also subject to periodic SEC examinations and other requirements, including, among other things, maintaining an effective compliance program, recordkeeping and reporting requirements, disclosure requirements and complying with anti-fraud prohibitions. The failure of our subsidiary to comply with the requirements of the Advisers Act could result in fines, suspensions of individual employees or other sanctions against our subsidiary thatdo so, which could have a material adverse effectimpact on us. Even if an investigation or proceeding does not result in a fine or sanction or if a fine or sanction imposed against our subsidiary or its employees were small in monetary amount, the adverse publicity relating to an investigation, proceeding or imposition of these fines or sanctions could harm our reputation and have a material adverse effect on us.
Our wholly-owned captive insurance company is a registered insurance broker with the Texas Department of Insurance, and therefore is subject to various rules and regulations and required to meet certain capital requirements, which can result in additional use of our resources.
We own and operate a postsecondary educational institution that provides pre-apprenticeship training as well as programs for experienced lineman. In order to operate, each of the institution’s campuses must be authorized by the state education agency where the campus is located, and the level of regulatory oversight varies substantially by state and can be extensive. If any of our campuses fail to comply with state licensing requirements, they may be unable to offer their programs and forced to close, which could result in harm to our reputation or negatively impact our ability to train skilled personnel that can be utilized to support our industry. Additionally, because our institution operates in a highly regulated industry, it is subject to compliance reviews and lawsuits or claims by government agencies and third parties. If the results of these reviews or proceedings are unfavorable to us,
we may be required to pay significant monetary damages or be subject to fines, limitations on the operations of the institution, injunctions or other penalties. The postsecondary educational institution is also accredited by the Accrediting Commission of Career Schools and Colleges. Accreditation is a non-governmental process through which a commission examines the academic quality of the instructional programs and is generally viewed as confirmation that the programs meet generally accepted academic standards and practices. If an institution fails to comply with accrediting commission requirements, the institution and/or its campuses are subject to loss of accreditation or may be placed on probation or a special monitoring or reporting status, which could ultimately result in loss of accreditation. Campus closure or loss of accreditation could result in reputational harm or student-initiated litigation or negatively impact our ability to train skilled personnel that can be utilized to support our business.
If we are unable to enforce our intellectual property rights or if our intellectual property rights become obsolete, our competitive position could be adversely impacted.
We utilize a variety of intellectual property rights while performing our services. We view our portfolio of proprietary energized services tools and techniques and other process and design technologies as our competitive strengths, which we believe differentiate our service offerings. We may not be able to successfully preserve these intellectual property rights in the future, and these rights could be invalidated, circumvented or challenged. In addition, the laws of some foreign countries in which our services may be sold do not protect intellectual property rights to the same extent as the laws of the United States. If we are unable to protect and maintain our intellectual property rights, or if intellectual property challenges or infringement proceedings succeed against us, our ability to differentiate our service offerings could be reduced. Further, if our intellectual property rights or work processes become obsolete, we may not be able to differentiate our service offerings and some of our competitors may be able to offer more attractive services to our customers, which could materially and adversely affect our business, financial condition and results of operations and cash flows. We may also license certain technologies from third parties, and there is a risk that our relationships with such licensors may terminate or expire or may be interrupted or harmed.operations.
We may incur additional healthcare costs arising from federal healthcare reform legislation.
In March 2010, the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 (collectively ACA) were signed into law in the United States. The status of the ACA and any repeal or replacement thereof, is currently uncertain. ChangesRisks Related to laws governing health insurance could have a substantial impact on our financial results. We continue to monitor developments under ACA, including any potential repeal or replacement thereof, and assess the extent to which any such change could result in long-term material cost increases for us.
Opportunities within the government arena could subject us to increased governmental regulation and costs.
Most government contracts are awarded through a regulated competitive bidding process, which can often be more time consuming than the bidding process for non-governmental projects. Additionally, involvement with government contracts could require a significant amount of costs to be incurred before any revenues are realized. As a government contractor, we are also subject to a number of procurement rules and other public sector regulations, 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 contractor’s performance under its contracts, cost structure and compliance with applicable laws, regulations and standards. If a government agency determines that costs were improperly allocated to specific contracts, such costs will not be reimbursed or a refund of previously reimbursed costs may be required. If a government agency alleges or proves improper activity, civil and criminal penalties could be imposed and serious reputational harm could result. 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.Our Common Stock
Our sale or issuance of additional common stock or other equity-related securities could dilute each stockholder’s ownership interest or adversely affect the market price of our common stock.
We grow our business organically as well as through acquisitions. We often fund a significant portion of the consideration paid in connection with our acquisitions with the issuance of additional equity securities, including sharescontingent consideration amounts payable if acquired businesses achieve certain performance objectives during specified post-acquisition periods. We also utilize stock-based compensation as a key component of our common stock and securities that are convertible into shares of our common stock.
compensation program. We mayexpect to issue additional equity securities in the future including in connection with future acquisitions orthese and other issuances of our common stock or convertible securities or otherwise.practices. Our Restated Certificate of Incorporation provides that we may issue up to 600,000,000 shares of common stock, of which 153,342,326142,324,318 shares were outstanding as of December 31, 2017. Additionally, former owners of certain acquired businesses own exchangeable shares, 486,112 of which were outstanding as of December 31, 2017 and included in the calculation of basic and diluted weighted average shares outstanding. These shares are exchangeable for shares of Quanta common stock on a one-for-one basis.2019. Any additional issuances of common stock or exchangeable shares couldwould have the effect of diluting our earnings per share and our existing stockholders’ individual ownership percentages and could lead
to volatility in the market price of our common stock. We cannot predict the effect that future issuances of our common stock or other equity-related securities would have on the market price of our common stock.
There can be no assurance that we will declare or pay future dividends on our common stock.
The declaration, amount and timing of future dividends are subject to capital availability and determinations by our Board of Directors that cash dividends are in the best interest of our stockholders and are in compliance with all respective laws and applicable agreements. Our ability to declare and pay dividends will depend upon, among other factors, our financial condition, results of operations, cash flows, current and anticipated expansion plans, requirements under Delaware law and other factors that our Board of Directors may deem relevant. A reduction in or elimination of our dividend payments could have a material negative effect on our stock price.
Certain provisions of our corporate governing documents could make an acquisition of our company more difficult.
The following provisions of our charter documents, as currently in effect, and Delaware law could discourage potential proposals to acquire us, delay or 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 boardBoard of directorsDirectors 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; and
we are subject to provisions of Delaware law which restrict 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.
| |
ITEM 1B. | Unresolved Staff Comments |
ITEM 1B.Unresolved Staff Comments
None.
ITEM 2.Properties
Facilities
We lease our corporate headquarters in Houston, Texas and own and lease other facilities throughout North Americathe United States, Canada and in variousother foreign locations where we conduct business. Our facilities are usedutilized for operations in both of our reportable segments and include offices, equipment yards, warehouses, storage, maintenance shops and vehicle shops.training and educational facilities. As of December 31, 20172019, we owned 5562 of our facilities and leased the remainder. We believe that our existing facilities are sufficient for our current needs.
Equipment
We operate a fleet of owned and leased trucks and trailers, support vehicles and specialty construction equipment, such as backhoes, excavators, trenchers, generators, boring machines, cranes, robotic arms, wire pullers, tensioners marine vessels and helicopters. Our owned equipment and the leasehold interests in our leased equipment are encumbered by a security interest granted under our credit agreement. As of December 31, 20172019, the total size of the rolling-stock fleet was approximately 40,00049,700 units. Most of our fleet is serviced by our own mechanics who work at various maintenance sites and facilities. We believe that our equipment is generally well maintained and adequate for our present operations.
ITEM 3.Legal Proceedings
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, negligence or gross negligence and/or property damages, wage and hour claims and other employment-related damages, punitive damages, civil penalties or other losses, or injunctive or declaratory relief. With respect to all such lawsuits, claims and proceedings, we record a reserve when it is probable that a loss has been incurred and the amount of loss can be reasonably estimated. In addition, we disclose matters for which management believes a material loss is at least reasonably possible. See Legal Proceedings and Collective Bargaining Agreements in Note 1514 of the Notes to Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data, which are incorporated by reference in this Item 3, for additional information regarding litigation, claims and other legal proceedings.
| |
ITEM 4. | Mine Safety Disclosures |
ITEM 4.Mine Safety Disclosures
Not applicable.
PART II
| |
ITEM 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
ITEM 5.Market for Registrant’s 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.” The following table sets forth the high and low closing 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, 2017 | | | | |
| 4th Quarter | | $ | 39.50 |
| | $ | 35.35 |
|
| 3rd Quarter | | $ | 37.59 |
| | $ | 32.67 |
|
| 2nd Quarter | | $ | 36.48 |
| | $ | 30.66 |
|
| 1st Quarter | | $ | 38.47 |
| | $ | 34.14 |
|
| | | | | |
| Year Ended December 31, 2016 | | | | |
| 4th Quarter | | $ | 36.85 |
| | $ | 27.29 |
|
| 3rd Quarter | | $ | 28.14 |
| | $ | 22.58 |
|
| 2nd Quarter | | $ | 24.47 |
| | $ | 21.60 |
|
| 1st Quarter | | $ | 22.87 |
| | $ | 16.77 |
|
On February 21, 2018,25, 2020, there were 670approximately 590 holders of record of our common stock, four holders of record of exchangeable shares of Canadian subsidiaries of Quanta, and one holder of record of our Series G preferred stock. There is no established trading market for the exchangeable shares or the Series G preferred stock; however, the exchangeable shares may be exchanged at the option of the holder for Quanta common stock on a one-for-one basis. See Note 11 of the Notes to Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data for additional discussion of our equity securities.
Unregistered Sales of Securities During the Fourth Quarter of 20172019
None. However, subsequent
Subsequent to the end of the fourth quarter of 2017, on January 19, 2018 and January 22, 2018,December 31, 2019, we completed acquisitions in which a portion of the consideration for each acquisition consisted of the unregistered issuance of shares of our common stock. The aggregate consideration paid at closing in these acquisitions included 379,817issued 36,183 shares of our common stock valued at approximately $13.6 millionto the former owners of an acquired business in exchange, on a one-for-one basis, for exchangeable shares in a Canadian subsidiary of Quanta that were held by the former owners. The former owners originally received the exchangeable shares as partial consideration for the sale of the acquisition dates. For additional information about these acquisitions, including additional consideration, see Note 19 of the Notes to Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data.acquired business. The shares of common stock issued in these acquisitionstransactions were issued in reliance upon the exemption from registration provided by Section 4(a)(2) of the Securities Act of 1933, as amended, as the shares were issued to the owners of businessesthe business acquired in a privately negotiated transactionstransaction not involving any public offering or solicitation.
Issuer Purchases of Equity Securities During the Fourth Quarter of 20172019
The following table contains information about our purchases of equity securities during the three months ended December 31, 2017.2019.
|
| | | | | | | | | | | | | |
| Period | | Total Number of Shares Purchased | | Average Price Paid per Share | | Total Number
of Shares Purchased
as Part of Publicly
Announced Plans or Programs | | Maximum
Number (or Approximate Dollar Value) of Shares
That May Yet be
Purchased Under
the Plans or Programs(2) |
| October 1 - 31, 2017 | | | | | | | | |
Tax Withholdings (1) | | 9,252 |
| | $37.42 | | — |
| | |
| November 1 - 30, 2017 | | | | | | | | |
Open Market Stock Repurchases (2017 Repurchase Program) (2) | | 1,382,292 |
| | $36.17 | | 1,382,292 |
| | $ | 250,000,000 |
|
Tax Withholdings (1) | | 1,692 |
| | $36.16 | | — |
| | |
| December 1 - 31, 2017 | | — |
| | — |
| | — |
| | |
| Total | | 1,393,236 |
| | | | 1,382,292 |
| | $ | 250,000,000 |
|
|
| | | | | | | | | | | | | | |
| Period | | Total Number of Shares Purchased | | Average Price Paid per Share | | Total Number
of Shares Purchased
as Part of Publicly
Announced Plans or Programs | | Maximum
Number (or Approximate Dollar Value) of Shares
That May Yet be
Purchased Under
the Plans or Programs(1) |
| October 1 - 31, 2019 | | | | | | | | |
Open Market Stock Repurchases (1) | | — |
| | $ | — |
| | — |
| | $ | 286,756,122 |
|
Tax Withholdings (2) | | 5,185 |
| | $ | 36.50 |
| | — |
| | |
| November 1 - 30, 2019 | | | | | | | | |
Open Market Stock Repurchases (1) | | — |
| | $ | — |
| | — |
| | $ | 286,756,122 |
|
Tax Withholdings (2) | | 12,905 |
| | $ | 42.25 |
| | — |
| | |
| December 1 - 31, 2019 | | | | | | | | |
Open Market Stock Repurchases (1) | | — |
| | $ | — |
| | — |
| | $ | 286,756,122 |
|
Tax Withholdings (2) | | 5 |
| | $ | 37.07 |
| | — |
| | |
| Total | | 18,095 |
| | | | — |
| | $ | 286,756,122 |
|
_______________
|
| | |
| (1) | | Includes shares purchased from employees to satisfy tax withholding obligations in connection withrepurchased as of the vestingtrade date of restricted stock unit awards and performance unit awards or the settlement of previously vested but deferred restricted stock unit awards.
|
(2) | | such repurchases. On May 25, 2017,September 4, 2018, we issued a press release announcing that our boardBoard of directorsDirectors approved a stock repurchase program that authorizes us to purchase, from time to time through June 30, 2020,2021, up to $300.0$500.0 million of our outstanding common stock. Repurchases under this program can be made in open market and privately negotiated transactions, at our discretion, based on market and business conditions, applicable contractual and legal requirements and other factors. This program does not obligate us to acquire any specific amount of common stock and may be modified or terminated by our boardBoard of directorsDirectors at any time at its sole discretion and without notice. As |
| |
| (2) | Includes shares purchased from employees to satisfy tax withholding obligations in connection with the vesting of December 31, 2017, we had repurchased 1.4 million sharesrestricted stock unit and performance stock units or the settlement of our commonpreviously vested but deferred restricted stock under this program at a cost of $50.0 million. Accordingly, $250.0 million remained available under the program.unit awards. |
Dividends
We did not declare any cash dividends on our common stockhave declared a quarterly dividend during the years ended December 31, 2017 or 2016, or in any previous periods. 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 stockeach quarter beginning in the immediate future.fourth quarter of 2018. The declaration, payment and amount of future cash dividends if any, will be at the discretion of our boardBoard of directorsDirectors after taking into account various factors, including 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 Liquidity and Capital Resources - — Debt Instruments — Senior Secured Credit Facility in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations our, the credit agreement restricts the payment of cash dividends unless certain conditions are met.
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, 20122014 to December 31, 20172019, the cumulative stockholder return on our common stock with the cumulative total return of the Standard & Poor’sS&P 500 Index (the S&P 500 Index)500), the S&P MidCap 400 Index (the S&P 400) and atwo peer groupgroups selected by our management that includesinclude public companies within our industries. The companies in the peer groupgroups were selected to represent a broad group of publicly held corporations with operations similar to ours. The current peer group (the 2019 Peer Group) includes AECOM, Chicago Bridge & Iron Company N.V.Dycom Industries, Inc., EMCOR Group Inc., Fluor Corporation, Jacobs Engineering Group Inc., KBR, Inc., MasTec, Inc., MYR Group Inc. and Primoris Services Corporation. The peer group used in the previous year (the 2018 Peer Group) included each of the foregoing companies, as well as McDermott International, Inc., but did not include Dycom Industries, Inc. We determined that McDermott International, Inc. should be excluded due to dissimilarities with respect to its financial condition and end markets and that Dycom Industries, Inc. should be added due to its similarities with respect to market capitalization, lines of business and end markets.
The graph below assumes an investment of $100 (with reinvestment of all dividends) in our common stock, the S&P 500, the S&P MidCap 400, the 2018 Peer Group and the S&P 500 Index2019 Peer Group on December 31, 20122014 and tracks their relative performance through December 31, 20172019. The returns of each company in the Peer Group are weighted based on the market capitalization of that company at the beginning of the measurement period. The stock price performance reflected in the following graph is not necessarily indicative of future stock price performance.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN
Among Quanta Services, Inc., the S&P 500, Indexthe S&P MidCap 400, the 2018 Peer Group and the 2019 Peer Group
| | | | | | | | | | | | | | | | December 31, |
| | | 12/12 | | 12/13 | | 12/14 | | 12/15 | | 12/16 | | 12/17 | | 2014 | | 2015 | | 2016 | | 2017 | | 2018 | | 2019 |
Quanta Services, Inc. | | $ | 100.00 |
| | $ | 115.65 |
| | $ | 104.03 |
| | $ | 74.20 |
| | $ | 127.70 |
| | $ | 143.31 |
| | $ | 100.00 |
| | $ | 71.33 |
| | $ | 122.75 |
| | $ | 137.76 |
| | $ | 106.16 |
| | $ | 144.21 |
|
| Peer Group | | $ | 100.00 |
| | $ | 140.12 |
| | $ | 100.17 |
| | $ | 91.17 |
| | $ | 111.67 |
| | $ | 118.25 |
| |
| S&P 500 | | $ | 100.00 |
| | $ | 132.39 |
| | $ | 150.51 |
| | $ | 152.59 |
| | $ | 170.84 |
| | $ | 208.14 |
| | $ | 100.00 |
| | $ | 101.38 |
| | $ | 113.51 |
| | $ | 138.29 |
| | $ | 132.23 |
| | $ | 173.86 |
|
| S&P MidCap 400 | | | $ | 100.00 |
| | $ | 97.82 |
| | $ | 118.11 |
| | $ | 137.30 |
| | $ | 122.08 |
| | $ | 154.07 |
|
| 2018 Peer Group | | | $ | 100.00 |
| | $ | 91.21 |
| | $ | 120.39 |
| | $ | 132.69 |
| | $ | 98.83 |
| | $ | 134.34 |
|
| 2019 Peer Group | | | $ | 100.00 |
| | $ | 94.95 |
| | $ | 121.47 |
| | $ | 137.81 |
| | $ | 102.22 |
| | $ | 141.28 |
|
| |
| ITEM 6. | Selected Financial Data |
The following historical selected financial data has been derived from our consolidated financial statements. See Note 54 of the Notes to Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data for information regarding certain acquisitions and the related impact on our results of operations as these acquisitions may affect the comparability of such results. Additionally, on August 4, 2015, we sold our fiber optic licensing operations. We have presented the results of operations, financial position and cash flows of such fiber optic licensing subsidiaries as discontinued operations for all applicable periods presented in this Annual Report on Form 10-K.Report. The historical selected financial data should be read in conjunction with our Consolidated Financial Statementsconsolidated financial statements and related notes thereto included in Item 8. Financial Statements and Supplementary Data andItem 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.Operations (in thousands, except share information).
| |
| | | | | | | | | | | | | | |
|
| | | Year Ended December 31, | | | | | | | | | | | | |
| | | 2017 | | 2016 | | 2015 | | 2014 | | 2013 | | | Year Ended December 31, |
| | | (In thousands, except per share information) | | 2019 | | 2018 | | 2017 | | 2016 | | 2015 |
| Consolidated Statements of Operations Data: | | |
| | |
| | |
| | |
| | |
| | | |
| | |
| | |
| | |
| | |
|
| Revenues | | $ | 9,466,478 |
| | $ | 7,651,319 |
| | $ | 7,572,436 |
| | $ | 7,747,229 |
| | $ | 6,411,577 |
| | | $ | 12,112,153 |
| | $ | 11,171,423 |
| | $ | 9,466,478 |
| | $ | 7,651,319 |
| | $ | 7,572,436 |
|
| Cost of services (including depreciation) | | 8,224,618 |
| | 6,637,519 |
| | 6,648,771 |
| | 6,578,435 |
| | 5,424,644 |
| | | 10,511,901 |
| | 9,691,459 |
| | 8,224,618 |
| | 6,637,519 |
| | 6,648,771 |
|
| Gross profit | | 1,241,860 |
| | 1,013,800 |
| | 923,665 |
| | 1,168,794 |
| | 986,933 |
| | | 1,600,252 |
| | 1,479,964 |
| | 1,241,860 |
| | 1,013,800 |
| | 923,665 |
|
| Selling, general and administrative expenses | | 777,920 |
| | 653,338 |
| | 592,863 |
| | 705,477 |
| (c) | 485,069 |
| | | 955,991 |
| | 857,574 |
| | 777,920 |
| | 653,338 |
| | 592,863 |
|
| Amortization of intangible assets | | 32,205 |
| | 31,685 |
| | 34,848 |
| | 34,257 |
| | 25,865 |
| | | 62,091 |
| | 43,994 |
| | 32,205 |
| | 31,685 |
| | 34,848 |
|
| Asset impairment charges (a) | | 58,057 |
| | 7,964 |
| | 58,451 |
| | — |
| | — |
| | | 13,892 |
| | 49,375 |
| | 58,057 |
| | 7,964 |
| | 58,451 |
|
| Change in fair value of contingent consideration liabilities | | (5,171 | ) | | — |
| | — |
| | — |
| | — |
| | | 13,404 |
| | (11,248 | ) | | (5,171 | ) | | — |
| | — |
|
| Operating income | | 378,849 |
| | 320,813 |
| | 237,503 |
| | 429,060 |
| | 475,999 |
| | | 554,874 |
| | 540,269 |
| | 378,849 |
| | 320,813 |
| | 237,503 |
|
| Interest expense | | (20,946 | ) | | (14,887 | ) | | (8,024 | ) | | (4,765 | ) | | (2,668 | ) | | | (66,890 | ) | | (36,945 | ) | | (20,946 | ) | | (14,887 | ) | | (8,024 | ) |
| Interest income | | 832 |
| | 2,423 |
| | 1,493 |
| | 3,736 |
| | 3,378 |
| | | 927 |
| | 1,555 |
| | 832 |
| | 2,423 |
| | 1,493 |
|
| Other income (expense), net | | (4,978 | ) | | (663 | ) | | (2,297 | ) | | (1,432 | ) | | 111,611 |
| (d) | |
| Other income (expense), net (b) | | | 83,376 |
| | (47,213 | ) | | (4,978 | ) | | (663 | ) | | (2,297 | ) |
| Income from continuing operations before income taxes | | 353,757 |
| | 307,686 |
| | 228,675 |
| | 426,599 |
| | 588,320 |
| | | 572,287 |
| | 457,666 |
| | 353,757 |
| | 307,686 |
| | 228,675 |
|
| Provision for income taxes (b) | | 35,532 |
| | 107,246 |
| | 97,472 |
| | 139,007 |
| | 196,875 |
| | |
| Provision for income taxes (c) | | | 165,472 |
| | 161,659 |
| | 35,532 |
| | 107,246 |
| | 97,472 |
|
| Net income from continuing operations | | 318,225 |
| | 200,440 |
| | 131,203 |
| | 287,592 |
| | 391,445 |
| | | 406,815 |
| | 296,007 |
| | 318,225 |
| | 200,440 |
| | 131,203 |
|
| Net income (loss) from discontinued operations | | — |
| | (342 | ) | | 190,621 |
| | 27,490 |
| | 29,864 |
| | | — |
| | — |
| | — |
| | (342 | ) | | 190,621 |
|
| Net income | | 318,225 |
| | 200,098 |
| | 321,824 |
| | 315,082 |
| | 421,309 |
| | | 406,815 |
| | 296,007 |
| | 318,225 |
| | 200,098 |
| | 321,824 |
|
| Less: Net income attributable to non-controlling interests | | 3,247 |
| | 1,715 |
| | 10,917 |
| | 18,368 |
| | 19,388 |
| | | 4,771 |
| | 2,661 |
| | 3,247 |
| | 1,715 |
| | 10,917 |
|
| Net income attributable to common stock | | $ | 314,978 |
| | $ | 198,383 |
| | $ | 310,907 |
| | $ | 296,714 |
| | $ | 401,921 |
| | | $ | 402,044 |
| | $ | 293,346 |
| | $ | 314,978 |
| | $ | 198,383 |
| | $ | 310,907 |
|
| Amounts attributable to common stock: | | | | | | | | | | | | | | | | | | | | | |
| Net income from continuing operations | | $ | 314,978 |
| | $ | 198,725 |
| | $ | 120,286 |
| | $ | 269,224 |
| | $ | 372,057 |
| | | $ | 402,044 |
| | $ | 293,346 |
| | $ | 314,978 |
| | $ | 198,725 |
| | $ | 120,286 |
|
| Net income (loss) from discontinued operations | | — |
| | (342 | ) | | 190,621 |
| | 27,490 |
| | 29,864 |
| | | — |
| | — |
| | — |
| | (342 | ) | | 190,621 |
|
| Net income attributable to common stock | | $ | 314,978 |
| | $ | 198,383 |
| | $ | 310,907 |
| | $ | 296,714 |
| | $ | 401,921 |
| | | $ | 402,044 |
| | $ | 293,346 |
| | $ | 314,978 |
| | $ | 198,383 |
| | $ | 310,907 |
|
| Basic earnings per share attributable to common stock from continuing operations | | $ | 2.02 |
| | $ | 1.26 |
| | $ | 0.62 |
| | $ | 1.22 |
| | $ | 1.73 |
| | | $ | 2.76 |
| | $ | 1.92 |
| | $ | 2.02 |
| | $ | 1.26 |
| | $ | 0.62 |
|
| Diluted earnings per share attributable to common stock from continuing operations | | $ | 2.00 |
| | $ | 1.26 |
| | $ | 0.62 |
| | $ | 1.22 |
| | $ | 1.73 |
| | | $ | 2.73 |
| | $ | 1.90 |
| | $ | 2.00 |
| | $ | 1.26 |
| | $ | 0.62 |
|
| | | | | | | | | | | | |
| Cash dividends declared per share | | | $ | 0.17 |
| | $ | 0.04 |
| | $ | — |
| | $ | — |
| | $ | — |
|
| |
| (a) | In 2019, 2018, 2017, 2016 and 2015, we recorded asset impairment charges of $13.9 million ($10.5 million net of tax), $49.4 million ($36.5 million net of tax), $58.1 million ($36.6 million net of tax), $8.0 million ($7.1 million net of tax) and $58.5 million ($44.6 million net of tax). The charges recorded in 2019 related to the winding down and exit of certain oil-influenced operations and assets, the replacement of an internally-developed software application and the planned sale of certain foreign operations and assets. The charges recorded in 2018 primarily related to the winding down of certain oil-influenced operations and assets. The charges recorded in 2017 related to goodwill and intangible assets, including a $57.0 million goodwill impairment and a $1.1 million impairment of a customer relationship intangible asset. The goodwill impairment iswas associated with two reporting units within our OilPipeline and GasIndustrial Infrastructure Services Division. The charges recorded in 2016 primarily related to a pending disposition of certain international renewable energy services operations, which was completed in 2017. The charges recorded in 2015 related to goodwill, intangible |
assets and property and equipment, including a $39.8 million goodwill impairment and a $12.1 million impairment to customer relationship, trade name and non-compete agreement intangible assets. For a discussion of these charges, refer to Results of Operations - Consolidated Results - Asset impairment charges included in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
| |
| (b) | In 2019, we recognized $60.3 million of earnings that were previously deferred in prior periods related to our equity investment in a large electric transmission project in Canada that was substantially completed and placed into commercial operation during the three months ended March 31, 2019. The lowmajority of these deferred profits were attributable to profit earned and deferred in the years ended December 31, 2018 and 2017. We also recognized a gain of $13.0 million from the sale of this equity investment during the three months ended December 31, 2019. |
| |
| (c) | The effective tax raterates in 2019, 2018 and 2017 was primarily due to $70.1 million of tax benefits related towere impacted by the enactment of the Tax Cuts and Jobs Act of 2017 (Tax Act) on December 22, 2017., which, among other things, lowered the U.S. federal corporate tax rate from 35% to 21% as of January 1, 2018. For more information and the status of our provisional analysis ofregarding the Tax Act, refer to Note 10 of the Notes to Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data. For more information on otheradditional items that impacted the effective tax rates in 2017, 20162019 and 2015,2018, refer to Results of Operations -— Consolidated Results -— Provision for income taxes included in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. The effective tax ratesrate in 2014 and 2013 were2016 was impacted by $8.1a $20.5 million and $9.9 million in tax benefits primarily duebenefit related to decreases in reserves for uncertain tax positions, resultingwhich resulted from the expiration of certain federal and state statute of limitations periods. |
| |
(c) | In 2014, selling, general and administrative expenses included a $102.5 million charge to provision for long-term contract receivable associated with an electric power infrastructure services project and a $38.8 million expense resulting from an arbitration decision associated with a contract dispute on a directional drilling project. |
| |
(d) | In 2013, we recorded a pre-tax gain of approximately $112.7 million from the sale of all of our equity ownership interest in Howard Midstream Energy Partners, LLC. |
| | | | | December 31, | | | | | | | | | | | |
| | | 2017 | | 2016 | | 2015 | | 2014 | | 2013 | | December 31, |
| | | (In thousands) | | 2019 | | 2018 | | 2017 | | 2016 | | 2015 |
| Balance Sheet Data: | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
| Working capital | | $ | 1,377,840 |
| | $ | 1,083,517 |
| | $ | 1,073,775 |
| | $ | 1,389,393 |
| | $ | 1,226,012 |
| | $ | 1,567,937 |
| | $ | 1,519,977 |
| | $ | 1,377,840 |
| | $ | 1,083,517 |
| | $ | 1,073,775 |
|
| Goodwill | | $ | 1,868,600 |
| | $ | 1,603,169 |
| | $ | 1,552,658 |
| | $ | 1,596,695 |
| | $ | 1,445,927 |
| | $ | 2,022,675 |
| | $ | 1,899,879 |
| | $ | 1,868,600 |
| | $ | 1,603,169 |
| | $ | 1,552,658 |
|
| Total assets | | $ | 6,480,154 |
| | $ | 5,354,059 |
| | $ | 5,213,543 |
| | $ | 6,253,583 |
| | $ | 5,731,982 |
| | $ | 8,331,682 |
| | $ | 7,075,787 |
| | $ | 6,480,154 |
| | $ | 5,354,059 |
| | $ | 5,213,543 |
|
| Long-term debt, net of current maturities | | $ | 670,721 |
| | $ | 353,562 |
| | $ | 475,364 |
| | $ | 72,489 |
| | $ | 1,053 |
| | $ | 1,292,195 |
| | $ | 1,040,532 |
| | $ | 670,721 |
| | $ | 353,562 |
| | $ | 475,364 |
|
| Total stockholders’ equity | | $ | 3,791,571 |
| | $ | 3,339,427 |
| | $ | 3,085,494 |
| | $ | 4,514,473 |
| | $ | 4,234,188 |
| | $ | 4,050,292 |
| | $ | 3,604,159 |
| | $ | 3,791,571 |
| | $ | 3,339,427 |
| | $ | 3,085,494 |
|
| |
| ITEM 7. | Management’s 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 included elsewhere 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 Item 1A. Risk Factors.
IntroductionOverview
We are a leading provider of specialty contracting services, offeringdelivering comprehensive infrastructure solutions primarily tofor the electric power, oil and gasenergy and communications industries in the United States, Canada, Australia Latin America and select other international markets. The performance of our business generally depends on our ability to obtain contracts with customers and to effectively deliver the services provided under those contracts. The services we provide include the design, installation, upgrade, repair and maintenance of infrastructure within each of the industries we serve, such as electric power transmission and distribution networks,networks; substation facilities, renewable energy facilities, andfacilities; pipeline transmission and distribution systems and facilities.facilities; refinery, petrochemical and industrial facilities; and telecommunications and cable multi-system operator networks. Our customers include many of the leading companies in the industries we serve, and we endeavor to develop and maintain strategic alliances and preferred service provider status with our customers. Our services are typically provided pursuant to master service agreements, repair and maintenance contracts and fixed price and non-fixed price installation contracts.
We report our results under two reportable segments: (1) Electric Power Infrastructure Services and (2) OilPipeline and GasIndustrial Infrastructure Services.Services, as further described in Item 1. Business – Reportable Segments. This structure is generally focused on broad end-user markets for our services. Our consolidated revenuesIncluded within the Electric Power Infrastructure Services segment are the results related to our telecommunications infrastructure services.
Current Year Financial Results and Significant Operational Trends and Events
Key financial results for the year ended December 31, 2017 were $9.472019 included:
Consolidated revenues increased 8.4% to $12.11 billion, as compared to $11.17 billion for the year ended December 31, 2018, of which 59% was attributable to the Electric Power Infrastructure Services segment and 41% was attributable to the OilPipeline and GasIndustrial Infrastructure Services segment.segment;
TheOperating income increased 2.7%, or $14.6 million, to $554.9 million as compared to $540.3 million for the year ended December 31, 2018;
Net income attributable to common stock increased 37.1%, or $108.7 million, to $402.0 million as compared to $293.3 million for the year ended December 31, 2018;
Diluted earnings per share increased 43.7%, or $0.83, to $2.73 as compared to $1.90 for the year ended December 31, 2018;
Net cash provided by operating activities increased 46.8%, or $167.8 million, to $526.6 million as compared to $358.8 million for the year ended December 31, 2018;
Remaining performance obligations increased 13.3%, or $621.0 million, to $5.30 billion as of December 31, 2019 as compared to $4.68 billion as of December 31, 2018; and
| |
| • | Total backlog (a non-GAAP measure) increased 21.6%, or $2.66 billion, to $15.00 billion as of December 31, 2019 as compared to $12.34 billion as of December 31, 2018. For a reconciliation of backlog to remaining performance obligations, its most comparable GAAP measure, see Remaining Performance Obligations and Backlog below. |
During 2019, our Electric Power Infrastructure Services segment provides comprehensive network solutions to customerswas impacted by the following significant operational trends and events:
Increased customer spending on smaller electric transmission and distribution services projects, including increased revenues in the electric power industry.western United States associated with grid modernization and accelerated fire hardening programs, which are services we generally consider to be base business operations;
Decreased revenues on larger transmission projects primarily due to the completion of a larger transmission project in Canada in the first quarter of 2019 as compared to full construction on the project throughout 2018;
Delays on other larger transmission projects in Canada, which shifted expected revenues from 2019 to 2020 and beyond; and
Recognition of a $79.2 million charge related to the termination of a large telecommunications project in Peru.
During 2019, our Pipeline and Industrial Infrastructure Services performedsegment was impacted by the following significant operational trends and events:
Increased customer spending on gas utility infrastructure replacement and modernization initiatives, pipeline integrity work, industrial services and other services that we generally consider to be base business operations;
Improved operating income margins across our transmission, distribution and industrial services operations resulting from improved execution and utilization;
Decreased revenues from larger pipeline projects as compared to 2018, the timing of which is highly variable due to potential permitting delays, worksite access limitations related to environmental regulations and seasonal weather patterns; and
Recognition of a $28.3 million project loss associated with engineering and production delays on a substantially complete processing facility project, which negatively impacted operating income and was partially offset by favorable change orders and insurance settlements on other projects during 2019.
During 2019, our results were also impacted by the following significant events, the gross amounts related to which are recorded as equity in earnings of unconsolidated affiliates included in “Other income (expense), net” in our consolidated statements of operations:
Recognition of $60.3 million ($43.9 million net of tax) of previously deferred earnings as a result of the completion of the larger transmission project in Canada referenced above; and
Recognition of a $13.0 million gain ($20.7 million with favorable tax benefits) related to the sale of our interest in the same large electric transmission project in Canada.
We also continue to selectively evaluate acquisitions as part of our overall business strategy and acquired seven businesses in 2019, including The Hallen Construction Co., Inc. (Hallen), a business that specializes in above-ground and underground gas distribution and transmission services in the northeastern United States. During 2019, revenues were positively impacted by approximately $305 million from acquired businesses.
Business Environment
We believe there are growth opportunities across the industries we serve and continue to have a positive long-term outlook. Although not without risks and challenges, including those discussed below and in Uncertainty of Forward-Looking Statements and Information and included in Item 1A. Risk Factors, we believe, with our full-service operations, broad geographic reach, financial position and technical expertise, we are well positioned to capitalize on opportunities and trends in our industries.
Electric Power Infrastructure Services segment generally include the design, installation, upgrade, repair and maintenance ofSegment. Utilities are investing significant capital in their electric power delivery systems, particularly transmission, substation and distribution infrastructure, through multi-year, multi-billion dollar grid modernization and reliability programs, which have provided, and are expected to continue to provide, demand for our services. Utilities are accommodating a changing fuel generation mix that is moving toward more sustainable sources such as natural gas and renewables and replacing aging infrastructure to support long-term economic growth. In order to reliably and efficiently deliver power, and in response to federal reliability standards, utilities are also integrating smart grid technologies into distribution systems in order to improve grid management and create efficiencies, and in preparation for emerging technologies such as electric vehicles. A number of utilities are also implementing system upgrades or hardening programs in response to recurring severe weather events, such as hurricanes and wildfires. In particular, current system resiliency initiatives in California and other regions in the western U.S. are designed to prevent and manage the impact of wildfires. However, while these resiliency initiatives also provide opportunities for our services, they also increase our potential exposure to significant liabilities attributable to those events.
We expect demand for electricity in North America to grow over the long term and believe that certain segments of the North American electric power grid are not adequate to efficiently serve the power needs of the future. As demand for power increases, we also expect an increase in new power generation facilities powered by certain traditional energy sources (e.g., natural gas) and renewable energy sources (e.g., solar and wind). To the extent this dynamic continues, we expect continued demand for new or expanded transmission and substation facilities along with other engineeringinfrastructure to transport power and technical services. This segment also provides emergency restoration services, including the repair of infrastructure damaged by inclement weather, the energized installation, maintenance and upgrade of electric power infrastructure utilizing unique bare hand and hot stick methods and our proprietary robotic arm technologies, and the installation of “smart grid” technologies on electric power networks. In addition, this segment designs, installs and maintains renewable energy generation facilities, consisting of solar, wind and certain types of natural gasinterconnect new generation facilities and related switchyardsthe modification and transmission infrastructure. To a lesser extent, the segment also provides comprehensivereengineering of existing infrastructure as existing coal and nuclear generation facilities are retired or shut down.
With respect to our communications infrastructure services toservice offerings, consumer and commercial demand for communication and data-intensive, high-bandwidth wireline fiber and wireless carrier customers withinservices and applications is driving significant investment in infrastructure and the deployment of new technologies. In particular, communications industry;providers in North America are in the early stages of developing new fifth generation wireless services (5G), which are intended to facilitate bandwidth-intensive services at high speeds for
consumers and a wide range of commercial applications. As a result of these industry trends, we believe there will be meaningful demand for our services in that market. While we continue to perform certain electric power and communications services in Latin America, we have completed a strategic review of those operations, and due to circumstances experienced in connection with the constructiontermination of electric power generation facilities; the design, installation, maintenancelarge telecommunications project in Peru during 2019 and repairpolitical volatility in other areas of commercialthe region, have concluded to pursue an orderly exit of our Latin American operations. While we expect additional costs in the near-term related to exiting these operations, we anticipate this decision will result in improved profitability of our overall services offerings.
Pipeline and industrial wiring; and the installation of traffic networks and cable and control systems for light rail lines.
The Oil and GasIndustrial Infrastructure Services segment provides comprehensive network solutions to customers involvedSegment. We have experienced an increase in the development, transportation, storage and processingdemand for our gas utility distribution services as a result of improved economic conditions, lower natural gas oilprices, regulatory requirements and othercustomer desire to upgrade and replace aging infrastructure. We believe there are also growth opportunities for our pipeline products. Services performed by the Oil and Gas Infrastructure Services segment generally include the design, installation, repair and maintenance of pipeline transmission and distribution systems, gathering systems, production systems, storage systems and compressor and pump stations, as well as related trenching, directional boring and mechanized welding services. In addition, this segment’s services include pipeline protection, integrity, testing, rehabilitation and replacement and fabricationservices, as regulatory measures have increased the frequency or stringency of pipeline support systemsintegrity testing requirements.
We provide critical path solutions and related structures and facilities. We also serve the offshore and inland water energy markets, primarily providingspecialty services to oilrefinery and gas exploration platforms, including mechanical installation (or “hook-ups”), electricalchemical processing facilities, primarily along the Gulf Coast of the United States and instrumentation, pre-commissioningin other select markets in North America. Trends and commissioning, coatings, shallow water pipeline installation, fabricationestimates for process facility utilization rates and marine asset repair. To a lesser extent, this segment designs, installsoverall refining capacity show North America as the largest downstream maintenance market in the world over the next several years, and maintains fueling systems, as well as water and sewer infrastructure. Through a recent acquisition discussed below, we expandedbelieve processing facilities located along the U.S. Gulf Coast region should have certain strategic advantages due to their proximity to affordable hydrocarbon resources. While our service offerings in this segment to include high-pressure and critical-path turnaround services can be negatively impacted in the short term by severe weather events, such as hurricanes, tropical storms and floods, we expect these favorable industry dynamics to the downstreamprovide near-term and midstream energy markets and enhancedlonger-term opportunities for these services, as well as our capabilities with respect to instrumentation, high-voltage and other electrical services, piping, fabrication and storage, tankand other industrial services.
For internal management purposes,Additionally, a number of larger pipeline projects from the North American shale formations and Canadian oil sands to power plants, refineries, liquefied natural gas (LNG) export facilities and other demand centers are in various stages of development. While there is risk the projects will not move forward or be delayed, we believe many of our customers remain committed to them given the cost and time required to move from conception to construction. The larger pipeline market is cyclical and the contribution of these projects to our revenues has declined over the last few years. We currently expect a further reduction in revenues from larger pipeline projects in 2020; however, we are pursuing various opportunities that, if successful, could cause our current expectations to increase. Due to its abundant supply and current low price, we also organized into two internal divisions, namely,believe natural gas will remain a fuel of choice for both primary power generation and backup power generation for renewable-driven power plants in North America. The favorable characteristics of natural gas also position the Electric Power Infrastructure Services DivisionUnited States as a leading competitor in the global LNG export market, which has the potential to continue to grow over the coming years as approved and proposed LNG export facilities are developed. In certain areas, the existing pipeline system infrastructure is insufficient to support these expected future developments, which could provide additional opportunities for our services.
Although much of our pipeline and industrial infrastructure services are influenced by hydrocarbon production volume rather than shorter-term changes in commodity prices, the broader oil and gas industry is highly cyclical and subject to price volatility, which can impact demand for our services. For example, certain of our end markets where the price of oil is influential, such as Australia, the Canadian Oil Sands and certain oil-driven U.S. shale formations, have been materially impacted and remain challenged, as the broader energy market has not fully recovered from the significant decline in oil prices that occurred in 2014 and 2015.
Regulatory Challenges and Opportunities. The regulatory environment creates both challenges and opportunities for our business. Certain regulatory and environmental permitting processes continue to create uncertainty for projects and negatively impact customer spending. In recent years, electric power and pipeline infrastructure services margins have been impacted by regulatory and permitting delays, particularly with respect to larger electric transmission and larger pipeline projects. We believe that several existing, pending or proposed legislative or regulatory actions may alleviate certain of these issues and positively impact long-term demand, particularly in connection with electric power infrastructure and renewable energy spending. For example, regulatory changes affecting siting and right-of-way processes could potentially accelerate construction for transmission projects, and state and federal reliability standards are creating incentives for system investment and maintenance. We also consider renewable energy, including solar and wind generation facilities, to be an ongoing opportunity for our engineering, project management and installation services; however, the economic feasibility of some of these projects remains subject to the continued availability of tax incentive programs.
Labor Resource Availability. Our customers are seeking additional specialized labor resources to address an aging utility workforce and labor availability issues, increasing pressure to reduce costs and improve reliability, and increasing duration and complexity of their capital programs. We believe these trends will continue, possibly to the point where demand for labor resources will outpace supply. Furthermore, the cyclical nature of the natural gas and oil industry can create shortages of qualified labor in those markets during periods of high demand. Our ability to capitalize on available opportunities is limited by our ability to employ, train and retain the necessary skilled personnel, and we are taking proactive steps to develop our workforce, including through
strategic relationships with universities, the military and unions and the Oilexpansion and Gas Infrastructure Services Division.development of our training facility and postsecondary educational institution. Although we believe these initiatives will help address workforce needs, meeting our customers’ demand for labor resources could remain challenging.
Acquisitions and Investments. We believe potential acquisition and investment opportunities exist in our industries and adjacent industries, primarily due to the highly fragmented and evolving nature of those industries and inability of many companies to expand and modernize due to capital or liquidity constraints. We continue to evaluate opportunities that are expected to, among other things, broaden our customer base, expand our geographic area of operations, and grow and diversify our portfolio of services.
Significant Factors Impacting Results
Our revenues, margins and other results of operations can be influenced by a variety of factors in any given period, including those described in Item 1A. Risk Factors and in Results of Operations and Uncertainty of Forward Looking Statements and Information, and those factors have caused fluctuations in our results in the past and are expected to cause fluctuations in our results in the future. Additional information with respect to certain of those factors is provided below.
Seasonality. Typically, our revenues are lowest in the first quarter of the year because cold, snowy or wet conditions can create challenging working environments that are more costly for our customers or cause delays on projects. In addition, infrastructure projects often do not begin in a meaningful way until our customers finalize their capital budgets, which typically occurs during the first quarter. Second quarter revenues are typically higher than those in the first quarter, as some projects begin, but continued cold and wet weather can often impact productivity. Third quarter revenues are typically the highest of the year, as a greater number of projects are underway and operating conditions, including weather, are normally more accommodating. Generally, revenues during the fourth quarter are lower than the third quarter but higher than the second quarter, as many projects are completed and customers often seek to spend their capital budgets before year end. However, the holiday season and inclement weather can sometimes cause delays during the fourth quarter, reducing revenues and increasing costs. These internal divisionsseasonal impacts are closely alignedtypical for our U.S. operations, but seasonality for our international operations may differ. For example, revenues in Canada are typically higher in the first quarter because projects are often accelerated in order to complete work while the ground is frozen and prior to the break up, or seasonal thaw, as productivity is adversely affected by wet ground conditions during warmer months.
Weather and Natural Disasters. The results of our business in a given period can be impacted by adverse weather conditions, severe weather events or natural disasters, which include, among other things, heavy or prolonged snowfall or rainfall, hurricanes, tropical storms, tornadoes, floods, blizzards, extreme temperatures, wildfires, pandemics and earthquakes. These conditions and events can negatively impact our financial results due to the termination, deferral or delay of projects, reduced productivity and exposure to significant liabilities. However, in some cases, severe weather events can increase our emergency restoration services, which typically yield higher margins due in part to higher equipment utilization and absorption of fixed costs.
Cyclicality and demand for services. Our volume of business may be adversely affected by declines or delays in new projects due to cyclicality, which may vary by geographic region. Project schedules also fluctuate, particularly in connection with larger, more complex or longer-term projects, which can affect the reportable segmentsamount of work performed in a given period. For example, the timing of obtaining permits and other approvals on a larger project may be delayed, and we may need to maintain a portion of our workforce and equipment in an underutilized capacity to ensure we are strategically positioned to deliver on the project when it moves forward. Examples of other items that may cause demand for our services to fluctuate materially from quarter to quarter include: the financial condition of our customers and their access to capital; economic and political conditions on a regional, national or global scale, including changes in U.S. and global trade relationships and interest rates; our customers’ capital spending, including on larger pipeline and electrical infrastructure projects; commodity and material prices; and project cancellations.
Revenue mix. The mix of revenues based on the predominanttypes of services we provide in a given period will impact margins, as certain industries and services provide higher-margin opportunities. For example, installation work is often performed on a fixed price basis, while maintenance work is often performed under pre-established or negotiated prices or cost-plus pricing arrangements. Margins for installation work varies by project but can be higher than maintenance work due to higher risk. We have historically derived approximately 30% to 35% of our annual revenues from maintenance work, but a higher portion of maintenance work in any given period may affect our gross margins for that period. Additionally, the areas in which we operate during a given period can impact margins. Some areas offer the opportunity for higher margins due to their more difficult geographic characteristics, such as urban settings or mountainous and other difficult terrain. However, margins may also be negatively impacted by unexpected difficulties that can arise due to those same characteristics, as well as unexpected site conditions.
Size, scope and complexity of projects. Larger or more complex projects with higher voltage capacities; larger diameter throughput capacities; increased engineering, design or construction complexities; more difficult terrain requirements; or longer distance requirements typically yield opportunities for higher margins as we assume a greater degree of performance risk and there is greater utilization of our resources for longer construction timeframes. Furthermore, smaller or less complex projects typically have a greater number of companies competing for them, and competitors at times may more aggressively pursue available work. A greater percentage of smaller scale or less complex work also could negatively impact margins due to the inefficiency of
transitioning between a larger number of smaller projects versus continuous production on fewer larger projects. Also, at times we may choose to maintain a portion of our workforce and equipment in an underutilized capacity to ensure we are strategically positioned to deliver on larger projects when they move forward.
Project variability and performance. Margins for a single project may fluctuate period to period due to changes in the volume or type of work providedperformed, the pricing structure under the project contract or job productivity. Additionally, our productivity and performance on a project can vary period to period based on a number of factors, including unexpected project difficulties or site conditions; project location, including locations with challenging operating conditions; whether the work is on an open or encumbered right of way; inclement weather or severe weather events; environmental restrictions or regulatory delays; protests, other political activity or legal challenges related to a project; and the performance of third parties.
Subcontract work and provision of materials. Work that is subcontracted to other service providers generally yields lower margins, and therefore an increase in subcontract work in a given period can decrease margins. In recent years, we have subcontracted approximately 15% to 20% of our work to other service providers. Our customers are usually responsible for supplying the materials for their projects; however, under some contracts we agree to procure all or part of the required materials. Margins may be lower on projects where we furnish a significant amount of materials, including projects where we provide engineering, procurement and construction (EPC) services, as our markup on materials is generally lower than our markup on labor costs. Furthermore, fluctuations in the price of materials we procure, including as a result of changes in U.S. or global trade relationships or other economic or political conditions, may impact our margins. In a given period, an increase in the percentage of work with higher materials procurement requirements may decrease our overall margins.
Foreign currency risk. Our financial performance is reported on a U.S. dollar-denominated basis but is partially subject to fluctuations in foreign currency exchange rates. Fluctuations in exchange rates relative to the U.S. dollar, primarily Canadian and Australian dollars, can materially impact margins and comparisons of our results of operations between periods.
Results of Operations
The results of acquired businesses have been included in the following results of operations beginning on their respective acquisition dates. A discussion of results of operations changes between the years ended December 31, 2018 and 2017 is included in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations of our Annual Report on Form 10-K for the year ended December 31, 2018, which was filed with the SEC on February 28, 2019. The following table sets forth selected statements of operations data, such data as a percentage of revenues for the years indicated as well as the dollar and percentage change from the prior year (dollars in thousands):
Consolidated Results
|
| | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, | | Change |
| | | 2019 | | 2018 | | $ | | % |
| Revenues | | $ | 12,112,153 |
| | 100.0 | % | | $ | 11,171,423 |
| | 100.0 | % | | $ | 940,730 |
| | 8.4 | % |
| Cost of services (including depreciation) | | 10,511,901 |
| | 86.8 |
| | 9,691,459 |
| | 86.8 |
| | 820,442 |
| | 8.5 | % |
| Gross profit | | 1,600,252 |
| | 13.2 |
| | 1,479,964 |
| | 13.2 |
| | 120,288 |
| | 8.1 | % |
| Selling, general and administrative expenses | | 955,991 |
| | 7.9 |
| | 857,574 |
| | 7.7 |
| | 98,417 |
| | 11.5 | % |
| Amortization of intangible assets | | 62,091 |
| | 0.5 |
| | 43,994 |
| | 0.4 |
| | 18,097 |
| | 41.1 | % |
| Asset impairment charges | | 13,892 |
| | 0.1 |
| | 49,375 |
| | 0.4 |
| | (35,483 | ) | | (71.9 | )% |
| Change in fair value of contingent consideration liabilities | | 13,404 |
| | 0.1 |
| | (11,248 | ) | | (0.1 | ) | | 24,652 |
| | * |
|
| Operating income | | 554,874 |
| | 4.6 |
| | 540,269 |
| | 4.8 |
| | 14,605 |
| | 2.7 | % |
| Interest expense | | (66,890 | ) | | (0.6 | ) | | (36,945 | ) | | (0.3 | ) | | (29,945 | ) | | 81.1 | % |
| Interest income | | 927 |
| | — |
| | 1,555 |
| | — |
| | (628 | ) | | (40.4 | )% |
| Other income (expense), net | | 83,376 |
| | 0.7 |
| | (47,213 | ) | | (0.4 | ) | | 130,589 |
| | * |
|
| Income before income taxes | | 572,287 |
| | 4.7 |
| | 457,666 |
| | 4.1 |
| | 114,621 |
| | 25.0 | % |
| Provision for income taxes | | 165,472 |
| | 1.3 |
| | 161,659 |
| | 1.5 |
| | 3,813 |
| | 2.4 | % |
| Net income | | 406,815 |
| | 3.4 |
| | 296,007 |
| | 2.6 |
| | 110,808 |
| | 37.4 | % |
| Less: Net income attributable to non-controlling interests | | 4,771 |
| | 0.1 |
| | 2,661 |
| | — |
| | 2,110 |
| | 79.3 | % |
| Net income attributable to common stock | | $ | 402,044 |
| | 3.3 | % | | $ | 293,346 |
| | 2.6 | % | | $ | 108,698 |
| | 37.1 | % |
* The percentage change is not meaningful.
Revenues. Contributing to the increase were incremental revenues of $706.3 million from electric power infrastructure services and $234.5 million from pipeline and industrial infrastructure services. See Segment Results below for additional information and discussion related to segment revenues.
Gross profit. The increase in gross profit was primarily due to the overall increase in revenues described above and margin improvement in pipeline and industrial infrastructure services, partially offset by a decline in margins for electric power infrastructure services. See Segment Results below for additional information and discussion related to segment operating income (loss).
Selling, general and administrative expenses. The increase was primarily attributable to a $29.9 million increase in compensation expenses, largely associated with higher salaries due to increased personnel to support business growth and annual compensation increases; a $23.4 million increase in expenses associated with acquired businesses, including incremental acquisition and integration costs of $7.5 million; and a $15.6 million increase in professional fees. Also contributing to the operating units within each division.increase were a $9.6 million increase in information systems-related expenses to support business growth; a $9.3 million increase in deferred compensation expense, which was primarily associated with market value changes; a $7.7 million increase in travel expenses and a $4.1 million increase in bad debt expense. These increases were partially offset by a $9.1 million increase in net gains on the sale of property and equipment.
Amortization of intangible assets. The increase was primarily due to increased amortization of intangible assets associated with recently acquired businesses, partially offset by reduced amortization expense from previously acquired intangible assets, as certain of those assets became fully amortized.
Asset impairment charges. During the fourth quarters of 2019 and 2018, we recognized $13.9 million and $49.4 million of asset impairment charges. The 2019 charges primarily related to the winding down and exit of certain oil-influenced operations
and assets, the replacement of an internally-developed software application and the planned sale of certain foreign operations and assets, while the 2018 charges primarily related to the winding down of certain oil-influenced operations and assets.
Change in fair value of contingent consideration liabilities. The overall change was primarily due to changes in performance in post-acquisition periods for certain acquired businesses and the effect of present value accretion on fair value calculations. Further changes in fair value are expected to be recorded periodically until contingent consideration liabilities are settled. See Contractual Obligations — Contingent Consideration Liabilities for more information.
Interest expense. Interest expense increased primarily due to increased borrowing activity and a higher weighted average interest rate.
Other income (expense), net. The change was primarily related to our equity investment in a limited partnership that built, owned and operated the large electric transmission project in Canada that was substantially completed and placed into commercial operation during the three months ended March 31, 2019. As a result of the project completion, we recognized $60.3 million of earnings that were previously deferred as a component of “Other income (expense), net” in prior periods, the majority of which were deferred in the years ended December 31, 2018 and 2017. Additionally, during the three months ended December 31, 2019, we recognized a gain of $13.0 million related to the sale of our interest in this limited partnership. The net expense recognized in the year ended December 31, 2018 was primarily related to the deferral of earnings on the same project.
Provision for income taxes. The effective tax rates for the years ended December 31, 2019 and 2018 were 28.9% and 35.3%. The higher effective tax rate for the year ended December 31, 2018 was primarily due to the impact of tax reform regulations issued during 2018, which resulted in a $37.2 million valuation allowance against certain tax benefits recognized during 2017 associated with the Tax Act and other entity restructuring and recapitalization efforts. The effective tax rate for the year ended December 31, 2019 includes the impact of a $79.2 million charge associated with the termination of a large telecommunications project in Peru, for which no income tax benefit was recognized, partially offset by $7.8 million of favorable tax benefits associated with the sale of our interest in the limited partnership referenced above. We expect our effective tax rate to be approximately 29.8% to 30.3% for 2020. For additional information regarding the Tax Act, refer to Note 10 of the Notes to Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data.
Other comprehensive income (loss), net of taxes. The gain in the year ended December 31, 2019 resulted from the translation of the balance sheet positions of our international operations, primarily in Canada and Australia, as of December 31, 2019 as compared to December 31, 2018, and the impact of the strengthening of those foreign currencies against the U.S. dollar as of December 31, 2019. The loss in the year ended December 31, 2018 resulted from the translation of the balance sheet positions of our international operations, primarily in Canada and Australia, as of December 31, 2018 as compared to December 31, 2017, and the impact of the strengthening of the U.S. dollar against those foreign currencies as of December 31, 2018.
Segment Results
Reportable segment information, including revenues and operating income by type of work, is gathered from each operating unit for the purpose of evaluating segment performance in support of our market strategies. These classificationsperformance. Classification of our operating unit revenues by type of work for segment reporting purposes can at times require judgment on the part of management. Our operating units may perform joint projects for customers in multiple industries, deliver multiple types of services under a single customer contract or provide services acrossservice offerings to various industries. For example, we perform joint trenching projects to install distribution lines for electric power and natural gas customers. Our integrated operations and common administrative support at each of ourfor operating units requiresrequire that certain allocations be made to determine segment profitability, including allocations of shared and indirect costs such as(e.g., facility costs,costs), indirect operating expenses including depreciation,(e.g., depreciation), and general and administrative costs.
Corporate Certain corporate costs such asare not allocated, including payroll and benefits, employee travel expenses, facility costs, professional fees, acquisition costs, andnon-cash stock-based compensation, amortization related to intangible assets, are not allocated.
Our customers include many of the leading companies in the industries we serve. We have developed strong strategic alliances with numerous customersasset impairment related to goodwill and strive to develop and maintain our status as a preferred service provider to our customers. We enter into various types of contracts, including 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 are frequently negotiated 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 a price per unit of work performed (unit price) or a fixed amount for the entire project (fixed price). We complete a substantial majority of our fixed price projects, other than certain large transmission 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 periodically.
We recognize revenues on our unit price and cost-plus contracts as units are completed or services are performed. For our fixed price contracts, we record revenues as work on the contract progresses on a percentage-of-completion basis. Under this method, revenues are 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.
We also enter into strategic partnerships and investment arrangements with customers and infrastructure investors to provide fully integrated infrastructure services on certain projects, including planning and feasibility analysis, engineering, design, procurement, construction and operation and maintenance, as well as project financing and investment. These projects include public-private partnerships, private infrastructure projects and concessions, along with build, own, operate and transfer and build to suit arrangements. As part of this strategy, during the year ended December 31, 2017, we formed a partnership with select infrastructure investors that provides up to $1.0 billion of capital, including approximately $80.0 million from us, available to invest in certain of these infrastructure projects through August 2024.
Recent Investments, Acquisitions and Divestitures
Acquisitions
In January 2018, we acquired an electrical infrastructure services business specializing in substation construction and relay services and a postsecondary educational institution that provides pre-apprenticeship training and programs for experienced lineman, both of which are located in the United States. The aggregate consideration for these acquisitions was $47.9 million in cash, subject to certain adjustments, and 379,817 shares of Quanta common stock, which had a fair value of approximately $13.6 million at the acquisition dates. Additionally, the acquisition of the postsecondary educational institution includes the potential payment of up to approximately $15.0 million of contingent consideration, payable if the acquired business achieves certain financial and operational objectives over a five-year period. The results of the acquired businesses will generally be included in our Electric Power Infrastructure Services segment and consolidated financial statements beginning on the acquisition dates.
On July 20, 2017, we acquired Stronghold, Ltd. and Stronghold Specialty, Ltd. (collectively Stronghold), a specialized services business located in the United States that provides high-pressure and critical-path solutions to the downstream and midstream energy markets. The aggregate consideration included $351.0 million in cash, subject to certain adjustments, and 2,693,680 shares of Quanta common stock, which had a value of $81.3 million at the acquisition date. Additionally, the acquisition includes the potential payment of up to $100.0 million of contingent consideration, payable if the acquired business achieves certain financial targets over a three-year period. Based on the estimated fair value of this contingent consideration, we recorded a $51.1 million liability as of the acquisition date. The results of the acquired business have generally been included in our Oil and Gas Infrastructure Services segment and consolidated financial statements since the acquisition date.
During the year ended December 31, 2017, we also acquired a communications infrastructure services contractor and an electrical and communications contractor, both of which are located in the United States. The aggregate consideration for these acquisitions consisted of $11.9 million paid or payable in cash, subject to certain adjustments, and 288,666 shares of Quanta common stock, with a value of $8.3 million as of the respective acquisition dates. The results of the acquired businesses have generally been included in our Electric Power Infrastructure Services segment and consolidated financial statements since the acquisition dates.
During 2016, we completed five acquisitions. The results of four of the acquired businesses are generally included in our Electric Power Infrastructure Services segment. These businesses included an electrical infrastructure services business located in Australia, a utility contracting business located in Canada, a full service medium- and high-voltage powerline contracting business located in the United States and a communications services business located in Canada. We also acquired a pipeline services contractor located in the United States, the results of which are generally included in our Oil and Gas Infrastructure Services segment. The aggregate consideration for these acquisitions consisted of $75.9 million paid or payable in cash, subject to certain adjustments, 70,840 shares of Quanta common stock valued at $1.5 million as of the settlement date of the applicable
acquisition, and contingent consideration payments of up to $39.5 million, payable if financial targets are achieved by certain of the acquired businesses. Based on the estimated fair value of this contingent consideration, we recorded a total of $18.7 million in liabilities as of the applicable acquisition dates. The results of the acquired businesses have been included in our consolidated financial statements since the acquisition dates.
During 2015, we completed 11 acquisitions. The results of eight of the acquired businesses are generally included in our Electric Power Infrastructure Services segment. These businesses included a foundation services business located in the United States, an electrical contracting business located in the United States, an electrical engineering business located in Australia, a powerline construction business located in the United States, an engineering business located in Canada, an engineering, procurement and construction services business based in the United States, an underground construction contracting business located in Canada and a supplier and material procurement specialist for the power and utility industry in Canada. The results of the remaining three acquired businesses are generally included in our Oil and Gas Infrastructure Services segment. These businesses include a business that services above-ground storage tanks in the United States, an underground utility distribution contractor that provides services to gas and electric utilities in Canada, and a business that specializes in the engineering, procurement, construction, and commissioning of compression and surface facilities for the high pressure gas industry in Australia. The aggregate consideration for these acquisitions consisted of $110.6 million paid or payable in cash, subject to certain adjustments, 461,037 shares of Quanta common stock valued at $10.1 million as of the settlement dates of the applicable acquisitions, and contingent consideration payments with an estimated fair value of $1.0 million as of the applicable acquisition date. The results of the acquired businesses have been included in our consolidated financial statements since the acquisition dates.
Disposition
On April 29, 2015, we entered into a stock purchase agreement with Crown Castle International Corp. pursuant to which we agreed to sell our fiber optic licensing operations. The purchase agreement contained customary representations and warranties, covenants and indemnities. On August 4, 2015, we completed the sale for a purchase price of $1.00 billion in cash, resulting in after-tax net proceeds of $848.2 million. In the third quarter of 2015, we recognized a net of tax gain of $171.0 million. We have presented the results of operations, financial position, cash flows and disclosures of the fiber optic licensing operations as discontinued operations for all periods in our consolidated financial statements.
Seasonality; Fluctuations of Results; Economic Conditions
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, receipt of required regulatory approvals, permits and rights of way, project timing and schedules, and holidays. Typically, our revenues are lowest in the first quarter of the year because cold, snowy or wet conditions can cause delays on projects. In addition, many of our customers develop their annual capital budgets during the first quarter, and therefore do not begin infrastructure projects in a meaningful way until their capital budgets are finalized. Second quarter revenues are typically higher than those in the first quarter, as some projects begin, but continued cold and wet weather can often impact second quarter productivity. Third quarter revenues are typically the highest of the year, as a greater number of projects are underway, and weather is normally more accommodating. Generally, revenues during the fourth quarter of the year are lower than the third quarter but higher than the second quarter. Many projects are completed in the fourth quarter, and revenues are often impacted positively by customers seeking to spend their capital budgets before the end of the year. However, the holiday season and inclement weather can sometimes cause delays during the fourth quarter, reducing revenues and increasing costs. Productivity and operating activity in any quarter may be positively or negatively affected by atypical weather patterns in the areas we serve, such as severe weather, excessive rainfall or unusual winter weather. The timing of project awards and unanticipated changes in project schedules as a result of delays or accelerations can also create variations in the level of operating activity from quarter to quarter.
These seasonal impacts are typical for our U.S. operations, but as our foreign operations grow, this pattern may have a lesser impact on our quarterly revenues. For example, revenues in Canada are often higher in the first quarter because projects are often accelerated in order to complete work prior to the break up, or seasonal thaw, as productivity is adversely affected by wet ground conditions during the warmer spring and summer months. Also, although revenues from Australia and other international operations have not been significant relative to our overall revenues to date, their seasonal patterns may differ from those in North America and may impact our seasonality more in the future.
Additionally, our industry can be highly cyclical. Our volume of business may be adversely affected by declines or delays in new projects due to cyclicality, which may vary by geographic region. Project schedules, particularly in connection with larger, longer-term projects, can also create fluctuations in the amount of work performed in a given period. For example, in connection with larger and more complicated projects, the timing of obtaining permits and other approvals may be delayed, and we may need to maintain a portion of our workforce and equipment in an underutilized capacity to ensure we are strategically positioned to deliver on such projects when they move forward. Examples of other items that may cause our results or demand for our services
to fluctuate materially from quarter to quarter include: the financial condition of our customers and their access to capital; margins of projects performed during any particular period; economic, political and market conditions on a regional, national or global scale; our customers’ capital spending, including on larger pipeline and electrical infrastructure projects; oil, natural gas and natural gas liquids prices; the timing of and costs associated with acquisitions; changes in the fair value of acquisition-related contingent consideration liabilities; dispositions; equity in earnings (losses) of unconsolidated affiliates; impairments of goodwill, intangible assets long-lived assets or investments; effective tax rates; and interest rates. Accordingly, our operating results in any particular period may not be indicative of the results that can be expected for any other period. Please read Outlook and Understanding Margins for additional discussion of trends and challenges that may affect our financial condition, results of operations and cash flows.
Understanding Margins
Our gross margin is gross profit expressed as a percentage of revenues, and our operating margin is operating income 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. Selling, general and administrative expenses and amortization of intangible assets are then subtracted from gross profit to obtain operating income. Various factors, only some of which are within our control, can impact our margins on a quarterly or annual basis.
Seasonal and geographical. Seasonal weather patterns can have a significant impact on margins. Generally, business is slower in the winter months versus the warmer months of the year, resulting in lower productivity and consequently reducing our ability to cover fixed costs. This can be offset somewhat by increased demand for electrical service and repair work resulting from severe weather. Additionally, project schedules, including when projects begin and are completed, may impact margins. The mix of business conducted in the areas we serve will also affect margins, as some areas offer the opportunity for higher margins due to their geographic characteristics. For example, margins may be negatively impacted by operations in an urban setting as opposed to a less populated rural setting or over mountainous or other difficult terrain as opposed to open terrain. Site conditions, including unforeseen underground conditions, can also impact margins.
Weather. Adverse or favorable weather conditions can impact gross margins in a given period. For example, snowfall, rainfall or other severe weather may negatively impact our revenues and margins due to reduced productivity, as projects may be terminated, deferred or delayed until weather conditions improve or an affected area recovers from a severe weather event. Conversely, in periods when weather remains dry and temperatures are accommodating, more work can be done, sometimes at a lower cost. In some cases, severe weather, such as hurricanes and ice storms, can provide us with emergency restoration service work, which typically yields higher margins due in part to better equipment utilization rates and absorption of fixed costs.
Revenue mix. The mix of revenues derived from the industries we serve and the types of services we provide within an industry will impact margins, as certain industries and services provide higher margin opportunities. Additionally, changes in our customers’ spending patterns can cause an imbalance in supply and demand and, therefore, affect margins and mix of revenues.
Service and maintenance versus installation. Installation work is often performed on a fixed price basis, while maintenance work is often performed under pre-established or negotiated prices or cost-plus pricing arrangements. Margins for installation work may vary from project to project, and may be higher than maintenance work, as work obtained on a fixed price basis has higher risk than other types of pricing arrangements. We typically derive approximately 30% of our annual revenues from maintenance work, but a higher portion of installation work in any given period may affect our gross margins for that period.
Subcontract work. Work that is subcontracted to other service providers generally yields lower margins. An increase in subcontract work in a given period may contribute to a decrease in margins. We typically subcontract approximately 20% to 25% of our work to other service providers.
Materials versus labor. Typically, our customers are responsible for supplying their own materials on projects; however, for some of our contracts we may agree to procure all or part of the required materials. Margins may be lower on projects where we furnish a significant amount of materials, including projects where we provide engineering, procurement and construction (EPC) services, as our mark-up on materials is generally lower than our mark-up on labor costs. In a given period, an increase in the percentage of work with higher materials procurement requirements may decrease our overall margins.
Size, scope and complexity of projects. We may experience a decrease or fluctuations in margins when larger, more complex electric transmission and pipeline projects experience significant delays. Larger projects with higher voltage capacities, larger diameter throughput capacities, increased engineering, design or construction complexities, more difficult terrain requirements or longer distance requirements typically yield opportunities for higher margins as we assume a greater degree of performance risk and allow for a higher degree of utilization of our resources for longer construction timeframes. Conversely, smaller or less complex electric transmission and pipeline projects typically provide lower margin opportunities as there are a greater number of competitors capable of performing in this market, and competitors at times may more aggressively pursue available volumes of work to absorb
fixed costs. A greater mix of smaller scale or less complex electric transmission and pipeline work also could negatively impact margins due to the inefficiency of transitioning between a greater number of smaller projects versus continuous production on fewer larger projects. Our margins may be further impacted by delays in the timing of larger projects, extended bidding procedures for more complex EPC projects or temporary decreases in capital spending by our customers. Also, during these periods we may choose to maintain a portion of our workforce and equipment in an underutilized capacity to ensure we are strategically positioned to deliver on larger, more complicated electric transmission or pipeline projects when they move forward.
Depreciation. We include depreciation in cost of services, which is common practice in our industry. However, this can make comparability of our margins to those of other companies difficult and must be taken into consideration when comparing us to other companies.
Insurance. As discussed in Contractual Obligations - Insurance, we are insured for employer’s liability, workers’ compensation, auto liability and general liability claims. We also have employee health care benefit plans for most employees not subject to collective bargaining agreements. Margins could be impacted by fluctuations in insurance accruals as additional claims arise and as circumstances and conditions of existing claims change.
Project Variability and Performance. Margins for a single project may fluctuate quarter to quarter due to changes in the volume or type of work performed, the pricing structure under the project contract or job productivity. Productivity can be influenced by many factors, including where the work is performed (e.g., rural versus urban area or mountainous or rocky area versus open terrain), whether the work is on an open or encumbered right of way, inclement weather, environmental restrictions or regulatory delays, protests or other political activity on a project, or the performance of third parties on a project. These types of factors are not practicable to quantify through accounting data, but may individually or in the aggregate have a direct impact on the gross margin of a specific project.
Foreign currency risk. Our financial performance is reported on a U.S. dollar-denominated basis but is partially subject to fluctuations in foreign currency exchange rates. Fluctuations in exchange rates relative to the U.S. dollar, primarily the Canadian and Australian dollars, could cause material fluctuations in comparisons of our results of operations between periods.
Changechange in fair value of contingent consideration liabilities. We anticipate fluctuations in operating income margins as a result of changes in the fair value of contingent consideration liabilities. See Note 2 to the Notes to Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data for more information about the valuation methodologies and assumptions related to the determination of the fair value of our contingent consideration liabilities.
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, acquisition costs, gains and losses on the sale of property and equipment, letter of credit fees and maintenance, training and conversion costs related to information technology systems.
Results of Operations
As previously discussed, the results of acquired businesses have been included in the following results of operations beginning on their respective acquisition dates. Additionally, the results of operations for our fiber optic licensing operations, which were disposed of on August 4, 2015, have been reclassified from continuing operations to net income (loss) from discontinued operations for all periods presented. The following table sets forth selected statements of operations data and such data as a percentage ofsegment revenues, segment operating income (loss) for the years indicated, as well as the dollar and percentage change from the prior year (dollars in thousands):
|
| | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, | | Change |
| | | 2019 | | 2018 | | $ | | % |
Revenues: | | |
| | |
| | |
| | |
| | | | |
|
| Electric Power Infrastructure Services excluding Latin America | | $ | 7,058,611 |
| | 58.3 | % | | $ | 6,319,436 |
| | 56.5 | % | | $ | 739,175 |
| | 11.7 | % |
| Latin America | | 63,226 |
| | 0.5 |
| | 96,126 |
| | 0.9 |
| | (32,900 | ) | | (34.2 | )% |
| Electric Power Infrastructure Services | | 7,121,837 |
| | 58.8 |
| | 6,415,562 |
| | 57.4 |
| | 706,275 |
| | 11.0 | % |
| Pipeline and Industrial Infrastructure Services | | 4,990,316 |
| | 41.2 |
| | 4,755,861 |
| | 42.6 |
| | 234,455 |
| | 4.9 | % |
| Consolidated revenues from external customers | | $ | 12,112,153 |
| | 100.0 | % | | $ | 11,171,423 |
| | 100.0 | % | | $ | 940,730 |
| | 8.4 | % |
| Operating income (loss): | | |
| | |
| | |
| | |
| | | |
|
|
| Electric Power Infrastructure Services excluding Latin America | | $ | 676,926 |
| | 9.6 | % | | $ | 636,403 |
| | 10.1 | % | | $ | 40,523 |
| | 6.4 | % |
| Latin America | | (85,749 | ) | | (135.6 | )% | | (8,117 | ) | | (8.4 | )% | | (77,632 | ) | | 956.4 | % |
| Electric Power Infrastructure Services | | 591,177 |
| | 8.3 | % | | 628,286 |
| | 9.8 | % | | (37,109 | ) | | (5.9 | )% |
| Pipeline and Industrial Infrastructure Services | | 332,011 |
| | 6.7 | % | | 204,178 |
| | 4.3 | % | | 127,833 |
| | 62.6 | % |
| Corporate and non-allocated costs | | (368,314 | ) | | N/A | | (292,195 | ) | | N/A | | (76,119 | ) | | 26.1 | % |
| Consolidated operating income | | $ | 554,874 |
| | 4.6 | % | | $ | 540,269 |
| | 4.8 | % | | $ | 14,605 |
| | 2.7 | % |
Electric Power Infrastructure Services Segment Results
|
| | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2017 | | 2016 | | 2015 |
| Revenues | | $ | 9,466,478 |
| | 100.0 | % | | $ | 7,651,319 |
| | 100.0 | % | | $ | 7,572,436 |
| | 100.0 | % |
| Cost of services (including depreciation) | | 8,224,618 |
| | 86.9 |
| | 6,637,519 |
| | 86.7 |
| | 6,648,771 |
| | 87.8 |
|
| Gross profit | | 1,241,860 |
| | 13.1 |
| | 1,013,800 |
| | 13.3 |
| | 923,665 |
| | 12.2 |
|
| Selling, general and administrative expenses | | 777,920 |
| | 8.2 |
| | 653,338 |
| | 8.5 |
| | 592,863 |
| | 7.8 |
|
| Amortization of intangible assets | | 32,205 |
| | 0.4 |
| | 31,685 |
| | 0.5 |
| | 34,848 |
| | 0.5 |
|
| Asset impairment charges | | 58,057 |
| | 0.6 |
| | 7,964 |
| | 0.1 |
| | 58,451 |
| | 0.8 |
|
| Change in fair value of contingent consideration liabilities | | (5,171 | ) | | (0.1 | ) | | — |
| | — |
| | — |
| | — |
|
| Operating income | | 378,849 |
| | 4.0 |
| | 320,813 |
| | 4.2 |
| | 237,503 |
| | 3.1 |
|
| Interest expense | | (20,946 | ) | | (0.4 | ) | | (14,887 | ) | | (0.2 | ) | | (8,024 | ) | | (0.1 | ) |
| Interest income | | 832 |
| | — |
| | 2,423 |
| | — |
| | 1,493 |
| | — |
|
| Other income (expense), net | | (4,978 | ) | | 0.1 |
| | (663 | ) | | — |
| | (2,297 | ) | | — |
|
| Income from continuing operations before income taxes | | 353,757 |
| | 3.7 |
| | 307,686 |
| | 4.0 |
| | 228,675 |
| | 3.0 |
|
| Provision for income taxes | | 35,532 |
| | 0.3 |
| | 107,246 |
| | 1.4 |
| | 97,472 |
| | 1.3 |
|
| Net income from continuing operations | | 318,225 |
| | 3.4 |
| | 200,440 |
| | 2.6 |
| | 131,203 |
| | 1.7 |
|
| Net income (loss) from discontinued operations | | — |
| | — |
| | (342 | ) | | — |
| | 190,621 |
| | 2.5 |
|
| Net income | | 318,225 |
| | 3.4 |
| | 200,098 |
| | 2.6 |
| | 321,824 |
| | 4.2 |
|
| Less: Net income attributable to non-controlling interests | | 3,247 |
| | 0.1 |
| | 1,715 |
| | — |
| | 10,917 |
| | 0.1 |
|
| Net income attributable to common stock | | $ | 314,978 |
| | 3.3 | % | | $ | 198,383 |
| | 2.6 | % | | $ | 310,907 |
| | 4.1 | % |
| Amounts attributable to common stock: | | | | | | | | | | | | |
| Net income from continuing operations | | $ | 314,978 |
| | 3.3 | % | | $ | 198,725 |
| | 2.6 | % | | $ | 120,286 |
| | 1.6 | % |
| Net income (loss) from discontinued operations | | — |
| | — |
| | (342 | ) | | — |
| | 190,621 |
| | 2.5 |
|
| Net income attributable to common stock | | $ | 314,978 |
| | 3.3 | % | | $ | 198,383 |
| | 2.6 | % | | $ | 310,907 |
| | 4.1 | % |
2017 compared to 2016
Revenues. Revenues increased $1.82 billion, or 23.7%, to $9.47 billion for the year ended December 31, 2017. Contributing to the increase was a $1.07 billion increase in revenues from oil and gas infrastructure services and a $749.3 million increase in revenues from electric power infrastructure services. The increase in revenues from oil and gas infrastructure services was primarily the result of increased capital spending by our customers on midstream gas pipeline transmission projects. Also contributing to the increase in oil and gas infrastructure services revenues were approximately $190 million in revenues from the acquisition of Stronghold. The increase in revenues from electric power infrastructure services was primarily due to increased customer spending on smaller transmission and distribution services, including increased revenues in the western United States associated with electricgrid modernization and accelerated fire hardening programs. Revenues also increased due to growth in our communications operations and $140 million was attributable to acquired businesses. These increases were partially offset by lower revenues on the larger transmission projects and $143.8project in Canada that was substantially completed during the three months ended March 31, 2019 but was in full construction throughout 2018; a $51 million decrease in additional emergency restoration services revenues primarily from Hurricanes Harveyrevenues; and Irma and winter storms in the United States and Canada. Also contributing to the increase in revenues from electric power infrastructure services was approximately $40 million in revenues from acquired companies. Additionally,less favorable foreign currency exchange rates, favorablywhich negatively impacted our international operationsrevenues by approximately $53$32 million during the year ended December 31, 2017. This favorable impact wasand were primarily attributable to the relationship between the U.S. dollar and the Canadian and Australian dollars.
As referenced in Current Year Financial Results and Significant Operational Trends and Events, during the year ended December 31, 2019, we recognized a $79.2 million charge associated with the termination of a telecommunications project in Peru, which included a $48.8 million reversal of revenues and a $30.4 million increase in cost of services. The charge included a reduction of previously recognized earnings on the project, a reserve against a portion of alleged liquidated damages and recognition of estimated costs to complete the project turnover and close out the project. As a result of the contract termination and other factors, we have concluded to pursue an orderly exit of our operations in Latin America and have modified our segment disclosures in the above table to separately identify the Latin American results. We believe that providing visibility into these results is beneficial to understanding the performance of our ongoing operations. See Legal Proceedings in Note 14 below for additional information involving the termination of the telecommunications project in Peru.
Gross profit. Gross profitThe increase in segment operating income excluding Latin America was primarily attributable to the increase in revenues from smaller transmission and distribution services described above, including increased $228.1 million, or 22.5%,customer spending on fire hardening programs, as well as growth in our communications operations. The decrease in operating income as a percentage of revenues excluding Latin America was primarily attributable to $1.24 billionhigher operating income for the year ended December 31, 2017. Gross profit as a percentage of revenues decreased slightly to 13.1% for the year ended December 31, 2017 from 13.3% for the year ended December 31, 2016. Gross profit and gross profit as a percentage of revenues for the year ended December 31, 2017 were positively impacted by greater contributions from emergency restoration services and midstream gas pipeline transmission projects, which typically yield higher margins. However, these increases were partially offset by the negative impact of work disruptions, deferrals, cancellations and employee support costs due to Hurricanes Harvey and Irma. Gross profit and gross profit as a percentage of revenues for the year ended December 31, 2016 were negatively impacted by $54.8 million of project losses2018 related to a power plant project in Alaska, which was substantially completed in the fourth quarter of 2016.
Selling, general and administrative expenses. Selling, general and administrative expenses increased $124.6 million, or 19.1%, to $777.9 million for the year ended December 31, 2017. This increase was primarily attributable to $62.8 million in higher compensation costs, largely associated with higher incentive compensation based on current year levels of profitability, annual compensation increases and increased personnel to support business growth; $38.3 million of incremental selling, general and administrative expenses associated with acquired businesses, including acquisition and integration costs; and $6.9 million in higher attorneys’ fees and related expenses, $4.2 million of which was associated with a matter involving our prior disposition of certain communications operations that was resolved in the first quarter of 2017. During the year ended December 31, 2016, selling, general and administrative expenses included $6.3 million in severance costs associated with the departure of our former president and chief executive officer and severance and restructuring costs primarily associated with certain operations within the Oil and Gas Infrastructure Services segment. Selling, general and administrative expenses as a percentage of revenues decreased to 8.2% for the year ended December 31, 2017 from 8.5% for the year ended December 31, 2016, primarily due to the increase in revenues described above.
Amortization of intangible assets. Amortization of intangible assets increased $0.5 million to $32.2 million for the year ended December 31, 2017. This increase was primarily due to increased amortization of intangible assets associated with recently acquired companies, partially offset by reduced amortization expense from previously acquired intangible assets as certain of these assets became fully amortized.
Asset impairment charges. Asset impairment charges were $58.1 million for the year ended December 31, 2017 compared to $8.0 million for the year ended December 31, 2016. During the fourth quarter of 2017, we recorded a $57.0 million goodwill impairment and a $1.1 million impairment related to a customer relationship intangible asset. The extended low commodity price environment has significantly impacted certain reporting units within our Oil and Gas Infrastructure Services Division. Specifically, a reporting unit that provides material handling services experienced lower operating margins and is expected to continue to face a highly competitive environment in its select markets and a reporting unit that provides marine and offshore services experienced prolonged periods of reduced revenues and operating margins and is expected to continue to experience lower levels of activity in the U.S. Gulf of Mexico and other offshore markets. During the fourth quarter of 2016, we recorded an asset impairment of $8.0 million related to certain international renewable energy services operations as a result of a pending disposition of these operations, which was completed in 2017.
Change in fair value of contingent consideration liabilities. A $5.2 million decrease in fair value of contingent consideration liabilities was recognized as of December 31, 2017, which resulted in a corresponding increase in operating income during 2017, as compared to no change in fair value in the year ended December 31, 2016. The decrease in fair value was primarily due to changes in the timing and amounts of forecasted operating results of certain acquired businesses. It is anticipated that changes in fair value will be recorded periodically until the contingent consideration liabilities are settled. See Contractual Obligations - Contingent Consideration Liabilities for more information.
Interest expense. Interest expense increased $6.1 million to $20.9 million for the year ended December 31, 2017 as compared to the year ended December 31, 2016 due to increased borrowing activity, primarily related to the acquisition of Stronghold, as well as a higher weighted average interest rate.
Provision for income taxes. The provision for income taxes was $35.5 million for the year ended December 31, 2017, with an effective tax rate of 10.0%. The provision for income taxes was $107.2 million for the year ended December 31, 2016, with an effective tax rate of 34.9%. The lower effective tax rate for the year ended December 31, 2017 was primarily due to a provisional benefit of $70.1 million related to the enactmentsuccessful execution of the Tax Act on December 22, 2017, which among other things, lowers the U.S. federal corporate tax rate from 35% to 21% effective January 1, 2018, requires payment of a one-time transition tax on earnings of certain foreign subsidiaries, limits and eliminates certain tax deductions and creates new taxes on certain foreign-sourced earnings. The 2017 provision for income taxes was also favorably impacted by $26.7 million associated with entity restructuring and recapitalization efforts, a $7.2 million decrease in reserves for uncertain tax positions resulting from the expiration of statute of limitation periods, a higher proportion of income before taxes from international jurisdictions, which are generally taxed at lower statutory rates, and a discrete income tax benefit of $5.1 million associated with the adoption of an accounting update addressing share-based payments, which is discussed further in Note 3 of the Notes to Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data - Adoption of New Accounting Pronouncements. Partially offsetting these benefits
was an $8.5 million decrease of the production activity related tax benefit due to the acceleration of certain deductions in 2017. Additionally, the effective tax rate for the year ended December 31, 2016 was impacted by $20.5 million in tax benefits due to decreases in reserves for uncertain tax positions resulting from the expiration of federal and state statute of limitations periods. As described above, the Tax Act significantly revised the U.S. corporate tax regime and is anticipated to significantly reduce our future effective tax rate, which we expect to be approximately 29% for 2018. For additional information on the status of our provisional analysis of the Tax Act, refer to Note 10 of the Notes to Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data.
Other comprehensive income. Other comprehensive income, net of taxes, was a gain of $68.3 million in the year ended December 31, 2017 compared to a gain of $23.0 million in the year ended December 31, 2016. These gains were due to a strengthening of foreign currencies associated with our international operations, primarily the Canadian and Australian dollars, against the U.S. dollar as of December 31, 2017 when compared to December 31, 2016 and as of December 31, 2016 when compared to December 31, 2015.
2016 compared to 2015
Revenues. Revenues increased $78.9 million, or 1.0%, to $7.65 billion for the year ended December 31, 2016. Contributing to the increase was a $165.7 million increase in revenues from oil and gas infrastructure services, partially offset by an $86.8 million decrease in revenues from electric power infrastructure services. The increase in revenues from oil and gas infrastructure services primarily resulted from increased capital spending by our customers associated with larger projects, certain of which moved into full construction during the second half of 2016, after experiencing regulatory and permitting delays in the first half of 2016, as well as from increased customer spending for natural gas distribution services. Consolidated revenues were also favorably impacted by approximately $125 million due to revenues generated by acquired companies, primarily in the Electric Power Infrastructure Services segment. The decrease in revenues from electric power infrastructure services resulted from reduced customer spending associated with larger electric transmission projects as customers continued to face heightened regulatory and environmental requirements from state and federal agencies and more stringent permitting processes with various regional system operators. This regulatory environment negatively impacted the timing of existing projects and delayed the development of other infrastructure projects, which resulted in decreased demand for our services. In addition, revenues contributed by our international operations were negatively impacted by approximately $41 million due to less favorable average foreign currency translation rates in 2016 as compared to 2015, primarily attributable to the strengthening of the U.S. dollar against the Canadian dollar throughout 2016.
Gross profit. Gross profit increased $90.1 million, or 9.8%, to $1.01 billion for the year ended December 31, 2016. Gross profit as a percentage of revenues increased to 13.3% for the year ended December 31, 2016 from 12.2% for the year ended December 31, 2015. These increases were primarily due to better utilization of certain larger transmission project resources, mainly in the second half of 2016, as compared to the utilization of similar resources during 2015. Also contributing to these increases was improved performance of ongoing larger pipeline and electric power projects, as we experienced increased productivity compared to the year ended December 31, 2015 which was negatively impacted by heavy snowfall and other unfavorable weather conditions in certain areas of Canada and the northern United States. Also contributing to these increases was the contribution of profits from higher overall revenues during 2016. Gross profit and gross profit as a percentage of revenues were adversely impacted during 2016 by project losses of $54.8 million related to a power plant construction project in Alaska, which are discussed further in the results of operations for the Electric Power Infrastructure Services segment, as compared to project losses of $66.1 million during 2015 related to the same project and an electric transmission project in Canada completed in the third quarter of 2015.
Selling, general and administrative expenses. Selling, general and administrative expenses increased $60.5 million, or 10.2%, to $653.3 million for the year ended December 31, 2016. This increase was primarily attributable to $9.8 million in incremental costs associated with acquired companies, net of reduced acquisition costs; $8.9 million in higher salaries and benefits from annual compensation increasesdescribed above and increased personnel; $8.6 million in higher incentive compensation costs associated with levels of profitability; $7.1 million in higher costs associated with ongoing technology and business development initiatives. Also contributing to the increase were $6.3 million in severance costs associated with the departure of Quanta’s former president and chief executive officer and severance and restructuring costs primarily associated with certain operations within the Oil and Gas Infrastructure Services segment; $2.5 million in higher legal costs related to ongoing litigation, which included $6.9 million of litigation costs related to our disposition of certain telecommunication operations; and $2.3 million contributed to a university endowment. Selling, general and administrative expenses as a percentage of revenues increased to 8.5% for the year ended December 31, 2016 from 7.8% for the year ended December 31, 2015.
Amortization of intangible assets. Amortization of intangible assets decreased $3.2 million to $31.7 million for the year ended December 31, 2016. This decrease was primarily due to reduced amortization expense from previously acquired intangible assets as certain of these assets became fully amortized, partially offset by increased amortization of intangible assets associated with acquired companies.
Asset impairment charges. Asset impairment charges were $8.0 million for the year ended December 31, 2016 compared to $58.5 million for the year ended December 31, 2015. During the fourth quarter of 2015, we recorded an asset impairment of $6.6 million related to certain international renewable energy services operations. These assets were further impaired during the fourth quarter of 2016 as a result of a pending disposition of these operations, which was completed in 2017. Additionally, during the fourth quarter of 2015, we recorded a $39.8 million goodwill impairment and a $12.1 million impairment of other intangible assets related to certain operations within our Oil and Gas Infrastructure Services Division, which were primarily attributable to lower levels of expected activity in the U.S. Gulf of Mexico and, to a lesser extent, the extended low commodity price environment for certain directional drilling operations in Australia.
Interest expense. Interest expense increased $6.9 million to $14.9 million for the year ended December 31, 2016 primarily due to increased borrowing activity and a higher weighted average interest rate during the year ended December 31, 2016.
Provision for income taxes. The provision for income taxes was $107.2 million for the year ended December 31, 2016, with an effective tax rate of 34.9%. The provision for income taxes was $97.5 million for the year ended December 31, 2015, with an effective tax rate of 42.6%. The lower effective tax rate for the year ended December 31, 2016 was primarily due to $20.5 million in tax benefits due to decreases in reserves for uncertain tax positions resulting from the expiration of federal and state statute of limitations periods, partially offset by the impact of a lower proportion of income before taxes from international operations, which are generally taxed at lower statutory rates. The provision for income taxes for the year ended December 31, 2015 included $5.0 million related to an increase in the Alberta provincial statutory income tax rate, effective as of June 1, 2015 and requiring a remeasurement of certain cumulative deferred tax assets and liabilities, which was partially offset by the realization of $4.2 million in tax benefits associated with the realization of a previously unrecognized deferred tax asset related to our investment in a foreign operating subsidiary. The effective tax rate for 2015 did not reflect a significant decrease in reserves for uncertain tax positions because the statute of limitations periods remained open for various tax years under audit.
Other comprehensive income (loss). Other comprehensive income (loss), net of taxes was a gain of $23.0 million in the year ended December 31, 2016 compared to a loss of $171.4 million in the year ended December 31, 2015. The gain in 2016 was due to a strengthening of foreign currencies associated with our international operations, primarily the Canadian dollar, against the U.S. dollar as of December 31, 2016 when compared to the exchange rates for those same currencies as of December 31, 2015. The loss in 2015 was due to weaker foreign currencies associated with our international operations, primarily the Canadian dollar, against the U.S. dollar as of December 31, 2015 when compared to the exchange rates for those same currencies as of December 31, 2014.
Segment Results
The following table sets forth segment revenues and segment operating income (loss) for the years indicated (dollars in thousands):
|
| | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2017 | | 2016 | | 2015 |
Revenues: | | |
| | |
| | |
| | |
| | |
| | |
|
| Electric Power Infrastructure Services | | $ | 5,599,836 |
| | 59.2 | % | | $ | 4,850,495 |
| | 63.4 | % | | $ | 4,937,289 |
| | 65.2 | % |
| Oil and Gas Infrastructure Services | | 3,866,642 |
| | 40.8 |
| | 2,800,824 |
| | 36.6 |
| | 2,635,147 |
| | 34.8 |
|
| Consolidated revenues from external customers | | $ | 9,466,478 |
| | 100.0 | % | | $ | 7,651,319 |
| | 100.0 | % | | $ | 7,572,436 |
| | 100.0 | % |
| Operating income (loss): | | |
| | |
| | |
| | |
| | |
| | |
|
| Electric Power Infrastructure Services | | $ | 518,130 |
| | 9.3 | % | | $ | 395,745 |
| | 8.2 | % | | $ | 362,328 |
| | 7.3 | % |
| Oil and Gas Infrastructure Services | | 184,083 |
| | 4.8 |
| | 149,502 |
| | 5.3 |
| | 142,929 |
| | 5.4 |
|
| Corporate and non-allocated costs | | (323,364 | ) | | N/A | | (224,434 | ) | | N/A | | (267,754 | ) | | N/A |
| Consolidated operating income | | $ | 378,849 |
| | 4.0 | % | | $ | 320,813 |
| | 4.2 | % | | $ | 237,503 |
| | 3.1 | % |
2017 compared to 2016
Electric Power Infrastructure Services Segment Results
Revenues for this segment increased $749.3 million, or 15.4%, to $5.60 billion for the year ended December 31, 2017. This increase was primarily due to increased customer spending associated with electric transmission projects, an increase of $143.8 million in emergency restoration services revenues and approximately $40 million in revenues from acquired companies. The increased customer spending associated with electric transmission projects primarily resulted from interconnections with new generation facilities and from modernization of the North American electric power grid. The increase is emergency restoration
restorations services, revenues primarily resulted from Hurricanes Harvey and Irma and winter storms across the United States and Canada. Also contributing to the increase were more favorable foreign currency exchange rates during the year ended December 31, 2017, which favorably impacted revenues by approximately $27 million, primarily attributable to the relationship between the U.S. dollar and the Canadian and Australian dollars. Partially offsetting these increases were delays on certain projects, including as a result of work disruptions, deferrals and cancellations due to Hurricanes Harvey and Irma, and a decrease in renewable energy services revenues due primarily to a lower volume of renewable energy projects and a reduction in revenues associated with a power plant project in Alaska that was substantially completed in the fourth quarter of 2016.
Operating income increased $122.4 million, or 30.9%, to $518.1 million for the year ended December 31, 2017. Operating income as a percentage of segment revenues increased to 9.3% for the year ended December 31, 2017 from 8.2% for the year ended December 31, 2016. These increases primarily resulted from the recognition of $54.8 million of project losses on a power plant project in Alaska during the year ended December 31, 2016, as well as incremental emergency restoration services revenues in the year ended December 31, 2017, which typically yield higher margins due in part to higher equipment utilization and absorption of fixed costs. Additionally, operating income for the year ended December 31, 2019 was negatively impacted due to an increase in unabsorbed costs in Canada related to permitting and other delays to the commencement of construction for certain larger transmission projects.
Pipeline and Industrial Infrastructure Services Segment Results
The increase in revenues was primarily due to approximately $165 million in revenues from acquired businesses. Also contributing to the increase were increased revenues from smaller pipeline transmission, gas distribution and industrial services,
which resulted from increased capital spending by our customers. Partially offsetting these increases was a loss of $17.3 million during the year ended December 31, 2017 on an electric transmission project that experienced road access, subcontractor and labor production issues. The project was approximately 90% complete as of December 31, 2017. Additionally, operating income and operating income as a percentage ofdecrease in revenues were negatively impacted by delays on certain projects, including as a result of work disruptions, deferrals, cancellations and employee support costs due to Hurricanes Harvey and Irma and expenses incurred to support the growth of our communications services operations.
Oil and Gas Infrastructure Services Segment Results
Revenues for this segment increased $1.07 billion, or 38.1%, to $3.87 billion for the year ended December 31, 2017. This increase was primarily the result of increased capital spending by our customers on midstream gasfrom larger pipeline transmission projects. Theprojects, the timing of construction for pipeline transmission projectswhich is highly variable due to potential permitting delays, associated with obtaining permits, as well as worksite access limitations related to environmental regulations and seasonality ofseasonal weather patterns. Also contributing to this increasepartially offsetting these increases were approximately $190 million in revenues from acquired companies and moreless favorable foreign currency exchange rates during the year ended December 31, 2017,2019, which favorablynegatively impacted our international operationsrevenues by approximately $26$25 million and were primarily attributable to the relationship between the U.S. dollar and the Canadian dollar. During the year ended December 31, 2016, revenues were negatively impacted by project delays due to forest firesand Australian dollars.
The increases in Alberta, Canada during mid-2016.
Operatingoperating income increased $34.6 million, or 23.1%, to $184.1 million for the year ended December 31, 2017. Operatingand operating income as a percentage of segment revenues decreasedwere primarily due to 4.8% for the year ended December 31, 2017improved margins across our transmission, distribution and industrial services operations resulting from 5.3% for the year ended December 31, 2016. Operatingimproved execution and utilization, including successful execution on a larger gas transmission project that resulted in lower project costs and higher earnings. Additionally, operating income and operating income as a percentage of segment revenues in 2018 were positivelynegatively impacted by a higher proportionthe recognition of midstream$52.7 million of asset impairment and other charges primarily related to the winding down of certain oil-influenced operations and assets, as compared to $10.2 million of asset impairment charges in 2019 primarily related to the winding down and exit of certain additional oil-influenced operations and assets. The year ended December 31, 2018 was also negatively impacted by $17.3 million of project losses associated with production issues and severe weather conditions on a gas transmission work which typically yields higher margins. In addition, overall higher revenues inproject. Additionally, the segment allowed for better coverageyears ended December 31, 2019 and 2018 were negatively impacted by $28.3 million and $32.5 million of fixed and overhead costs. These increases were offset by higher costsproject losses associated with adverse weather conditions,engineering and production delays and other production issues during the third and fourth quarterson a processing facility project, which was substantially complete as of 2017 on certain Canadian pipeline transmission projects. Additionally, several projects associated with our recent acquisition of Stronghold were temporarily suspended or deferred as a result of Hurricane Harvey, which negatively impacted operating income and operating income as a percentage of segment revenues.December 31, 2019.
Corporate and Non-allocated Costs
Certain selling, general and administrative expenses and amortization of intangible assets are not allocated to segments. CorporateThe increase in corporate and non-allocated costs for the year ended December 31, 2017 increased $98.9 million to $323.4 million compared to the year ended December 31, 2016. This increase was primarilypartially due to a $13.4 million increase in the $58.1 millionfair value of goodwill and intangible asset impairment charges recordedcontingent consideration liabilities in the year ended December 31, 2017 mentioned above. In addition, higher compensation costs, largely associated with higher incentive compensation based on profitability for 2017,2019, as well as higher acquisition and integration costs and higher costs associated with ongoing technology and business development initiatives contributedcompared to the 2017 increase. Also contributing to the increase were $4.2 million of attorneys’ fees and related expenses associated with a matter involving our prior disposition of certain communications operations that was resolved in the three months ended March 31, 2017 and $2.4 million in charitable contributions in connection with the formation of a non-profit line training school. These increases were partially offset by the favorable impact of a $5.2an $11.2 million decrease in the fair value of contingent consideration liabilities during the year ended December 31, 2017 and $4.0 million in costs associated with the departure of our former president and chief executive officer recognized in the year ended December 31, 2016.
2016 compared to 2015
Electric Power Infrastructure Services Segment Results
Revenues for this segment decreased $86.8 million, or 1.8%, to $4.85 billion for the year ended December 31, 2016. This decrease was primarily a result of reduced customer spending associated with larger electric transmission projects as customers
continued to face heightened regulatory and environmental requirements from state and federal agencies and more stringent permitting processes with various regional system operators. This regulatory environment negatively impacted the timing of existing projects and delayed the development of other infrastructure projects, which resulted in decreased demand for our services. Revenues also declined as a result of less favorable foreign currency exchange rates during the year ended December 31, 2016, which negatively impacted our international operations by approximately $23 million and were primarily attributable to the strengthening of the U.S. dollar against the Canadian dollar. Partially offsetting these decreases were approximately $95 million in revenues from acquired companies and $29.9 million in higher emergency restoration services revenues.
Operating income increased $33.4 million, or 9.2%, to $395.7 million for the year ended December 31, 2016. Operating income as a percentage of segment revenues increased to 8.2% for the year ended December 31, 2016 from 7.3% for the year ended December 31, 2015. These increases were primarily due to better utilization of certain larger transmission project resources as compared to the utilization of similar resources in 2015. Also contributing to these increases was improved performance of ongoing projects, as we experienced more favorable weather and increased productivity compared to the year ended December 31, 2015, which was negatively impacted by heavy snowfall and other unfavorable weather conditions in certain areas of Canada and the northern United States. Operating income and operating income as a percentage of revenues during 2016 were adversely impacted by project losses of $54.8 million related to performance issues on a power plant construction project in Alaska which compares to the 2015 impact of project losses of $66.1 million primarily associated with the same project in Alaska and an electric transmission project in Canada that was completed in the third quarter of 2015.
The project losses related to the Alaska power plant construction project recognized during the year ended December 31, 2016 were primarily2018 based on performance of certain acquired businesses. Also contributing to the increase was an $18.1 million increase in intangible amortization due to performance issuesan increase in intangible assets associated primarily with 2019 acquisitions, an $11.1 million increase in deferred compensation expense primarily associated with increases in the market value of participants’ investment elections, a $7.2 million increase in professional fees and a claimed force majeure event that disrupted the commissioning phase of the project during the second quarter of 2016. These issues resulted$7.5 million increase in higher than expected production costs dueacquisition-related costs. Partially offsetting these increases was a $6.8 million decrease in incentive and stock-based compensation, primarily attributable to quality deficiencieslower performance against incentive compensation metrics in 2019 as compared to 2018.
Remaining Performance Obligations and their impact on production sequencing. We provided the customer and its insurance providersBacklog
A performance obligation is a promise in a contract with a noticecustomer to transfer a distinct good or service. Our remaining performance obligations represent management’s estimate of force majeure in orderconsolidated revenues that are expected to seek schedule relief and cost recoverybe realized from the disruptions. remaining portion of firm orders under fixed price contracts not yet completed or for which work has not yet begun, which includes estimated revenues attributable to consolidated joint ventures and variable interest entities (VIEs), revenues from funded and unfunded portions of government contracts to the extent they are reasonably expected to be realized, and revenues from change orders and claims to the extent management believes they will be earned and are probable of collection.
We arehave also historically disclosed our backlog, a measure commonly used in our industry but not recognized under generally accepted accounting principles in the process of developing potential claims for damagesUnited States (GAAP). We believe this measure enables management to more effectively forecast our future capital needs and results and better identify future operating trends that may have resulted from third-party engineeringnot otherwise be apparent. We believe this measure is also useful for investors in forecasting our future results and comparing us to our competitors. Our remaining performance obligations are a component of backlog, which also includes estimated orders under master service agreements (MSAs), including estimated renewals, and non-fixed price contracts expected to be completed within one year. Our methodology for determining backlog may not be comparable to the methodologies used by other contractor performance issues; however, no revenues or cost recovery was reflected in the estimatecompanies.
As of December 31, 2019 and 2018, MSAs accounted for 53% and 53% of our estimated 12-month backlog and 61% and 60% of total project losses at December 31, 2017 or 2016. This project had a contract valuebacklog. Generally, our customers are not contractually committed to specific volumes of $202 millionservices under our MSAs, and was completedmost of our contracts can be terminated on short notice even if we are not in 2017. However, we remain withindefault. We determine the warranty periodestimated backlog for these MSAs using recurring historical trends, factoring in seasonal demand and projected customer needs based upon ongoing communications. In addition, many of our MSAs are subject to renewal, and these potential warranty claims, for which we have provided anrenewals are considered in determining estimated warranty reserve.
Oil and Gas Infrastructure Services Segment Results
Revenues for this segment increased $165.7 million, or 6.3%, to $2.80 billion for the year ended December 31, 2016. This increase was primarily the result of increased capital spending by our customers on larger projects, certain of which moved into full construction during the second half of 2016, after experiencing regulatory and permitting delays in the first half of 2016, as well as increased customer spending for natural gas distribution services. In addition, revenues were favorably impacted by the contribution of approximately $30 million in revenues from acquired companies. The revenues contributed from our international operations were negatively impacted by approximately $18 million asbacklog. As a result, estimates for remaining performance obligations and backlog are subject to change based on, among other things, project accelerations; project cancellations or delays, including but not limited to those caused by commercial issues, regulatory requirements, natural disasters and adverse weather conditions; and final acceptance of less favorable foreign currency exchange rateschange orders by customers. These factors can cause revenues to be realized in the year ended December 31, 2016 as compared to the year ended December 31, 2015, primarily attributable to the strengthening of the U.S. dollar against the Canadian dollar.periods and at levels that are different than originally projected.
Operating income increased $6.6 million, or 4.6%, to $149.5 million for the year ended December 31, 2016. Operating income as a percentage of segment revenues decreased to 5.3% for the year ended December 31, 2016 from 5.4% for the year ended December 31, 2015.
The increase in operating income was primarily due to the increase in revenues described above. The decrease in operating income as a percentage of segment revenues was primarily due to the negative impact on resource utilization due to permitting delays on certain pipeline projects that were scheduled to begin in the first half of 2016 but did not start until the second half of 2016. Operating income as a percentage of revenues was also negatively impacted by approximately $2 million in severance and restructuring costs recognized during 2016. Partially offsetting these items that negatively impacted operating income as a percentage of revenues was improvedfollowing table reconciles total remaining performance on certain larger pipeline projects that moved into full construction during 2016.
Corporate and Non-allocated Costs
Certain selling, general and administrative expenses and amortization of intangible assets are not allocated to segments. Corporate and non-allocated costs for the year ended December 31, 2016 decreased $43.3 million to $224.4 million as compared to the year ended December 31, 2015. This decrease was primarily due to the $51.9 million previously described goodwill and intangible asset impairment charges recorded in the year ended December 31, 2015, partially offset by $4.6 million in higher costs related to ongoing litigation, which included $6.9 million of litigation costs relatedobligations to our dispositionbacklog (a non-GAAP measure) by reportable segment, along with estimates of certain telecommunication operations, and $4.0 million in costs associated with the departure of Quanta’s former president and chief executive officer recognized during 2016.amounts expected to be realized within 12 months (in thousands):
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| | | | | | | | | | | | | | | | |
| | | December 31, 2019 | | December 31, 2018 |
| | | 12 Month | | Total | | 12 Month | | Total |
| Electric Power Infrastructure Services | | | | | | | | |
| Remaining performance obligations | | $ | 2,483,109 |
| | $ | 3,957,710 |
| | $ | 2,093,461 |
| | $ | 3,045,553 |
|
| Estimated orders under MSAs and short-term, non-fixed price contracts | | 2,873,446 |
| | 5,864,527 |
| | 2,467,654 |
| | 5,499,887 |
|
| Backlog | | 5,356,555 |
| | 9,822,237 |
| | 4,561,115 |
| | 8,545,440 |
|
| | | | | | | | | |
| Pipeline and Industrial Infrastructure Services | | | | | | | | |
| Remaining performance obligations | | 670,707 |
| | 1,344,741 |
| | 1,003,543 |
| | 1,635,918 |
|
| Estimated orders under MSAs and short-term, non-fixed price contracts | | 1,919,791 |
| | 3,837,923 |
| | 1,411,329 |
| | 2,161,275 |
|
| Backlog | | 2,590,498 |
| | 5,182,664 |
| | 2,414,872 |
| | 3,797,193 |
|
| | | | | | | | | |
| Total | | | | | | | | |
| Remaining performance obligations | | 3,153,816 |
| | 5,302,451 |
| | 3,097,004 |
| | 4,681,471 |
|
| Estimated orders under MSAs and short-term, non-fixed price contracts | | 4,793,237 |
| | 9,702,450 |
| | 3,878,983 |
| | 7,661,162 |
|
| Backlog | | $ | 7,947,053 |
| | $ | 15,004,901 |
| | $ | 6,975,987 |
| | $ | 12,342,633 |
|
Liquidity and Capital Resources
Cash Requirements
Our cash and cash equivalents totaled $138.3 million and $112.2 million as of December 31, 2017 and 2016. As of December 31, 2017 and 2016, cash and cash equivalents held in domestic bank accounts were $83.1 million and $19.5 million, and cash and cash equivalents held in foreign bank accounts were $55.2 million and $92.7 million. As of December 31, 2017 and 2016, cash and cash equivalents held by our joint ventures, which are either consolidated or proportionately consolidated, were $16.7 million and $11.5 million, of which $10.0 million and $10.0 million related to domestic joint ventures. Cash and cash equivalents held by the joint ventures are available to support joint venture operations, but we cannot utilize those assets to support our other operations. We generally have no right to a joint venture’s cash and cash equivalents other than participating in distributions and in the event of dissolution.
We were in compliance with the covenants under the credit agreement for our senior secured revolving credit facility at December 31, 2017. We anticipate that our cash and cash equivalents on hand, existing borrowing capacity under such credit facility, and our future cash flows from operations will provide sufficient funds to enable us to meet our future operating needs and our planned capital expenditures during 2018, as well as facilitate our ability to grow through acquisitions or otherwise in the foreseeable future.
Our industry is capital intensive, and we expect the need for substantial capital expenditures to continue into the foreseeable future to meet the anticipated demand for our services. Total capital expenditures are expected to be approximately $275 million for 2018.
We also evaluate opportunities for strategic acquisitions from time to time that may require cash, as well as opportunities to make investments in strategic partnerships with customers and infrastructure investors where we anticipate performing services such as project management, engineering, procurement or construction services. These investment opportunities exist in the markets and industries we serve and may require the use of cash to purchase debt or equity investments.
Management continues to monitor themonitors financial markets and general national and global economic conditions for factors that may affect our liquidity and capital resources. We consider our investment policies related to cash and cash equivalents investment policies to be conservative in that we maintain a diverse portfolio of what we believe to be high-quality cash and cash equivalent investments with short-term maturities. Accordingly, we do notWe anticipate that any weakness in the capital markets will have a material impact on the principal amounts of our cash and cash equivalents or our ability to rely upon our senior secured revolving credit facility for funds. To date, we have not experienced a loss of or lack of access to our cash or cash equivalents or fundson hand, existing borrowing capacity under our senior secured revolving credit facility; however,facility, our ability to access capital markets and future cash flows from operations will provide sufficient funds to enable us to meet our debt repayment obligations, fund future operating needs, facilitate our ability to pay any future dividends we declare, grow through acquisitions or strategic investments, and fund planned capital expenditures during 2020. However, our liquidity and capital resources, as well as our access to investedthese sources of funds, can be influenced by adverse conditions in financial markets and economic trends and conditions that impact our results of operations.
Cash Requirements
Our available commitments and cash and cash equivalents or availabilityat December 31, 2019 were as follows (in thousands):
|
| | | | |
| | | December 31, 2019 |
| Total capacity available for revolving loans and letters of credit | | $ | 2,135,000 |
|
| Less: | | |
| Borrowings of revolving loans under our senior secured credit facility | | 104,885 |
|
| Letters of credit outstanding under our senior secured credit facility | | 383,800 |
|
| Available commitments under senior secured credit facility for issuing revolving loans or new letters of credit | | 1,646,315 |
|
| Plus: | | |
| Cash and cash equivalents | | 164,798 |
|
| Total available commitments under senior secured credit facility and cash and cash equivalents | | $ | 1,811,113 |
|
We also had borrowings of term loans under our senior secured revolving credit facility couldof $1.24 billion as of December 31, 2019, and we are required to make quarterly principal payments of $16.1 million on these loans.
Our industry is capital intensive, and we expect substantial capital expenditures and commitments under equipment lease and rental arrangements to be impactedneeded into the foreseeable future in order to meet anticipated demand for our services. Total capital
expenditures are expected to be approximately $300 million for the future by adverse conditions in the financial markets.year ended December 31, 2020. We also continue to evaluate opportunities for stock repurchases under our authorized stock repurchase programs.
We generally do not provideRefer to Contractual Obligations below for taxes related to undistributed earningsa summary of our foreign subsidiaries because such earnings either would not be taxable when remitted orfuture contractual obligations as of December 31, 2019 and Off-Balance Sheet Transactions and Contingencies below for a description of certain contingent obligations. Although some of these contingent obligations could require the use of cash in future periods, they are consideredexcluded from the Contractual Obligations table because we are unable to be indefinitely reinvested. We could also be subject to additional foreign withholding taxes if we were to repatriate cash that is indefinitely reinvested outsideaccurately predict the United States, but we do not expecttiming and amount of any such amounts to be material.obligations as of December 31, 2019.
Sources and Uses of Cash
As of December 31, 2017, we hadIn summary, our cash and cash equivalents of $138.3 million and working capital of $1.38 billion. We also had $413.3 million of outstanding letters of credit and bank guarantees under our senior secured revolving credit facility, $228.6 million of whichflows for each period were denominated in U.S. dollars and $184.7 million of which were denominated in currencies other than the U.S. dollar, primarily in Australian or Canadian dollars. We also had $668.4 million of outstanding revolving loans under our senior secured revolving credit facility, $645.0 million of which were denominated in U.S. dollars and $23.4 million of which were denominated in Australian dollars. As of December 31, 2017, our $1.81 billion senior secured revolving credit facility had $728.3 million available for revolving loans or issuing new letters of credit or bank guarantees. As discussed in Debt Instruments - Credit Facility below, we entered into an amendment to our senior secured revolving credit facility that extended the maturity date to October 31, 2022 and adjusted the interest rates applicable to certain borrowings.as follows (in thousands):
|
| | | | | | | | |
| | | Year Ended December 31, |
| | | 2019 | | 2018 |
| Net cash provided by operating activities | | $ | 526,551 |
| | $ | 358,789 |
|
| Net cash used in investing activities | | (617,596 | ) | | (402,670 | ) |
| Net cash provided by (used in) financing activities | | 177,687 |
| | (16,570 | ) |
Operating Activities
Cash flow from operationsoperating activities is primarily influenced by demand for our services and operating margins but canis also be influenced by working capital needs associated with the various types of services that we provide. In particular,Our working capital needs may increase when we commence large volumes of work under circumstances where project costs, primarily associated with labor, equipment and subcontractors, are required to be paid before the associated receivables resulting from the work performed are billed and collected. Accordingly, changes within working capital in accounts receivable, costscontract assets and estimated earnings in excess of billings
on uncompleted contracts, and billings in excess of costs and estimated earnings on uncompleted contractscontract liabilities are normally related and are typically affected on a collective basis by changes in revenue due to the timing and volume of work performed and variability in the timing of customer billings and payments. Additionally, working capital needs are generally higher during the summer and fall months due to increased demand for our services when favorable weather conditions exist in many of our operating regions. Conversely, working capital assets are typically converted to cash during the winter months. These seasonal trends can be offset by changes in theproject timing of projects due to delays or accelerations and other economic factors that may affect customer spending.
Operating activities of continuing operations provided net cash of $372.5 million during 2017 as compared to $390.2 million during 2016 and $628.6 million during 2015. Net cash provided by operating activities during 20172019 was favorably impacted by a decrease in cash used for operating assets and 2016,liabilities as compared to 2015, were favorably impacted by increases2018, including as a result of the timing and number of contracts that include advance billing terms and/or retention balances. Net cash used in earnings from continuing operations. However,operating activities during 2019 included our payment of $112 million as a result of the exercise of on-demand advance payment and performance bonds in connection with the termination of the large telecommunications project in Peru, which is described in further detail in Note 14 of the Notes to Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data.
Days sales outstanding (DSO) represents the average number of days it takes revenues to be converted into cash, which management believes is an important metric for 2017, the higher earnings were offset by increased working capital requirements primarily related to variability in billing and payment terms across various projects and an increase in accounts receivable associated with emergency restoration services work performed late in 2017. Also contributing to theassessing liquidity. A decrease in 2017 as compared to 2016 was the $25.5 million payment related to the settlement of the multiemployer pension plan withdrawal liabilities associated with the Central States Plan, partially offset by reduced cash tax payments due to the acceleration of tax deductions into 2017. The decrease inDSO has a favorable impact on cash flow from operating activities, of continuing operations for the year ended December 31, 2016 compared to the year ended December 31, 2015 was primarily due to additional working capital requirements associated with larger oil and gas infrastructure projects that moved into full construction during the second half of 2016 and invoicing challenges and billing delayswhile an increase in DSO has a negative impact on two related electric transmission projects located in remote regions of northeastern Canada, which resultedcash flow from extensive quality assurance documentation and administrative requirements. These invoicing and billing delays were substantially resolved during 2017. Operating activities of continuing operations for 2015 were positively impacted by the receipt of a $65 million cash payment associated with the settlement of a large project receivable, as well as a corresponding benefit due to the reduction in income tax payments that resulted from the prior year charge to selling, general and administrative expenses of $102.5 million associated with this settlement.
Days sales outstanding (DSO) as of December 31, 2017 was 76 days, as compared to 74 days as of December 31, 2016. This increase was primarily due to favorable billing terms for certain projects ongoing at December 31, 2016 as compared to projects ongoing at December 31, 2017, partially offset by the impact of invoicing challenges and billing delays on two related large electric transmission projects in remote regions of northeastern Canada as of December 31, 2016.operating activities. DSO is calculated by using the sum of current accounts receivable, net of allowance (which includes retainage and unbilled balances), plus costs and estimated earnings in excess of billings on uncompleted contractscontract assets less billings in excess of costs and estimated earnings on uncompleted contracts,contract liabilities, divided by average revenues per day during the quarter. DSO as of December 31, 2019 was 81 days, as compared to 74 days as of December 31, 2018. The increase in DSO was primarily due to the timing of work on larger pipeline transmission projects and the related billing and collection cycles. During the fourth quarter of 2018, we had higher revenues on larger pipeline transmission projects with relatively lower receivable balances as compared to lower revenues and relatively higher receivable balances on larger pipeline transmission projects during the fourth quarter of 2019.
Investing Activities
During 2017, weNet cash used net cash in investing activities of continuing operations of $575.8 million as compared to $266.0 million and $307.1 million used in 2016 and 2015. Investing activities of continuing operations in 2017during 2019 included $361.2$388.0 million used for acquisitions, including $347.5 million associated with the Stronghold acquisition, and $244.7$261.8 million used for capital expenditures.expenditures and $47.1 million of cash paid for investments in unconsolidated affiliates and other entities. These items were partially offset by $23.3$46.6 million of proceedscash received from investments in unconsolidated affiliates and other entities related to the sale of propertyour equity interest in the limited partnership that built, owned and equipment. Investing activities of continuing operationsoperated the large electric transmission project in 2016 included $212.6 million used for capital expendituresCanada and $68.8 million used for acquisitions, partially offset by $22.0 million of proceeds from the sale of property and equipment. Investing activities of continuing operations in 2015 included $210.0 million used for capital expenditures and $112.9 million used for acquisitions, partially offset by $26.2$31.1 million of proceeds from the sale of property and equipment.
Additionally,Net cash used in investing activities during 2018 included $293.6 million used for capital expenditures; $94.9 million used for acquisitions; $36.9 million of cash paid for investments in unconsolidated affiliates and other entities, including $18.5 million for our acquisition of Strongholda 30% interest in 2017 includesa water and gas pipeline infrastructure contractor located in Australia and $14.9 million related to the potential payment of up to approximately $100.0limited partnership for the large electric transmission project in Canada; and $14.4 million of contingent consideration, payable atcash paid for intangible assets. These items were partially offset by $31.8 million of proceeds from the endsale of a three-year period if the acquired business achieves certain financial targets. Any contingent consideration that is earned will be paid at least 70% in cash,property and we may elect to pay up to the full amount in cash. We recorded a $51.1 million liability as of the acquisition date based on the estimated fair value of the liability. The aggregate fair value of all of our contingent consideration liabilities totaled $65.7 million as of December 31, 2017. We also completed an acquisition in January 2018 that included contingent consideration of up to $15.0 million, payable if the acquired business achieves certain financial and operational objectives and which would be paid at least 70% in cash.equipment.
Our industry is capital intensive, and we expect the need for substantial capital expenditures and commitments under equipment lease and rental arrangements to continuebe needed into the foreseeable future to meet the anticipated demand for our services.future. We also have various contractual obligations related to investments in unconsolidated affiliates and other capital commitments whichthat are detailed in Contractual Obligationsbelow. In addition, we expect to continue to pursue strategic acquisitions and investments, although we cannot predict the timing or magnitudeamount of the potential cash outlaysneeded for these initiatives.
Financing Activities
During 2017, netNet cash provided by financing activities of continuing operations was $227.8 million as compared to net cash used in financing activities of continuing operations of $133.8 million and $1.23 billion in 2016 and 2015. Financing activities of continuing operations during 20172019 included $307.9$272.5 million of net borrowings under our senior secured revolving credit facility, partially offset by $50.0facility. These borrowings were primarily utilized to fund operating and investing activities, including capital expenditures, the cash portion of acquisitions, payments in connection with the exercise of on-demand advance payment and performance bonds described above and working capital requirements. Additional financing activities during 2019 included $28.3 million of net short-term debt repayments, $20.1 million of common stock repurchases under our stock repurchase program, $23.2 million of cash payments of dividends and $18.5cash dividend equivalents and $16.1 million of payments to satisfy tax withholding obligations associated with share-basedstock-based compensation.
Net borrowingscash used in financing activities during 2017 were primarily utilized to fund the cash portion of the consideration paid at closing for the Stronghold acquisition and additional working capital requirements associated with increases in emergency restoration services projects and the number and size of ongoing oil and gas infrastructure projects. Financing activities of continuing operations in 20162018 included $116.2$443.2 million of net repaymentscommon stock repurchases under our senior secured revolving credit facilitystock repurchase programs and $8.3$15.2 million of payments to satisfy tax withholding obligations associated with share-basedstock-based compensation.
Financing activities of continuing operations in 2015 included $1.61 billion of common stock repurchases under our stock repurchase programs; $18.9 million of cash payments to non-controlling interests as distributions of joint venture profits, net of contributions received; and $9.8 million of payments to satisfy tax withholding obligations associated with share-based compensation, partially These items were mostly offset by $413.6$415.3 million of net borrowings under our senior secured revolving credit facility.facility and $33.8 million of net short-term debt borrowings.
Additionally, on August 4, 2015, we completed the saleContingent Consideration Liabilities
Certain of our fiber optic licensing operations for a purchase price of $1.00 billion in cash, resulting in after-tax net proceeds of $848.2 million. We have presentedacquisitions include the results of operations, financial position, cash flows and disclosures of the fiber optic licensing operations as discontinued operations for all periods in our consolidated financial statements. A cash taxpotential payment of $134.3contingent consideration, payable in the event certain performance objectives are achieved by the acquired businesses during designated post-acquisition periods. The majority of these contingent consideration liabilities are subject to a maximum payment amount, which totaled $157.2 million as of December 31, 2019. Included within this maximum amount is approximately $18.0 million related to certain acquisitions completed in 2018, payable based on performance over five-year and three-year post-acquisition periods, and approximately $100.0 million related to the gain2017 acquisition of Stronghold, Ltd. and Stronghold Specialty, Ltd., payable based on performance over a three-year post-acquisition period. The aggregate fair value of all of our contingent consideration liabilities was $84.2 million as of December 31, 2019, of which $77.6 million is included in “Accounts payable and accrued expenses” and $6.5 million is included in “Insurance and other non-current liabilities.” The significant majority of these liabilities would be paid at least 70% to 85% in cash. Cash payments for these liabilities up to the amount recognized at the respective acquisition dates, including measurement-period adjustments, will be classified as financing activities in our consolidated statements of cash flows. Any cash payments in excess of the amount of contingent consideration liabilities recognized at the respective acquisition dates will be classified as operating activities in our consolidated statements of cash flows.
Stock Repurchases
We repurchased the following shares of common stock in the fourth quarteropen market under our stock repurchase programs (in thousands):
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| | | | | | | |
| Year ended: | | Shares | | Amount |
| December 31, 2019 | | 376 |
| | $ | 11,953 |
|
| December 31, 2018 | | 13,917 |
| | $ | 451,290 |
|
| December 31, 2017 | | 1,382 |
| | $ | 50,000 |
|
Our policy is to record a stock repurchase as of 2015 and was included in net cash provided by (used in) investing activities from discontinued operations on our consolidated statementthe trade date; however, the payment of cash flows forrelated to a repurchase is made on the yearsettlement date of the trade. During the years ended December 31, 2015.2019, 2018 and 2017, cash payments related to stock repurchases were $20.1 million, $443.2 million and $50.0 million.
Stock Repurchases
During the second quarterAs of 2017,December 31, 2019, $286.8 million remained authorized under our board of directors approved a stockexisting repurchase program, thatwhich authorizes us to purchase,repurchase outstanding common stock from time to time through June 30, 2020, up to $300.0 million of our outstanding common stock2021 (the 20172018 Repurchase Program). Repurchases under the 20172018 Repurchase Program canmay be made inimplemented through open market andor privately negotiated transactions. Astransactions, at management’s discretion, based on market and business conditions, applicable contractual and legal requirements, including restrictions under our senior secured credit facility, and other factors. We are not obligated to acquire any specific amount of December 31, 2017, we had repurchased 1.4 millioncommon stock and the 2018 Repurchase Program may be modified or terminated by our Board of Directors at any time at its sole discretion and without notice. For additional detail about our stock repurchases, refer to Note 11 of the Notes to Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data.
Dividends
We declared and paid the following cash dividends and cash dividend equivalents during 2019 and 2018 (in thousands, except per share amounts):
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| | | | | | | | | | | | |
| Declaration | | Record | | Payment | | Dividend | | Dividends |
| Date | | Date | | Date | | Per Share | | Declared |
| December 11, 2019 | | January 2, 2020 | | January 16, 2020 | | $ | 0.05 |
| | $ | 7,371 |
|
| August 28, 2019 | | October 1, 2019 | | October 15, 2019 | | $ | 0.04 |
| | $ | 5,564 |
|
| May 24, 2019 | | July 1, 2019 | | July 15, 2019 | | $ | 0.04 |
| | $ | 6,233 |
|
| March 21, 2019 | | April 5, 2019 | | April 19, 2019 | | $ | 0.04 |
| | $ | 5,896 |
|
| December 6, 2018 | | January 2, 2019 | | January 16, 2019 | | $ | 0.04 |
| | $ | 5,838 |
|
A significant majority of dividends declared were paid on the corresponding payment dates. Holders of restricted stock units (RSUs) awarded under the Quanta Services, Inc. 2011 Omnibus Equity Incentive Plan (the 2011 Plan) generally received cash dividend equivalent payments equal to the cash dividend payable on account of the underlying Quanta common stock. Holders of exchangeable shares of ourcertain Canadian subsidiaries of Quanta were paid a cash dividend per exchangeable share equal to the cash dividend per share paid to Quanta common stock at a costshareholders on the payment dates. Holders of $50.0 million in the open marketRSUs awarded under the 2017 Repurchase Program.
During the third quarterQuanta Services, Inc. 2019 Omnibus Equity Incentive Plan (the 2019 Plan) and holders of 2015, our board of directors approved aunearned and unvested performance stock repurchase program that authorized us to purchase, from time to time through February 28, 2017, up to $1.25 billion of our outstanding common stock (the 2015 Repurchase Program). During 2015, we repurchased 19.2 million shares of our common stock at a cost of $449.9 million in the open marketunits (PSUs) awarded under the 2015 Repurchase Program. During2011 Plan and the third quarter of 2015, we also entered into an accelerated share repurchase arrangement (the ASR)2019 Plan receive cash dividend equivalent payments only to repurchase $750.0 million of our common stock under the 2015 Repurchase Program. Pursuantextent such RSUs and PSUs become earned and/or vest. Additionally, cash dividend equivalents related to certain stock-based awards that have been deferred pursuant to the terms of a deferred compensation plan maintained by us are recorded as liabilities in such plans until the ASR, based on the final volume-weighted average share price during the term of the ASR, minus a discount and subject to other adjustments, we paid $750.0 million to JPMorgan Chase Bank, National Association, London Branch (JPMorgan) and received 25.7 million shares of our common stock in the third quarter of 2015 and 9.4 million shares of our common stock in the second quarter of 2016. As a result, we repurchased a total of 54.3 million shares of our common stock at a cost of $1.20 billion under the 2015 Repurchase Program prior to its termination on February 28, 2017.
During the fourth quarter of 2013, our board of directors approved a stock repurchase program authorizing us to purchase from time to time through December 31, 2016, up to $500.0 million of our outstanding common stock (the 2013 Repurchase Program). During the year ended December 31, 2015, we repurchased 14.3 million shares of our common stock at a cost of $406.5 million in the open market and completed the 2013 Repurchase Program.deferred awards are settled.
Debt Instruments
Senior Secured Revolving Credit Facility
On December 18, 2015, we entered into an amended and restatedWe have a credit agreement with various lenders that provides for (i) a $1.81$2.14 billion senior secured revolving credit facility. On October 31, 2017, wefacility and the lenders entered into an amendment to the credit(ii) a term loan facility which, among other things, extended the maturity date from December 18, 2020 to October 31, 2022 and adjusted the interest rates applicable to certain borrowings. The entire amount available under the credit facility may be used by us for revolving loans and letters of credit in U.S. dollars and certain alternative currencies. Up to $600.0 million of the credit facility may be used by certain of our subsidiaries for revolving loans and letters of credit in certain alternative currencies. Up to $100.0 million of the credit facility may be used for swing linewith term loans in U.S. dollars, up to $50.0 millionthe aggregate initial principal amount of the credit facility may be used for swing line loans in Canadian dollars and up to $30.0 million of the credit facility may be used for swing line loans in Australian dollars.$1.29 billion. In addition, subject to the conditions specified in the credit agreement, we have the option to increase the capacity of the credit facility, in the form of an increase in the revolving
commitments by up to $400.0 million credit facility, incremental term loans or a combination thereof, from time to time, upon receipt of additional commitments from new or existing lenders. lenders by up to an additional (i) $400.0 million plus (ii) an additional amount that is unlimited so long as the Incremental Leverage Ratio Requirement (as defined in the credit agreement) is satisfied at the time of such increase. The Incremental Leverage Ratio Requirement requires, among other things, after giving pro forma effect to such increase and the use of proceeds therefrom, compliance with the credit agreement’s financial covenants as of the most recent fiscal quarter end for which financial statements were required to be delivered and that our Consolidated Leverage Ratio (as defined below) does not exceed 2.5 to 1.0, subject to the conditions specified in the credit agreement.
Borrowings under the credit agreement are to be used to refinance existing indebtedness and for working capital, capital expenditures, acquisitions and other general corporate purposes.
As The maturity date for both the revolving credit facility and the term loan facility is October 31, 2022; however, we may voluntarily prepay the term loans from time to time in whole or in part, without premium or penalty. We are required to make quarterly principal payments of $16.1 million on the term loan facility. During the years ended December 31, 2017, we had $413.3 million of outstanding letters of credit2019 and bank guarantees under2018, our weighted average interest rates associated with our senior secured revolving credit facility $228.6were 3.8% and 3.6%.
We borrowed $600.0 million under the term loan facility in October 2018 and borrowed an additional $687.5 million under the term loan facility in September 2019 and used the majority of which were denominated in U.S. dollars and $184.7 million of which were denominated in currencies other than the U.S. dollar, primarily in Australian or Canadian dollars. We also had $668.4 million ofsuch proceeds to repay outstanding revolving loans under the credit facility, $645.0 millionagreement. As of which were denominated in U.S. dollars and $23.4 millionDecember 31, 2019, we had $1.35 billion of which were denominated in Australian dollars. The remaining $728.3 million was available for revolving loans or new letters of credit or bank guarantees.
Beginning on November 20, 2017, amounts borrowed in U.S. dollars bear interest, at our option, at a rate equal to either (i) the Eurocurrency Rate plus 1.125% to 2.000%, as determined based on our Consolidated Leverage Ratio, or (ii) the Base Rate plus 0.125% to 1.000%, as determined based on our Consolidated Leverage Ratio. Amounts borrowed as revolving loansborrowings outstanding under the credit agreement, in any currency other than U.S. dollars bear interest at a rate equal towhich included $1.24 billion borrowed under the Eurocurrency Rate plus 1.125% to 2.000%, as determined based on our Consolidated Leverage Ratio. Additionally, standby or commercialterm loan facility and $104.9 million of outstanding revolving loans. We also had $383.8 million of letters of credit issued under our revolving credit facility. The remaining $1.65 billion of available commitments under the revolving credit agreement are subject to a letterfacility was available for additional revolving loans or letters of credit fee of 1.125% to 2.000%, based on our Consolidated Leverage Ratio, and Performance Letters of Credit issued under the credit agreement in support of certain contractual obligations are subject to a letter of credit fee of 0.675% to 1.150%, based on our Consolidated Leverage Ratio.
From December 18, 2015 through November 19, 2017, amounts borrowed in U.S. dollars bore interest, at our option, at a rate equal to either (i) the Eurocurrency Rate (as defined in the credit agreement) plus 1.125% to 2.125%, as determined based on our Consolidated Leverage Ratio (as described below), or (ii) the Base Rate (as described below) plus 0.125% to 1.125%, as determined based on our Consolidated Leverage Ratio. Amounts borrowed as revolving loans under the credit agreement in any currency other than U.S. dollars bore interest at a rate equal to the Eurocurrency Rate plus 1.125% to 2.125%, as determined based on our Consolidated Leverage Ratio. Standby or commercial letters of credit issued under the credit agreement were subject to a letter of credit fee of 1.125% to 2.125%, based on our Consolidated Leverage Ratio, and Performance Letters of Credit (as defined in the credit agreement) issued under the credit agreement in support of certain contractual obligations were subject to a letter of credit fee of 0.675% to 1.275%, based on our Consolidated Leverage Ratio.
We are also subject to a commitment fee of 0.20% to 0.40%, based on our Consolidated Leverage Ratio, on any unused availability under the credit agreement.
The Consolidated Leverage Ratio is the ratio of our Consolidated Funded Indebtedness to Consolidated EBITDA (as those terms are defined in the credit agreement). For purposes of calculating our Consolidated Leverage Ratio, Consolidated Funded Indebtedness is reduced by available cash and cash equivalents (as defined in the credit agreement) in excess of $25.0 million. The Base Rate equals the highest of (i) the Federal Funds Rate (as defined in the credit agreement) plus 0.5%, (ii) the prime rate publicly announced by Bank of America, N.A. and (iii) the Eurocurrency Rate plus 1.00%.
Subject to certain exceptions, the credit agreement is secured by substantially all of our assets and the assets of our wholly owned U.S. subsidiaries and by a pledge of all of the capital stock of our wholly owned U.S. subsidiaries and 65% of the capital stock of direct foreign subsidiaries of our wholly owned U.S. subsidiaries. Our wholly owned U.S. subsidiaries also guarantee the repayment of all amounts due under the credit agreement. Subject to certain conditions, all collateral will automatically be released from the liens at any time we maintain an Investment Grade Rating (defined in the credit agreement as two of the following three conditions being met: (i) a corporate credit rating that is BBB- or higher by Standard & Poor’s Rating Services, (ii) a corporate family rating that is Baa3 or higher by Moody’s Investors Services, Inc. or (iii) a corporate credit rating that is BBB- or higher by Fitch Ratings, Inc.).alternative currencies.
The credit agreement contains certain covenants, including (1)(i) a maximum Consolidated Leverage Ratio of 3.0 to 1.0 (provided(except that in connection with certain permitted acquisitions in excess of $200.0 million, such ratio is 3.5 to 1.0 for the fiscal quarter in which the acquisition is completed and the two subsequent fiscal quarters) and (2)(ii) a minimum Consolidated Interest Coverage Ratio (as defined in the credit agreement) of 3.0 to 1.0. As of December 31, 2017,2019, we were in compliance with all of the financial covenants under the credit agreement. Consolidated Leverage Ratio is the ratio of our Consolidated Funded Indebtedness to Consolidated EBITDA (as those terms are defined in the credit agreement.agreement). For purposes of calculating our Consolidated Leverage Ratio, Consolidated Funded Indebtedness
is reduced by available cash and Cash Equivalents (as defined in the credit agreement) in excess of $25.0 million. Consolidated Interest Coverage Ratio is the ratio of (i) Consolidated EBIT (as defined in the credit agreement) for the four fiscal quarters most recently ended to (ii) Consolidated Interest Expense (as defined in the credit agreement) for such period (excluding all interest expense attributable to capitalized loan costs and the amount of fees paid in connection with the issuance of letters of credit on our behalf during such period).
The credit agreement provides for customary events of default and generally contains cross-default provisions with other debt instruments exceeding $150.0 million in borrowings or availability. Additionally, subject to certain exceptions, (i) all borrowings are secured by substantially all the assets of Quanta and its wholly-owned U.S. subsidiaries and by a pledge of all of the capital stock of Quanta’s wholly-owned U.S. subsidiaries and 65% of the capital stock of direct foreign subsidiaries of Quanta’s wholly-owned U.S. subsidiaries and (ii) Quanta’s wholly-owned U.S. subsidiaries guarantee the repayment of all amounts due under the credit agreement. The credit agreement also limits certain acquisitions, mergers and consolidations, indebtedness, asset sales and prepayments of indebtedness and, subject to certain exceptions, prohibits liens on our assets. The credit agreement allows cash payments for dividends and stock repurchases subject to compliance with the following requirements (after(including after giving effect to the dividend or stock repurchase): (i) no default or event of default under the credit agreement; (ii) continued compliance with the financial covenants in the credit agreement; and (iii) at least $100.0 million of availability under the revolving credit agreementfacility and/or cash and cash equivalents on hand.
The credit agreement provides for customary events of default and contains cross-default provisions with our underwriting, continuing indemnity and security agreement with our sureties and all of our other debt instruments exceeding $100.0 million in borrowings or availability. If an Event of Default (as defined in the credit agreement) occurs and is continuing, on the terms and
subject to the conditions set forth in the credit agreement, the lenders may declare all amounts outstanding and accrued and unpaid interest immediately due and payable, require that we provide cash collateral for all outstanding letter of credit obligations, terminate the commitments under the credit agreement, and foreclose on the collateral.
Prior to the amendment and restatement of our credit agreement on December 18, 2015 and after April 1, 2014, amounts borrowed bore interest at the same rates as the period from December 18, 2015 through November 19, 2017 described above, and we were subject to the same commitment fees as above.
Other Facilities
We have also entered into bilateral credit agreements with various lenders that provide for up to $50.2 million in aggregate availability in both U.S. dollars and certain alternative currencies, primarily Australian dollars. We may utilize these facilities for, among other things, the issuance of letters of credit or bank guarantees and overdraft protection and had $2.8 million of letters of credit and bank guarantees outstanding under these facilities at December 31, 2017.
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 certain obligations relating to our investments and joint venture arrangements, liabilities associated with non-cancelable operating leases, letters of credit obligations, surety guarantees related to performance bonds, commitments to purchase equipment and certain multiemployer pension plan liabilities.
Investments in Affiliates and Other Entities
Certain joint venture structures involve risks not directly reflected in our balance sheets. For example, we have guaranteed all of the obligations of certain joint ventures under contracts with the customer. Additionally, other joint venture arrangements qualify as a general partnership, for which we are jointly and severally liable for all of the obligations of the joint venture. In our joint venture arrangements, typically each joint venture party indemnifies the other party for any liabilities incurred in excess of the liabilities such other party is obligated to bear under the respective joint venture agreement.
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 the 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, 2017, the maximum guaranteed residual value was $626.8 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 disburse on our behalf, such as to beneficiaries under our insurance programs. In addition, from time to time, certain customers require us to post letters of credit to ensure payment of subcontractors and vendors and guarantee performance under our contracts. Such letters of credit are generally issued by a bank or similar financial institution, typically pursuant to our credit agreement. Each letter of credit commits the issuer to pay specified amounts to the holder of the letter of credit if the holder claims 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 be required to record a charge to earnings for the reimbursement. We do not believe that it is likely that any material claims will be made under a letter of credit in the foreseeable future.
As of December 31, 2017, we had $413.3 million in outstanding letters of credit and bank guarantees under our senior secured revolving credit facility securing our casualty insurance program and various contractual commitments. These are irrevocable stand-by letters of credit with maturities generally expiring at various times throughout 2018. Upon maturity, it is expected that the majority of the letters of credit related to the casualty insurance program will be renewed for subsequent one-year periods.
Performance Bonds and Parent Guarantees
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, 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 underwriting, continuing indemnity and security agreement with our sureties and with the consent of the lenders that are party to our credit agreement, we have granted security interests in certain of our assets to collateralize our obligations to the sureties. Subject to certain conditions and consistent with terms of our credit agreement, these security interests will be automatically released if we maintain a credit rating that meets two of the following three conditions: (i) a corporate credit rating that is BBB- or higher by Standard & Poor’s Rating Services, (ii) a corporate family rating that is Baa3 or higher by Moody’s Investors Services, Inc. or (iii) a corporate credit rating that is BBB- or higher by Fitch Ratings, Inc. We may be required to post letters of credit or other collateral in favor of the sureties or our customers in the future, which would reduce the borrowing availability under our senior secured revolving credit facility. To date, we have not been required to make any reimbursements to our sureties 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, 2017, the total amount of outstanding performance bonds was estimated to be approximately $3.0 billion. Our estimated maximum exposure as it relates to the value of performance bonds outstanding is lowered on each bonded project as the cost to complete is reduced, and each of our commitments under the performance bonds generally extinguishes concurrently with the expiration of our related contractual obligation. The estimated cost to complete these bonded projects was approximately $869 million as of December 31, 2017.
Additionally, from time to time, we guarantee the obligations of our wholly owned subsidiaries, including obligations in connection with certain contracts with customers, lease obligations, joint venture arrangements and, in some states, contractors’ licenses. We are not aware of any material obligations for performance or payment asserted against us under any of these guarantees.
Equipment Purchase Commitments
See Contractual Obligations - Equipment Purchase Obligations below for a description of these obligations.
Multiemployer Pension Plans
See Contractual Obligations - Multiemployer Pension Plans below for a description of these obligations.
Contractual Obligations and Contingencies
The following table summarizes our future contractual obligations as of December 31, 2017,2019, excluding certain amounts related to certain capital commitments related to investments in unconsolidated affiliates, unrecognized tax benefits, multiemployer pension plan obligations, interest associated with letters of credit and bank guarantees, commitment fees under our senior secured revolving credit facility, commitments associated with our insurance liabilities and acquisition-related contingent consideration liabilitiesdiscussed below (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Total | | 2018 | | 2019 | | 2020 | | 2021 | | 2022 | | Thereafter |
Long-term debt - principal (1) | | $ | 670,237 |
| | $ | 158 |
| | $ | 1,652 |
| | $ | — |
| | $ | — |
| | $ | 668,427 |
| | $ | — |
|
Long-term debt - cash interest (2) | | 49 |
| | 43 |
| | 6 |
| | — |
| | — |
| | — |
| | — |
|
| Operating lease obligations | | 316,004 |
| | 115,985 |
| | 75,556 |
| | 49,287 |
| | 28,422 |
| | 15,883 |
| | 30,871 |
|
Capital lease and related interest obligations (3) | | 1,704 |
| | 1,062 |
| | 642 |
| | — |
| | — |
| | — |
| | — |
|
| Equipment purchase commitments | | 14,633 |
| | 14,633 |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Capital commitment related to investments in unconsolidated affiliates | | 39,988 |
| | 14,793 |
| | 25,195 |
| | — |
| | — |
| | — |
| | — |
|
| Total | | $ | 1,042,615 |
| | $ | 146,674 |
| | $ | 103,051 |
| | $ | 49,287 |
| | $ | 28,422 |
| | $ | 684,310 |
| | $ | 30,871 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Total | | 2020 | | 2021 | | 2022 | | 2023 | | 2024 | | Thereafter |
Long-term debt - principal (1) | | $ | 1,359,565 |
| | $ | 67,887 |
| | $ | 66,345 |
| | $ | 1,219,512 |
| | $ | 1,971 |
| | $ | 1,971 |
| | $ | 1,879 |
|
Long-term debt - cash interest (2) | | 545 |
| | 545 |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Short-term debt (3) | | 6,542 |
| | 6,542 |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Operating lease obligations (4) | | 317,249 |
| | 102,848 |
| | 75,982 |
| | 51,295 |
| | 34,153 |
| | 17,952 |
| | 35,019 |
|
Operating lease obligations that have not yet commenced (5) | | 12,893 |
| | 1,805 |
| | 2,451 |
| | 2,352 |
| | 2,140 |
| | 2,145 |
| | 2,000 |
|
Finance lease obligations (6) | | 1,010 |
| | 469 |
| | 325 |
| | 127 |
| | 60 |
| | 21 |
| | 8 |
|
Short-term lease obligations (7) | | 19,930 |
| | 19,930 |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Equipment purchase commitments (8) | | 30,459 |
| | 30,459 |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Capital commitment related to investments in unconsolidated affiliates (9) | | 1,686 |
| | 1,686 |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Total contractual obligations | | $ | 1,749,879 |
| | $ | 232,171 |
| | $ | 145,103 |
| | $ | 1,273,286 |
| | $ | 38,324 |
| | $ | 22,089 |
| | $ | 38,906 |
|
| |
(1) | Amounts were recorded inWe had $1.35 billion of outstanding borrowings under our December 31, 2017 consolidated balance sheetsenior secured credit facility, which included $1.24 billion borrowed under the term loan facility and included $668.4$104.9 million of outstanding revolving loans, under our senior secured revolving credit facility,both of which bear interest at variable market rates. Assuming the principal amount outstanding at December 31, 20172019 remained outstanding and the interest rate in effect at December 31, 20172019 remained the same, the annual cash interest expense with respect to our senior secured revolving credit facility would be approximately $19.9$43.9 million, payable until October 31, 2022, the maturity date of the facility. Additionally, in connection with the term loan facility, we are required to make quarterly principal payments of $16.1 million and pay the remaining balance on the maturity date for the remainder of the term of such credit facility, which matures in October 2022.facility. |
| |
(2) | Amounts relate toAmount represents cash interest expense on our fixed-rate long-term debt, which excludes our senior secured revolving credit facility. |
| |
(3) | Principal amounts of capital lease obligations wereAmount represents short-term borrowings recorded inon our December 31, 20172019 consolidated balance sheet. |
Equipment Purchase Commitments
We have | |
| (4) | Amounts represent undiscounted operating lease obligations at December 31, 2019. The operating lease obligations recorded on our December 31, 2019 consolidated balance sheet represent the present value of these amounts. |
| |
| (5) | Amounts represent undiscounted operating leases obligations that had not commenced as of December 31, 2019. The operating leases obligations will be recorded on our consolidated balance sheet beginning on the commencement date of each lease. |
| |
| (6) | Amounts represent undiscounted finance lease obligations at December 31, 2019. The finance lease obligations recorded on our December 31, 2019 consolidated balance sheet represent the present value of these amounts. |
| |
| (7) | Amounts represent short-term lease obligations that are not recorded on our December 31, 2019 consolidated balance sheet due to our accounting policy election. Month-to-month rental expense associated primarily with certain equipment rentals is excluded from these amounts because we are unable to accurately predict future rental amounts. |
| |
| (8) | Amount represents capital committed capital for the expansion of our vehicle fleet. Although we have committed to the purchase of these vehicles at the time of their delivery, we expect that these orders will be assigned to third-party leasing companies and made available to us under certain of our master equipment lease agreements. |
| |
| (9) | Amount represents outstanding capital commitments associated with investments in unconsolidated affiliates. As of December 31, 2019, we had outstanding capital commitments associated with investments in unconsolidated affiliates. |
As discussed in Notes 2, 10, 13 and 14 of the Notes to Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data, we have various contingencies and commitments that may require the use of cash in future periods. The Contractual Obligations table excludes the contingencies described below, as we are unable to accurately predict the timing and amount of any of the following contingent obligations.
Concentrations of Credit Risk
We are subject to concentrations of credit risk related primarily to our cash and cash equivalents and our net receivable position with customers, which includes amounts related to billed and unbilled accounts receivable and contract assets net of advanced billings with the same customer. Substantially all of our vehicle fleetcash and cash equivalents are managed by what we believe to be high credit quality financial institutions. In accordance with our investment policies, these institutions are authorized to invest cash and cash equivalents in ordera diversified portfolio of what we believe to accommodate manufacturer lead timesbe high quality cash and cash equivalent investments, which consist primarily of interest-bearing demand deposits, money market investments and money market mutual funds. Although we do not currently believe the principal amount of these cash and cash equivalents is subject to any material risk of loss, changes in economic conditions could impact the interest income we receive from these investments. In addition, we grant credit under
normal payment terms, generally without collateral, to our customers, which include electric power and energy companies, governmental entities, general contractors, and builders, owners and managers of commercial and industrial properties located primarily in the United States, Canada, Australia and Latin America. Consequently, we are subject to potential credit risk related to business, economic and financial market conditions that affect these locations. However, we generally have certain statutory lien rights with respect to services provided. Some of our customers have experienced significant financial difficulties (including bankruptcy), and customers may experience financial difficulties in the future. These difficulties expose us to increased risk related to collectability of billed and unbilled receivables and contract assets for services we have performed.
For example, on certain typesJanuary 29, 2019, PG&E Corporation and its primary operating subsidiary, Pacific Gas and Electric Company (collectively PG&E), one of vehicles.our largest customers, filed for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code, as amended. We are monitoring the bankruptcy proceeding and evaluating the treatment of, and potential claims related to, our pre-petition receivables. As of the bankruptcy filing date, we had $165 million of billed and unbilled receivables. Subsequent to the bankruptcy filing, the bankruptcy court approved the assumption by PG&E of certain contracts with our subsidiaries, pursuant to which PG&E had paid $122 million of our pre-petition receivables as of December 31, 2017, $14.62019. We also sold $36 million of production orders were issued with expected delivery dates in 2018. Although we have committedour pre-petition receivables to the purchase of these vehicles at the time of their delivery, we intend that these orders will be assigned toa third party leasing companies and made available to us under certain of our master equipment lease agreements, which will release us from our capital commitment.
Capital Commitments Related to Investments in Unconsolidated Affiliates
Duringduring the yearthree months ended December 31, 2017, we formed2019 in exchange for cash consideration of $34 million, subject to certain claim disallowance provisions, the occurrence of which could result in our obligation to repurchase some or all of the pre-petition receivables sold. We expect the remaining $7 million of pre-petition receivables to be sold or ultimately collected in the bankruptcy proceeding. However, the ultimate outcome of the bankruptcy proceeding is uncertain, and our belief regarding any future sale or collection of the remaining receivables is based on a partnership with select investorsnumber of assumptions that provides upare potentially subject to $1.0 billionchange as the proceeding progresses. Should any of capital, including approximately $80.0 million from us, available to invest in certain specified typesthese assumptions change, the amount collected could be less than the amount of infrastructure projects through August 2024. Becausethe remaining receivables. Additionally, we are not obligatedcontinuing to invest this amountperform services for PG&E while the bankruptcy case is ongoing and believe that amounts billed for post-petition services will continue to be collected in the ordinary course of business.
No customer represented 10% or more of our consolidated revenues for the years ended December 31, 2019, 2018 or 2017, and no customer represented 10% or more of our consolidated net receivable position at December 31, 2019 or 2018.
Legal Proceedings
We are unablefrom time to determine the timing of any such investments, we have excluded this capital commitment from the Contractual Obligations table.
Unrecognized Tax Benefits
During 2016, the Internal Revenue Service (IRS) completed its examination relatedtime party to tax years 2010, 2011 and 2012; however, certain subsidiaries remain under examination by various U.S. state, Canadianlawsuits, claims and other foreign tax authoritieslegal proceedings that arise in the ordinary course of business. These actions typically seek, among other things, compensation for multiple periods,alleged personal injury, breach of contract, negligence or gross negligence and/or property damages, wage and hour claims and other employment-related damages, punitive and consequential damages, civil penalties or other losses, or injunctive or declaratory relief. With respect to all such lawsuits, claims and proceedings, we record a reserve when it is probable that a loss has been incurred and the amount of unrecognized tax benefits could therefore increase or decrease asloss can be reasonably estimated. In addition, we disclose matters for which management believes a resultmaterial loss is at least reasonably possible. See Note 14 of the expiration of certain statute of limitations periods or settlements of these examinations. We believe it is reasonably possible that within the next 12 months unrecognized tax benefits may decrease by upNotes to $13.7 million due to the expiration of certain statute of limitations periods or settlements of the examinations.Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data for additional information regarding litigation, claims and other legal proceedings.
Multiemployer Pension Plans
The previously presented table of estimated contractual obligations does not reflect the obligations under the multiemployer pension plans in which our union employees participate. SomeCertain of our operating units are parties to various collective bargaining agreements with unions that represent certain of their employees, which require usthe operating units to provide to the employees subject to these agreementspay specified wages, provide certain benefits to union employees and benefits, as well as to make contributionscontribute certain amounts to multiemployer pension plans.plans and employee benefit trusts. Our multiemployer pension plan contribution rates generally are specified in the collective bargaining agreements (usually on an annual basis), and contributions are made to the plans on a “pay-as-you-go” basis based on our union employee payrolls. The location and number of union employees that we employ at any given time and
the plans in which they may participate vary depending on the projects we have ongoing at any time and theour need for union resources in connection with thoseour ongoing projects. Therefore, we are unable to accurately predict our union employee payroll and the amount of the resulting multiemployer pension plan contribution obligations for future periods.
We may also be required to make additional contributions to our multiemployer pension plans if they become underfunded, and these additional contributions will be determined based on our union employee payrolls. The Pension Protection Act of 2006 added specialSpecial funding and operational rules are generally applicable to plan years beginning after 2007 forcertain of these multiemployer plans that are classified as “endangered,” “seriously endangered,”endangered” or “critical” status. Plans in these classifications must adopt measures to improve their funded status through a funding improvement or rehabilitation plan, as applicable, which may require additional contributions from employers (which may take the form of a surchargebased on benefit contributions) and/or modifications to retiree benefits. A number of multiemployer plans to which our operating units contribute or may contribute in the future are in “endangered,” “seriously endangered,” or “critical” status.multiple factors. The amount, of additional funds, if any, that we may be obligated to contribute to these plans in the future cannot be reasonably estimated and areis not included in the above table due to uncertainty regarding the amount of the future levels of work that require the specific use of theinvolving covered union employees, covered by these plans, as well as the future contribution levels and possible surcharges on contributions applicableplan contributions.
Furthermore, we may be subject to these plans.
We may also have additional liabilities imposed by law as a result of our participation in multiemployer defined benefit pension plans. The Employee Retirement Income Security Act of 1974, as amended by the Multiemployer Pension Plan Amendments Act of 1980, imposes certain liabilities upon employers who are contributors toplans, including in connection with a multiemployer plan if the employer withdrawswithdrawal or deemed withdrawal from thea plan or thea plan isbeing terminated or experiencesexperiencing a mass withdrawal. These liabilities include an allocable share of the unfunded vested benefits in the plan for all plan participants, not merely the benefits payable to a contributing employer’s own retirees. Other than as noted below, weAs a result, participating employers may bear a higher proportion of liability for unfunded vested benefits if other participating employers cease to contribute or withdraw, with the reallocation of liability being more acute in cases when a withdrawn employer is insolvent or otherwise fails to pay its withdrawal liability. We are not currently aware of any material amounts of withdrawal liabilityliabilities that have been incurred or are expectedasserted
and that remain outstanding. However, we have been subject to be incurred as a result of asignificant withdrawal by any of our operating units from any multiemployer defined benefit pension plans.
2011 Central States Plan Withdrawal Liability. In the fourth quarter of 2011, certain of our subsidiaries withdrew from the Central States Plan. This withdrawal event was the result of an amendment to a collective bargaining agreement with the International Brotherhood of Teamsters (Teamsters) that eliminated certain employers’ obligations to contribute to the Central States Plan, which was then in critical status and significantly underfunded as to its vested benefit obligations. The amendment was negotiated by the Pipe Line Contractors Association (PLCA) on behalf of its members, which include certain of our subsidiaries. Because certain of our other subsidiaries continued participationliabilities in the Central States Plan into 2012, the subsidiaries’ withdrawals in 2011 effected only a partial withdrawal on our behalf in 2011. We believed that the partial withdrawal was advantageous because it limited exposure to increased liability resulting from a future withdrawal event, at which point the Central States Plan could have been further underfunded. We and other PLCA members now contribute to a different multiemployer pension plan on behalf of the affected Teamsters employees.
The Central States Plan subsequently asserted that the withdrawal of the PLCA members, and thus our partial withdrawal, was not effective in 2011. The PLCA and Quanta believed at that time that a legally effective withdrawal had occurred during the fourth quarter of 2011, and this issue was litigated in the federal district court for the Northern District of Illinois, Eastern Division. In September 2013, the district court ruled in favor of the Central States Plan, and that decision was appealed by the PLCA. In July 2014, the Central States Plan provided us with a Notice and Demand claiming partial withdrawal liability in the amount of $39.6 million and requiring Quanta to make payments on this assessment while the dispute was ongoing. In September 2015, the United States Court of Appeals for the Seventh Circuit ruled in favor of the PLCA and reversed the district court’s previous ruling. Based on the outcome of the appeal, in January 2016, the Central States Plan issued a revised Notice and Demand claiming partial withdrawal liability in the amount of $32.9 million.
Separately, in December 2013, the Central States Plan filed lawsuits against two of our subsidiariespast, including in connection with their withdrawal in 2012. In the first lawsuit, the Central States Plan alleged that the subsidiary elected to participate in the Central States Plan pursuant to the collective bargaining agreement under which it participated. We argued that no such election was made and that any payments made to the Central States Plan were made in error. In July 2014, the parties reached an agreement to settle the lawsuit, and the court dismissed the case with prejudice. In the second lawsuit, the Central States Plan alleged that contributions made by our subsidiary to a new industry fund created after we withdrew from the Central States Plan should have been made to the Central States Plan. This arguably would have extended our withdrawal date for this subsidiary to at least the end of 2013. We disputed these allegations on the basis that we properly paid contributions to the new industry fund based on the terms of the collective bargaining agreement under which we participated and asserted that we terminated our obligation to contribute to the Central States Plan by the end of 2012. The parties both moved for summary judgment, and in March 2015, the court entered judgment in our favor. The Central States Plan filed a notice of appeal in April 2015, and in December 2015, the Central States Plan agreed to dismiss the appeal with prejudice.
In December 2017, Quanta and the Central States Plan entered into a settlement agreement and release, whereby the parties agreed on a final settlement amount of $48.9 million, which included a final withdrawal liability of $44.1 million and retention of interest paid on the assessed amount of $4.8 million. This settlement addressed (i) the partial withdrawal liability assessed in the January 2016 Notice and Demand; (ii) an unassessed withdrawal liability in connection with a partial withdrawal in 2012; and (iii) an unassessed withdrawal liability in connection with a complete withdrawal in 2013 or 2014. Prior to settlement of the matter, we made monthly payments on the assessed partial withdrawal liability according to the terms of the January 2016 Notice and Demand, and the portion of those payments that was attributable to the principal amount of the assessed liability was offset against our final withdrawal liability. Accordingly, a final payment of $25.5 million was made in December 2017 in full satisfaction of this matter.
2013 Central States Plan Withdrawal Liability. On October 9, 2013, we acquired a business that experienced a complete withdrawal from the Central States, Southeast and Southwest Areas Pension Plan, priorand may be subject to the acquisition date. Prior to the acquisition, the Central States Plan issued a Notice and Demand to the acquired business claiming amaterial withdrawal liabilityliabilities in the total amount of $6.9 million and requiring payments to be made on this assessment while the dispute is ongoing. In connection with the acquisition, we recorded an initial liability of $4.8 million related to this withdrawal liability, and a portion of the purchase price for the acquiredfuture, which could adversely affect our business, was deposited into an escrow account to fund any withdrawal obligation in excess of the initial liability recorded. In January 2016, the Central States Plan issued a revised Notice and Demand claiming a withdrawal liability in the amount of $4.8 million. Although we continue to dispute the total liability owed to the Central States Plan, we continue to make monthly payments according to the terms of this revised Notice and Demand while the parties determine the final withdrawal liability. As of December 31, 2017, payments totaling $4.2 million had been made toward the withdrawal liability assessment. The final amount of withdrawal liability payable in connection with this matter remains the subject of a pending arbitration proceeding and will ultimately depend on various factors, including the outcome of the arbitration. However, the acquired business’s withdrawal from the Central States Plan is not expected to have a material impact on our financial condition, results of operations or cash flows.
LettersPerformance Bonds and Parent Guarantees
Many customers, particularly in connection with new construction, require us to post performance and payment bonds. These bonds provide a guarantee that we will perform under the terms of Credita contract and Bank Guarantee Feespay our subcontractors and Commitment Fees
vendors. If we fail to perform, the customer may demand that the surety make payments or provide services under the bond, and we must reimburse the surety for any expenses or outlays it incurs. Under our underwriting, continuing indemnity and security agreement with our sureties, we have granted security interests in certain of our assets as collateral for our obligations to the sureties. We have excluded from the Contractual Obligations table interest associated withmay be required to post letters of credit and bank guarantees and commitment feesor other collateral in favor of the sureties or our customers in the future, which would reduce the borrowing availability under our senior secured revolving credit facility becausefacility. We have not been required to make any material reimbursements to our sureties for bond-related costs except in connection with the exercise of approximately $112 million of advance payment and performance bonds related to the terminated telecommunications project in Peru, which is described further in Legal Proceedings in Note 14 of the Notes to Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data. To the extent further reimbursements are required, the amounts could be material and could adversely affect our consolidated business, financial condition, results of operations or cash flows. As of December 31, 2019, we are not aware of any outstanding lettersmaterial obligations for payments related to bond obligations.
Performance bonds expire at various times ranging from mechanical completion of credita project to a period extending beyond contract completion in certain circumstances, and bank guarantees, availabilityas such a determination of maximum potential amounts outstanding requires the use of certain estimates and applicable interest ratesassumptions. Such amounts can also fluctuate from period to period based upon the mix and fees are variable. For additional information regarding our letters of credit and bank guarantees and the interest rates and fees associated with these items and our borrowings under our senior secured revolving credit facility, see Liquidity and Capital Resources - Debt Instruments - Credit Facility above.
Insurance
We are insured for employer’s liability, workers’ compensation, auto liability and general liability claims. Under these programs, the deductible for employer’s liability is $1.0 million per occurrence, the deductible for workers’ compensation is $5.0 million per occurrence, and the deductibles for auto liability and general liability are $10.0 million per occurrence. We manage and maintain a portionlevel of our casualty risk through our wholly-owned captive insurance company, which insures all claims up tobonded operating activity. As of December 31, 2019, the total amount of the applicable deductibleoutstanding performance bonds was estimated to be approximately $2.9 billion. Our estimated maximum exposure as it relates to the value of the performance bonds outstanding is lowered on each bonded project as the cost to complete is reduced, and each commitment under a performance bond generally extinguishes concurrently with the expiration of our third-party insurance programs. Inrelated contractual obligation. The estimated cost to complete these bonded projects was approximately $1.1 billion as of December 31, 2019.
Additionally, from time to time, we guarantee certain obligations and liabilities of our subsidiaries that may arise in connection with, among other things, contracts with customers, equipment lease obligations, joint venture arrangements and contractor licenses. These guarantees may cover all of the subsidiary’s unperformed, undischarged and unreleased obligations and liabilities under or in connection with the relevant agreement. For example, with respect to customer contracts, a guarantee may cover a variety of obligations and liabilities arising during the ordinary course of the subsidiary’s business or operations, including, among other things, warranty and breach of contract claims, third-party and environmental liabilities arising from the subsidiary’s work and for which it is responsible, liquidated damages, or indemnity claims. We are not aware of any claims under any of these guarantees that are material, except as set forth in Legal Proceedings within Note 14 of the Notes to Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data. To the extent a subsidiary incurs a material obligation or liability and we have guaranteed the performance or payment of such liability, the recovery by a customer or other counterparty or a third party will not be limited to the assets of the subsidiary. As a result, responsibility under a guarantee could adversely affect our casualty insurance programs, we are required to issue lettersconsolidated business, financial condition, results of credit to secure our obligations. We also have employee health care benefit plans for most employees not subject to collective bargaining agreements, of which the primary plan is subject to a deductible of $0.4 million per claimant per year.operations and cash flows.
Insurance
Insurance Coverage. Losses under all of theseour insurance programs are accrued based upon our estimate of the ultimate liability for claims reported and an estimate of claims incurred but not reported, with assistance from third-party actuaries. These insurance liabilities are difficult to assess and estimate due to unknown factors, including the severity of an injury, the extent of damage, the determination of our liability in proportion to other parties and the number of incidents not reported. The accruals are based upon known facts and historical trends, and management believes such accruals are adequate. As of December 31, 20172019 and 2016,2018, the gross amount accrued for insurance claims totaled $254.7$287.6 million and $218.2$272.9 million,, with $200.0$212.9 million and $162.0$210.1 million considered to be long-term and included in “Insurance and other non-current liabilities.” Related insurance recoveries/receivables as of December 31, 20172019 and 20162018 were $50.4$35.1 million and $8.7$56.5 million,, of which $0.4$0.3 million and $0.4$0.3 million were are included in “Prepaid expenses and other current assets” and $50.0$34.8 million and $8.3$56.2 million wereare included in “Other assets, net.”
We renew our insurance policies on an annual basis, and therefore deductibles and levels of insurance coverage may change in future periods. In addition, insurers may cancel our coverage or determine to exclude certain items from coverage, or we may elect not to obtain certain types or incremental levels of insurance if we believe thatbased on the potential benefits considered relative to the cost to obtainof such insurance, or coverage exceeds any additional benefits.may not be available at reasonable and competitive rates. In any such event, our overall risk exposure would increase, which could negatively affect our results of operations, financial condition and cash flows. The Contractual Obligations table excludes commitmentsFor example, due to the increased occurrence in recent years and future risk of wildfires in California and other areas in the western United States, Australia and other locations, insurers have reduced coverage limits and increased the cost of insurance coverage for those events.
As a result, we expect our level of insurance coverage for wildfire events will decrease at the time of our annual insurance renewal in the spring of 2020, and such level may not be sufficient to cover potential losses. Our third party insurers could also decide to further reduce or exclude coverage for wildfires in the future.
Project Insurance Claim. In June 2018, while performing a horizontal directional drill and installing an underground gas pipeline, one of our subsidiaries experienced a partial collapse of a borehole. Subsequent to the incident, we worked with our customer to mitigate the impact of the incident and to complete the project. As required by the contract, the customer procured certain insurance coverage for the project, with our subsidiaries as additional insureds, and we worked collaboratively with our customer to pursue insurance claims with the customer’s insurance carriers. In December 2019 and January 2020, we reached settlement and release agreements with the insurers and the customer, respectively, resulting in total insurance recoveries related to this matter of $95.5 million. We expect to receive the remaining insurance proceeds in the first quarter of 2020.
Hallen Acquisition Assumed Liability. As discussed in further detail in Legal Proceedings within Note 14 of the Notes to Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data, we assumed certain contingent liabilities in connection with the acquisition of Hallen. Hallen’s liabilities associated with ourthis matter are expected to be covered under applicable insurance liabilities, aspolicies or contractual remedies negotiated by us with the former owners of Hallen. As of December 31, 2019, we are unable to determine the timing of paymentshad not recorded an accrual for any probable and estimable loss related to these obligations.
this matter. However, the ultimate amount of liability in connection with this matter remains subject to uncertainties associated with pending litigation, including, among other things, the apportionment of liability among the defendants and the likelihood and amount of potential damages claims. As a result, this matter could result in a loss that is in excess of, or not covered by, such insurance or contractual remedies, which could have a material adverse effect on our consolidated results of operations and cash flows.
Contingent Consideration Liabilities
We have excluded from the Contractual Obligations table acquisition-related contingent considerationThe liabilities whichrecorded represent the estimated fair valuevalues of future amounts payable to the former owners of acquired businesses, because the amounts have not been earned and we are unable to determine the portion of the liabilities that will be settled in cash and the exact timing of any such payments as of December 31, 2017. Payment of such consideration is contingent on the future financial performance of the acquired businesses and the fair value of such consideration isare estimated by management based on entity-specific assumptions that are evaluated on an ongoing basis. As of December 31, 2017 and 2016, the fair value of these contingent consideration liabilities totaled $65.7 million and $19.5 million, all of which was included in “Insurance and other non-current liabilities” on our consolidated balance sheets. Because acquisition-related contingent consideration liabilities are contingent upon future events, we include these liabilities in the Contractual Obligationscontractual obligations table when the contingencies are resolved. We expect a significant portion of these liabilities to be settled by late 2020 or early 2021.
Aggregate fair values of these outstanding and unearned contingent consideration liabilities and their classification in the Consolidated Balance Sheets in Item 1. Financial Statements were as follows (in thousands):
|
| | | | | | | | |
| | | December 31, 2019 | | December 31, 2018 |
| Accounts payable and accrued expenses | | $ | 77,618 |
| | $ | — |
|
| Insurance and other non-current liabilities | | 6,542 |
| | 70,756 |
|
| Total contingent consideration liabilities | | $ | 84,160 |
| | $ | 70,756 |
|
The fair values of the contingent considerationthese liabilities as of December 31, 2017 waswere primarily determined using a Monte Carlo simulation valuation methodology based on probability-weighted financial performance projections and other inputs, including a discount rate and an expected volatility factor for each acquisition. The discount ratesexpected volatility factor ranged from 0.9%20.4% to 2.3% depending30.0% based on historical asset volatility of selected guideline public companies. Depending on contingent consideration payment terms, the settlement methods available andpresent values of the estimated payments are generallydiscounted based on a risk-free rate and/or our cost of debt. The expected volatility factors rangeddebt, ranging from 23.0%1.6% to 32.7% based on historical asset volatility of selected guideline public companies.3.9%. The fair value determinations incorporate significant inputs not observable in the market. Accordingly, the level of inputs used for these fair value measurements is the lowest level (Level 3), as further described in Note 2 of the Notes to our consolidated financial statements.Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data. Significant changes in any of these assumptions could result in a significantly higher or lower potential liability.
The majority of our contingent consideration liabilities are subject to a maximum payment amount, and the aggregate maximum amount of these liabilities was $139.5which aggregated to $157.2 million as of December 31, 2017.2019. One contingent consideration liability is not subject to a maximum payout amount, and thethat liability had a fair value of that liability was $1.0 million as of December 31, 2017.2019.
Our aggregate contingent consideration liabilities can change due to additional business acquisitions, payments to settlesettlement of outstanding liabilities, changes in the fair value of amounts owed to former ownersbased on performance in post-acquisition periods and accretion in present value. During the year ended December 31, 2019, we recognized a net increase of the acquired businesses, and foreign currency translation gains or losses.fair value of our aggregate contingent consideration liabilities of $13.4 million. During the years ended December 31, 2017, 20162018 and 2015, acquisitions increased our contingent consideration liabilities by $51.1 million, $18.7 million and $1.0 million. We made no payments related to contingent consideration liabilities during the years ended December 31, 2017 and 2015 and a nominal payment during the year ended December 31, 2016. During the year ended December 31, 2017, we recognized a decreasenet decreases in the fair value of our aggregate contingent consideration liabilities of $11.2 million and $5.2 million. NoThese changes in fair value of contingent consideration liabilities were recognized in 2016 and 2015. Changes in fair value of contingent consideration liabilities are includedreflected in “Change in fair value of contingent consideration liabilities” onin our consolidated statements of operations.
ConcentrationsUndistributed Earnings of Credit RiskForeign Subsidiaries and Unrecognized Tax Benefits
We generally do not provide for taxes related to undistributed earnings of our foreign subsidiaries because such earnings either would not be taxable when remitted or they are considered to be indefinitely reinvested. We could also be subject to concentrations of credit risk related primarilyadditional foreign withholding taxes if we were to ourrepatriate cash and cash equivalents and our net receivable position with customers, which includes amounts related to billed and unbilled accounts receivable and costs and estimated earnings in excess of billings on uncompleted contracts net of advanced billings withthat is indefinitely reinvested outside the same customer. Substantially all of our cash and cash equivalents are managed by what we believe to be high credit quality financial institutions. In accordance with our investment policies, these institutions are authorized to invest cash and cash equivalents in a diversified portfolio of what we believe to be high quality investments, which primarily include interest-bearing demand deposits, money market investments, money market mutual funds and investment grade commercial paper with original maturities of three months or less. AlthoughUnited States, but we do not currentlyexpect such amounts to be material.
Quanta and certain subsidiaries remain under examination by various U.S. state, Canadian and other foreign tax authorities for multiple periods. We believe it is reasonably possible that within the principal amount of these cash and cash equivalents is subjectnext 12 months unrecognized tax benefits may decrease by up to any material risk of loss, changes in economic conditions could impact the interest income we receive from these investments. In addition, we grant credit under normal payment terms, generally without collateral, to our customers, which include electric power and oil and gas companies, governmental entities, general contractors, and builders, owners and managers of commercial and industrial properties located primarily in the United States, Canada, Australia and Latin America. Consequently, we are subject to potential credit risk related to changes in business and economic factors in these locations, which may be heightened$6.3 million as a result of uncertain economicsettlement of these examinations or the expiration of certain statute of limitations periods.
Letters of Credit Fees and financial market conditionsCommitment Fees
The Contractual Obligations table excludes letters of credit and commitment fees under our senior secured credit facility because the amount of outstanding letters of credit, availability and applicable fees are all variable. Assuming that have existed in recent years. However, we generally have certain statutory lien rights with respect to services provided. Historically, somethe amount of our customers have experienced significant financial difficulties, and others may experience financial difficulties in the future. These difficulties expose us to increased risk related to collectabilityletters of billed and unbilled receivables and costs and estimated earnings in excess of billings on uncompleted contracts for services we have performed.
At December 31, 2016, one customer within our Electric Power Infrastructure Services segment accounted for 16% of our consolidated net receivable position. Portions of this net receivable balance were related to invoicing challenges and billing delays on two electric transmission projects located in remote regions of northeastern Canada which resulted from changed site conditions requiring extensive quality assurance documentation and administrative requirements. During the second quarter of 2017, wecredit outstanding and the customer reached a settlement and entered into a renegotiated contract, which eliminated the previous scheduling and billing
issues and settled outstanding change orders. No other customers represented 10% or more of our consolidated net receivable positionfees as of December 31, 20172019 remained the same, the annual cash expense for our letters of credit would be approximately $5.4 million. For additional information regarding our letters of credit and 2016,the associated fees and no customers represented 10% or more of our consolidated revenues for the years ended December 31, 2017, 2016borrowings under our senior secured credit facility, see Liquidity and 2015.Capital Resources — Debt Instruments above.
Off-Balance Sheet Transactions
Legal Proceedings
We are from time to time party to various lawsuits, claims and other legal proceedings that ariseAs is common in our industry, we have entered into certain off-balance sheet arrangements in the ordinary course of business. These actions typically seek, among other things, compensationbusiness that result in risks not directly reflected in our balance sheets. Our significant off-balance sheet transactions include certain obligations relating to our investments and joint venture arrangements; short-term, non-cancelable leases; letters of credit obligations; surety guarantees related to performance bonds; committed expenditures for alleged personal injury, breachthe purchase of contract and/or property damages, employment-related damages, punitive damages, civil penalties or other losses, or injunctive or declaratory relief. With respect to all such lawsuits, claimsequipment; and proceedings, we record a reserve when it is probable that a loss has been incurredcertain multiemployer pension plan liabilities. See Contractual Obligations above and the amount of loss can be reasonably estimated. In addition, we disclose matters for which management believes a material loss is at least reasonably possible. See Legal Proceedings and Collective Bargaining Agreements in Note 1514 of the Notes to Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data for additional information regarding litigation, claims and other legal proceedings.
Related Party Transactions
In the normal coursea description of business, we enter into transactions from time to time with related parties. Our significant related party transactions typically take the form of facility leases with prior owners of certain acquired companies.
Inflation
Due to relatively low levels of inflation experienced during the years ended December 31, 2017, 2016 and 2015, inflation did not have a significant effect on our results of operations, financial condition or cash flows.
these arrangements.
Critical Accounting PoliciesEstimates
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 US GAAP. 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 as of the date the consolidated financial statements are published and the reported amounts of revenues and expenses recognized during the periods presented. We review all significant estimates affecting our consolidated financial statements on a recurring basis and record the effect of any necessary adjustments prior to their publication. Judgments and estimates are based on our 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. 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 boardBoard of directors. We believeDirectors. Our accounting policies are primarily described in Note 2 of the Notes to Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data and should be read in conjunction with the following accounting policies identified below that we believe affect our more significant judgments and estimates used in the preparation of our consolidated financial statements:
Revenue Recognition
We provide services pursuant to master service agreements, repair and maintenance contracts and fixed price and non-fixed price installation contracts. Pricing under these contracts may be competitive unit price, cost-plus/hourly (or time and materials basis) or fixed price (or lump sum basis), and -the final terms and pricesestimation of these contracts are frequently negotiated with the customer. Under unit-based contracts, the utilization of an output-based measurement is appropriate for revenue recognition, and we recognize revenue as units are completed based on pricing established with the customer for each delivered unit, which best reflects the pattern in which the obligation to the customer is fulfilled. Under 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. Such contracts provide that the customer accept completion of progress to date and compensate us for services rendered, which may be measured in terms of units installed, hours expended, costs incurred to date compared to total estimated contract costs or some other measure of progress. Contract costs include all direct materials, labor and subcontract costs and those indirect costs related to contract performance, such as indirect labor, supplies, tools, repairs and depreciation costs. Much of the material associated with our work is owner-furnished and is therefore not included in contract revenues and costs. The cost estimation process is basedcosts, progress on 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 management’s assessment of contract value and estimated costs, and as a result, the profit recognized.
As discussed in Note 3 of the Notes to Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data, effective for the quarter ending March 31, 2018, we will adopt new revenue recognition guidance using the modified
retrospective transition method. The new guidance will be applied to contracts with customers that were not substantially complete as of January 1, 2018. Our financial results for reporting periods after January 1, 2018 will be presented under the new guidance, while our financial results for prior periods will continue to be reported in accordance with the prior guidance and our historical accounting policy. We have substantially completed our evaluation of the impact of the new guidance on our contracts with customers, including identification of differences that will result from the new requirements. Based on this evaluation, we estimate that the net cumulative adjustment to retained earnings from adoption as of January 1, 2018 will be less than $10.0 million. With respect to ongoing revenues generated from master service agreements, repair and maintenance contracts and fixed price and non-fixed price installation contracts, we do not anticipate any significant changes to the pattern of revenue recognition and do not believe that the guidance surrounding identification of contracts and performance obligations or measurement ofconstruction projects, variable consideration will have a material impact on the revenue recognition for these arrangements. We expect our disclosuresand collectability of accounts receivables, long-term accounts receivable, unbilled receivables, retainage and contract assets, including amounts related to revenue recognition will expand to address new quantitative and qualitative requirements regarding the nature, amount and timing of revenue from contracts with customers and additional information related to contract assets and liabilities.
Actual revenues and project costs can vary, sometimes substantially, from previous estimates due to changes in a variety of factors, including unforeseen or changed circumstances not included in our cost estimates or covered by our contracts for which we cannot obtain adequate compensation or reimbursement. Some of these include concealed or unknown environmental conditions; changes in the cost of equipment, commodities, materials or labor; unanticipated costs or claims due to delays caused by customers or third parties; customer failure to provide required materials or equipment; errors in engineering, specifications or designs; project modifications or contract termination; weather conditions; and quality issues requiring rework or replacement. These factors, along with other risks inherent in performing fixed price contracts, may cause actual revenues and gross profits for a project to differ from previous estimates and could result in reduced profitability or losses on projects. Changes in these factors may result in revisions to costs and income, and their effects are recognized in the period in which the revisions are determined. These factors are routinely evaluated on a project-by-project basis throughout the project term, and the impact of any such revisions in management’s estimates of contract value, contract cost and contract profit are recorded as necessary in the period in which the revisions are determined. Provisions for losses on uncompleted contracts are made in the period in which such losses are determined to be probable and the amount can be reasonably estimated.
Our operating results for the year ended December 31, 2017 were impacted by less than 5% as a result of aggregate changes in contract estimates related to projects that were in progress at December 31, 2016. Our operating results for the year ended December 31, 2016 were impacted by less than 5% as a result of aggregate changes in contract estimates related to projects that were in progress at December 31, 2015. However, operating results for the year ended December 31, 2016 included losses of $54.8 million on a power plant construction project in Alaska due to performance issues that increased the estimated costs of the project. This project was substantially completed during the fourth quarter of 2016. The losses on this project were partially offset by the aggregate positive impact of numerous individually immaterial changes in profitability generally due to better than expected performance for projects that were ongoing at December 31, 2015. Our operating results for the year ended December 31, 2015 were impacted by numerous individually immaterial changes in contract estimates related to projects that were in progress at December 31, 2014; however, the aggregate impact was less than 5% despite losses of $44.9 million recorded during 2015 on the same Alaska power plant construction project.
The current asset “Costs and estimated earnings in excess of billings on uncompleted contracts” represents revenues recognized in excess of amounts billed for contracts accounted for under the percentage-of-completion method. The current liability “Billings in excess of costs and estimated earnings on uncompleted contracts” represents billings in excess of revenues recognized for contracts accounted for under the percentage-of-completion method.
We may incur costs subject tounapproved change orders whether approved or unapproved by the customer, and/or claims related to certain contracts. We determine the probability that such costs will be recovered based upon evidence such as past practices with the customer, specific discussions or preliminary negotiations with the customer or verbal approvals. We treat items as costs of contract performance in the period incurred if it is not probable that the costs will be recovered or will recognize additional revenue if it is probable that the contract price will be adjusted and can be reliably estimated.
As of December 31, 2017 and 2016, we recognized revenues of $144.0 million and $137.8 million related to change orders and/or claims that were in the process of being negotiatednegotiated;
Property and approvedEquipment - the valuation methods and assumptions used in assessing impairment, useful life determination and the normal courserelated timing of business. These aggregate contract price adjustments represent management’s best estimate of additional contract revenues which have been earneddepreciation and which management believes are probable of collection. The amounts ultimately realized by us upon final acceptance by our customers could be higher or lower than such estimated amounts; however, such amounts cannot currently be estimated.
Insurance
As discussed in Contractual Obligations - Insurance, we are insured for employer’s liability, workers’ compensation, auto liability, general liability, and group health claims.
Losses under all of these insurance programs are accrued based upon our estimate of the ultimate liability for claims reported and an estimate of claims incurred but not reported, with assistance from third-party actuaries. These insurance liabilities are difficult to assess and estimate due to unknown factors, including the severity of an injury, the extent of damage, the determination of our liabilityasset groupings;
Goodwill - the valuation methods and assumptions used in proportion to other parties and the numberassessing impairment, including determination of incidents not reported. The accruals are based upon known facts and historical trends, and management believes such accruals are adequate. As of December 31, 2017 and 2016, the gross amount accrued for insurance claims totaled $254.7 million and $218.2 million, with $200.0 million and $162.0 million considered to be long term and included in “Insurance and other non-current liabilities.” Related insurance recoveries/receivables as of December 31, 2017 and 2016 were $50.4 million and $8.7 million, of which $0.4 million and $0.4 million were included in “Prepaid expenses and other current assets” and $50.0 million and $8.3 million were included in “Other assets, net.”
Valuation of Goodwill
We have recorded goodwill in connection with our historical acquisitions of companies. Upon acquisition, these companies were either combined into one of our existing operating units or managed on a stand-alone basis as an individual operating unit. Goodwill recorded in connection with these acquisitions is subject to an annual assessment for impairment, which we perform at the operating unit level for each operating unit that carries a balance of goodwill. Each of our operating units is organized into one of two internal divisions: the Electric Power Infrastructure Services Division and the Oil and Gas Infrastructure Services Division. As most of the companies acquired by us provide multiple types of services for multiple types of customers, these divisional designations are based on the predominant type of work performed by each operating unit at the point in time the divisional designation is made. Goodwill is required to be measured for impairment at the reporting unit level, which represents the operating segment level or one level below the operating segment level for which discrete financial information is available. We have determined that our individual operating units represent our reporting units for the purpose of assessing goodwill impairments.
In January 2017, the Financial Accounting Standards Board issued an update intended to simplify the subsequent measurement of goodwill by eliminating the second step in the two-step goodwill impairment test. The update requires an entitywhether to perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and to recognize an impairment charge for the amount by which the carrying amount exceeds the fair value. The income tax effect associated with an impairment of tax deductible goodwill is also considered in the measurement of the goodwill impairment. We elected to adopt the provisions of the update in connection with our annual impairment test performed in the fourth quarter of 2017.
We have the option to first assess qualitative factors to determine whether it is necessary to perform the quantitative fair value-based impairment test described below. If we believe that, as a result of our qualitative assessment it is more likely than not that the fair value of a reporting unit is less than its carrying amount, the quantitative impairment test is required. We can choose to perform the qualitative assessment on none, some or all of ourthe reporting units. We can also bypass the qualitative assessment for any reporting unit in any period and proceed directly to the quantitative impairment test, and then resume the qualitative assessment in any subsequent period. Qualitative indicators including deterioration in macroeconomic conditions, declining financial performance, or a sustained decrease in share price, among other things, may trigger the need for annual or interim impairment testingunits, weighting of goodwill associated with one or allvarious methods of our reporting units.
Our annual goodwill impairment assessment is performed in the fourth quarter of our fiscal year, or more frequently if events or circumstances arise which indicate that goodwill may be impaired. For instance, a decrease in our market capitalization below book value, a significant change in business climate or loss of a significant customer, as well as the qualitative indicators referenced above, may trigger the need for interim impairment testing of goodwill for a reporting unit. The quantitative impairment test involves comparingdetermining the fair value of each of our reporting units with its carrying amount, including goodwill. If the carrying amount of a reporting unit, exceeds its fairnumber of years of cash flows utilized before applying a terminal value, an impairment loss is recorded as a reduction to goodwill with a corresponding charge to “Asset impairment charges.” Any goodwill impairment is limited to the total amount of goodwill allocated to that reporting unit.
We determine the fair value of our reporting units using a weighted combination of the discounted cash flow, market multiple and market capitalization valuation approaches, with heavier weighting on the discounted cash flow method because management believes this method results in the most accurate calculation of fair value. Determining the fair value of a reporting unit requires judgment and the use of significant estimates and assumptions, including revenue growth rates, operating margins, discount rates, weighted average costscost of capital, transaction multiples, guideline public company multiples and future market conditions. We believefive-year compounded annual growth rates;
Other Intangible Assets - the estimatesvaluation methods and assumptions used in our impairment assessments are reasonableassessing impairment;
Income Taxes - the identification and based on available market information, but variations in anymeasurement of the assumptions could result in materially different calculations of fair value and determinations of whether or not an impairment is indicated.
Under the discounted cash flow method, we determine fair value based on the estimated future cash flows of each reporting unit, discounted to present value using risk-adjusted industry discount rates, which reflect the overall level of inherent risk of a reporting unit and the rate of return an outside investor would expect to earn. Cash flow projections are derived from budgeted
amounts and operating forecasts (typically a one-year model) plus an estimate of later period cash flows, all of which are evaluated by management. Subsequent period cash flows are developed for each reporting unit using growth rates that management believes are reasonably likely to occur, along with a terminal value derived from the reporting unit’s earnings before interest, taxes, depreciation and amortization (EBITDA). The EBITDA multiples for each reporting unit are based on trailing twelve-month comparable industry data.
Under the market multiple and market capitalization approaches, we determine the estimated fair value of each of our reporting units by applying transaction multiples to each reporting unit’s projected EBITDA and then averaging that estimate with similar historical calculations using either a one, two or three year average. For the market capitalization approach, we add a reasonable control premium, which is estimated as the premium that would be received in a sale of the reporting unit in an orderly transaction between market participants.
The projected cash flows and estimated levels of EBITDA by reporting unit were used to determine fair value under the three approaches discussed herein. The following table presents the significant estimates used by management in determining the fair values of our reporting units at December 31, 2017, 2016 and 2015:
|
| | | | | | |
| | | 2017 | | 2016 | | 2015 |
| Years of cash flows before terminal value | | 5 years | | 5 years | | 5 years |
| Discount rates | | 12.0% to 14.0% | | 12.5% to 14.5% | | 12.0% to 16.0% |
| EBITDA multiples | | 5.5 to 7.0 | | 5.5 to 7.0 | | 5.0 to 6.5 |
| Weighting of three approaches: | | | | | | |
| Discounted cash flows | | 70% | | 70% | | 70% |
| Market multiple | | 15% | | 15% | | 15% |
| Market capitalization | | 15% | | 15% | | 15% |
For recently acquired reporting units, a quantitative impairment test may indicate a fair value that is substantially similar to the reporting unit’s carrying amount. Such similarities in value are generally an indication that management’s estimates of future cash flows associated with the recently acquired reporting unit remain relatively consistent with the assumptions that were used to derive its initial fair value.
During the fourth quarter of 2017, a quantitative fair-value based goodwill impairment analysis was performed for each of our reporting units, and no reporting units were evaluated solely on a qualitative basis. The analysis indicated that the fair value of each of our reporting units, with the exception of two reporting units in our Oil and Gas Infrastructure Services Division, was in excess of its carrying amount. We recorded a $57.0 million non-cash charge in the fourth quarter of 2017 for the impairment of goodwill associated with the two reporting units. Specifically, a reporting unit that provides material handling services experienced lower operating margins and is expected to continue to face a highly competitive environment in its select markets and a reporting unit that provides marine and offshore services experienced prolonged periods of reduced revenues and operating margins and is expected to continue to experience lower levels of activity in the U.S. Gulf of Mexico and other offshore markets.
As discussed generally above, when evaluating the 2017 quantitative impairment test results, management considered many factors in determining whether an impairment of goodwill for any reporting unit was reasonably likely to occur in future periods, including future market conditions and the economic environment. Additionally, management considered the sensitivity of its fair value estimates to changes in certain valuation assumptions. After taking into account a 10% decrease in the fair value of each of our reporting units, one additional reporting unit within our Oil and Gas Infrastructure Services Division would have a fair value below its carrying amount. The fair value determined in 2017 for this reporting unit was consistent with the fair value determined in 2016. Circumstances such as market declines, unfavorable economic conditions, loss of a major customer or other factors could increase the risk of impairment of goodwill for this reporting unit in future periods.
If an operating unit experiences prolonged periods of declining revenues, operating margins or both, it may be at risk of failing the quantitative goodwill impairment test. In addition to the reporting units referenced above, certain operating units have experienced declines over the short-term due to challenging macroeconomic conditions in certain geographic areas and low oil and natural gas prices, which have negatively impacted customer spending and resulted in project cancellations and delays. Additionally, customer capital spending has been constrained asa result of an increasingly complex regulatory and permitting environment. Certain operating units within our Oil and Gas Infrastructure Services Division that primarily operate within the midstream and smaller-scale transmission market, including the reporting unit referenced above, have continued to be negatively impacted by these factors. Goodwill and intangible assets associated with these operating units were $50.1 million and $14.7 million at December 31, 2017. We monitor these conditions and others to determine if it is necessary to perform the quantitative fair-value based impairment test for one or more operating units prior to the annual impairment assessment. Although we are not
aware of circumstances that would lead to additional goodwill impairments at this time, circumstances such as a continued market decline, the loss of a major customer or other factors could impact the valuation of goodwill in the future.
The goodwill analysis performed for each reporting unit was based on estimates and comparisons obtained from the electric power and oil and gas industries. We assigned a higher weighting to the discounted cash flow approach in all periods to reflect increased expectations of market value being determined from a “held and used” model. As stated previously, cash flows are derived from budgeted amounts and operating forecasts that have been evaluated by management. In connection with the 2017 assessment, reporting unit annual compounded revenue growth rates during the cash flow projection period varied from negative 14% to positive 17%.
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 values 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 the amount of any 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. Goodwill impairments are included within “Asset impairment charges” on our consolidated statements of operations.
Based on the goodwill impairment analysis, we compared the sum of fair values of our reporting units to our market capitalization at December 31, 2017 and determined that the excess of the aggregate fair value of all reporting units to our market capitalization reflected a reasonable control premium. Our market capitalization at December 31, 2017 was approximately $6.02 billion, and our total stockholders’ equity was approximately $3.79 billion. If the price of our common stock were to decline to a level that causes our market capitalization to be lower than the value of our stockholders’ equity, this would be another factor that could increase the risk of further impairment of goodwill in future periods. Increases in the carrying amount of individual reporting units that may be indicated by our impairment tests are not recorded, therefore we may record goodwill impairments in the future, even when the aggregate fair value of our reporting units as a whole may increase.
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 individual reporting units. If material adverse conditions occur that impact our reporting units, our 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.
During the fourth quarter of 2015, management concluded that goodwill was impaired at two reporting units in our Oil and Gas Infrastructure Services Division and recorded a $39.8 million non-cash charge for the impairment of goodwill, which primarily resulted from lower levels of expected activity in the U.S. Gulf of Mexico and, to a lesser extent, the extended low commodity price environment for certain directional drilling operations in Australia.
Valuation of Other Intangible Assets
Our intangible assets include customer relationships, backlog, trade names, non-compete agreements, patented rights and developed technology, all of which are subject to amortization. The value of customer relationships is estimated as of the date a business is acquired based on the value-in-use concept utilizing the income approach, specifically the excess earnings method. This analysis discounts to present value the projected cash flows attributable to the customer relationships, with consideration given to customer contract renewals and estimated customer attrition rates. The following table presents the significant estimates used by management in determining the fair values of customer relationships associated with acquisitions in the years ended December 31, 2017, 2016 and 2015:
|
| | | | | | |
| | | 2017 | | 2016 | | 2015 |
| Discount rates | | 17% to 25% | | 20% to 23% | | 18% to 22% |
| Customer attrition rates | | 15% to 78% | | 10% to 70% | | 14% to 70% |
We value backlog for acquired businesses as of the acquisition date based upon the contractual nature of the backlog within each service line, discounted to present value. The value of trade names is estimated using the relief-from-royalty method of the income approach. This approach is based on the assumption that in lieu of ownership, a company would be willing to pay a royalty for use of the trade name.
We amortize intangible assets based upon the estimated consumption of their economic benefits, or on a straight-line basis if the pattern of economic benefit cannot otherwise be reliably estimated. Intangible assets subject to amortization are reviewed for impairment and tested for recoverability whenever events or changes in circumstances indicate that the carrying amount may
not be recoverable. For instance, a significant change in business climate or a loss of a significant customer, among other things, may trigger the need for interim impairment testing of intangible assets. An impairment loss is recognized if the carrying amount of an intangible asset is not recoverable and its carrying amount exceeds its fair value. Intangible asset impairments are included within “Asset impairment charges” on our consolidated statements of operations.
During the fourth quarter of 2017, we recorded an impairment charge of $1.1 million related to a customer relationship intangible asset, which primarily resulted from a strategic decision to restructure a business within a reporting unit in our Oil and Gas Infrastructure Services Division.
During the fourth quarter of 2015, we recorded an impairment charge of $12.1 million related to customer relationship, trade name and non-compete agreement intangible assets, which primarily resulted from lower levels of expected activity in the U.S. Gulf of Mexico and, to a lesser extent, the extended low commodity price environment for certain directional drilling operations in Australia. The two reporting units impacted also had related goodwill impairments, as discussed above, and are in our Oil and Gas Infrastructure Services Division.
Valuation of Long-Lived Assets
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 group are compared to the asset group’s carrying amount to determine if an impairment of such asset group is necessary. This requires us to make long-term forecasts of the future revenues and costs related to the asset group subject to review. Forecasts require assumptions about demand for our products and future market conditions. Estimating future cash flows requires significant judgment, and our projections may vary from the cash flows eventually realized. When an impairment exists, the difference between the fair value of such asset group and its carrying amount is expensed and reflected in operating income (loss) in our consolidated statements of operations. In addition, we estimate the useful lives of our long-lived assets and periodically review these estimates to determine whether they are appropriate.
We recorded asset impairments primarily related to certain international renewable energy services operations of $8.0 million in 2016 and $6.6 million in 2015. The 2016 impairment was primarily due to a pending disposition of certain international renewable energy services operations, which was completed in 2017, and the 2015 impairment was based on the estimated future undiscounted cash flows for the asset group as compared to their carrying amount.
Current and Long-Term Accounts and Notes Receivable and Allowance for Doubtful Accounts
We provide an allowance for doubtful accounts when collection of an account or note receivable is considered doubtful, and receivables are written off against the allowance when deemed uncollectible. Inherent in the assessment of the allowance for doubtful accounts are certain judgments and estimates regarding, among other factors, our customer’s access to capital, our customer’s willingness or ability to pay, general economic and market conditions, the ongoing relationship with the customer and uncertainties related to the resolution of disputed matters. We consider accounts receivable delinquent after 30 days but do not generally include delinquent accounts in our analysis of the allowance for doubtful accounts unless the accounts receivable have been outstanding for at least 90 days. We also include accounts receivable balances that relate to customers in bankruptcy or with other known difficulties in our analysis of the allowance for doubtful accounts. Material changes in our customers’ business or cash flows, which may be impacted by negative economic and market conditions, could affect our ability to collect amounts due. As of December 31, 2017 and 2016, we had allowances for doubtful accounts on current receivables of $4.5 million and $2.8 million. Long-term accounts receivable are included within “Other assets, net” on our consolidated balance sheets.
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, we could experience reduced cash flows and losses in excess of current allowances provided.
The balances billed but not paid by customers pursuant to retainage provisions in certain contracts are generally due upon completion of the contracts and acceptance by the customer. Based on our experience with similar contracts in recent years, the majority of the retainage balances at each balance sheet date are expected to be collected within the next twelve months. Current retainage balances as of December 31, 2017 and 2016 were $300.5 million and $231.0 million and were included in “Accounts receivable.” Retainage balances with settlement dates beyond the next twelve months were included in “Other assets, net,” and as of December 31, 2017 and 2016 were $41.9 million and $5.2 million.
Within accounts receivable, we recognize unbilled receivables in circumstances such as when revenues have been earned and recorded but the amount cannot be billed under the terms of the contract until a later date; costs have been incurred but are yet to be billed under cost-reimbursement type contracts; or amounts arise from routine lags in billing (for example, work completed one month but not billed until the next month). These balances do not include revenues accrued for work performed under fixed-price contracts as these amounts are recorded as “Costs and estimated earnings in excess of billings on uncompleted contracts.”
At December 31, 2017 and 2016, the balances of unbilled receivables included in “Accounts receivable” were $303.9 million and $206.8 million.
Contingent Consideration Liabilities
We have recorded liabilities related to contingent consideration associated with certain acquisitions, the payment of which is contingent upon the future financial performance of the acquired businesses and, if earned, would be payable to the former owners of the acquired businesses. The liabilities recorded represent the estimated fair values of future amounts payable to the former owners, and the fair values are estimated by management based on entity-specific assumptions that are evaluated on an ongoing basis. As of December 31, 2017 and 2016, the aggregate fair value of these outstanding and unearned contingent consideration liabilities totaled $65.7 million and $19.5 million, which was included in “Insurance and other non-current liabilities” on our consolidated balance sheets.
The fair values of each contingent consideration liability as of December 31, 2017 was determined using a Monte Carlo simulation valuation methodology based on probability-weighted financial performance projections and other inputs, including a discount rate and an expected volatility factor for each acquisition. The discount rates ranged from 0.9% to 2.3% depending on the settlement methods available and are generally based on a risk-free rate and/or our cost of debt. The expected volatility factors ranged from 23.0% to 32.7% based on historical asset volatility of selected guideline public companies. The fair value determinations incorporate significant inputs not observable in the market. Accordingly, the level of inputs used for these fair value measurements is the lowest level (Level 3). Significant changes in any of these assumptions could result in a significantly higher or lower potential liability. We expect a significant portion of these liabilities to be settled by late 2020 or early 2021.
Our aggregate contingent consideration liabilities can change due to additional business acquisitions, payments to settle outstanding liabilities, changes in the fair value of amounts owed and foreign currency translation gains or losses. During the year ended December 31, 2017, we recognized a decrease in the fair value of contingent consideration liabilities of $5.2 million. No changes in fair value of contingent consideration liabilities were recognized in 2016 and 2015. Changes in fair value of contingent consideration liabilities are included in “Change in fair value of contingent consideration liabilities” on our consolidated statements of operations.
Income Taxes
We follow the liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recorded for future tax consequencesliabilities; the measurement 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 foron deferred tax assets for which future realization is uncertain, including in connection with changes in tax laws affecting these assets. The estimation of required valuation allowances includes estimates of future taxable income. The ultimate realization of deferredincome; estimates associated with tax assets is dependent upon the generation of future taxable income during the periodsliabilities 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 estimated.
We record reserves for income taxes related to certain tax positions in those instances where we consider it more likely than not that additional taxes may be due in excess of amounts reflected on income tax returns filed. When recording reserves for expected tax consequences of uncertain positions, we assume that taxing authorities have full knowledge of the position and all relevant facts. We continually review exposure to additional tax obligations, and as further information is known or events occur, changes in tax reserves may be recorded. To the extent interest and penalties may be assessed by taxing authorities on any underpayment of income tax, such amounts have been accrued and included in the provision for income taxes.
As of December 31, 2017, the total amount of unrecognized tax benefits relating to uncertain tax positions was $36.2 million, an increase from December 31, 2016 of $1.0 million. This increase resulted primarily from a $7.0 million increase in reserves for uncertain tax positions to be taken for 2017 and a $2.2 million increase for uncertain tax positions related to prior years, partially offset by an $8.3 million decrease in reserves for uncertain tax positions resulting from the expiration of statute of limitations periods. Although the IRS completed its examination related to tax years 2010, 2011 and 2012 during the year ended December 31, 2016, certain subsidiaries remain under examination by various U.S. state, Canadian and other foreign tax authorities for multiple periods. We believe it is reasonably possible that within the next 12 months unrecognized tax benefits may decrease by up to $13.7 million as a result of settlement of these examinations or as a result of the expiration of certain statute of limitations periods.
U.S. federal and state and foreign income tax laws and regulations are voluminous and are often ambiguous. As such, we are required to make many subjective assumptionsambiguous; and judgments regarding ourbenefits from uncertain tax positions that could materially affect amounts recognized in our future consolidated balance sheets, consolidated statements of operations and consolidated statements of
comprehensive income. For example, as previously described, the Tax Act significantly revised the U.S. corporate tax regime and resulted in a remeasurement of our deferred tax assets and liabilities and is anticipated to significantly reduce our future effective tax rate. For additional information on the status of our provisional analysis of the Tax Act,(also refer to Note 10 of the Notes to Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data.Data);
Insurance - the estimation of liabilities and related recoveries;
Outlook
We believe there are growth opportunities acrossLitigation Costs and Reserves and Loss Contingencies - the industries we serveestimation of when a loss is probable or reasonably possible and continuewhether any such loss is reasonably estimable or any range of possible loss is estimable, as well as uncertainties related to have a positive long-term outlook. Overall, favorable end-market drivers have spurred demand for infrastructure services in both our Electric Power Infrastructure Servicesthe outcome of litigation or other legal proceedings (also refer to Notes 13 and Oil and Gas Infrastructure Services segments, and we believe both segments are generally entering a renewed multi-year up-cycle. We are focused on long-term profitable growth and continuing14 of the Notes to distinguish ourselves through safe execution and best-in-class field leadership. Though not without risks and challenges, including those discussed below and referencedConsolidated Financial Statements in Item 1A. Risk Factors and Uncertainty of Forward-Looking8. Financial Statements and Information, we believe we are well-positioned to capitalize on opportunitiesSupplementary Data);
Contingent Consideration Liabilities - the valuation methods and trendsassumptions used in assessing the industries we serve with our full-service operations, broad geographic reach, financial position and technical expertise.
Electric Power Infrastructure Services Segment
We expect demand for electricity in North America to grow over the long term and believe that certain segmentsfair values of the North American electric power grid are not adequate to efficiently serve the power needs of the future. These factors have affected and will continue to affect reliability, requiring utilities to upgrade, modernize and expand their existing transmission and distribution systems. Furthermore, current federal legislation also requires the power industry to meet federal reliability standards for its transmission and distribution systems. In response to these dynamics, over the past several years, many utilities across North America have begun to implement plans to upgrade their transmission and distribution systems in order to improve reliability and reduce congestion.
As demand for power increases, we expect the need for new power generation facilities to also increase. The development of such facilities, expected to be powered by certain types of traditional energy sources and renewable energy sources such as solar and wind, would necessitate new or expanded transmission infrastructure to transport power to demand centers. Furthermore, we anticipate that the access to low cost natural gas resources from unconventional shale formations in the United States and Canada will continue to increase the amount of electricity generated by natural gas powered plants. To the extent this dynamic continues, transmission and substation infrastructure will be needed to interconnect new natural gas-fired generation facilities. We also anticipate that modification and reengineering of existing transmission and substation infrastructure will be required as existing coal and nuclear generation facilities are retired or shut down.
With respect to distribution systems, a number of utilities are implementing system upgrades or hardening programs in response to severe weather events that have occurred over the past several years, which is increasing distribution investment in some regions of the United States. We also anticipate that utilities will continue to integrate smart grid technologies into their distribution systems over time to improve grid management and create efficiencies. Further,future amounts payable to the extent adoptionformer owners of electrical vehicle technology increases, we believe upgradescertain acquired businesses; and
Acquisitions - the assumptions used to distributiondetermine the fair value of consideration transferred and other electrical infrastructure will be required to accommodate increased load demand.
We believe that several existing, pending or proposed legislative or regulatory actions may also positively impact long-term demand for the services we provide, particularlyallocate this consideration to assets acquired and liabilities assumed in connection with electric power infrastructure and renewable energy spending. For example, legislative or regulatory action that alleviates someour acquisitions, including the estimated useful lives of other intangible assets subject to amortization (also refer to Note 4 of the sitingNotes to Consolidated Financial Statements in Item 8. Financial Statements and right-of-way challenges that impact transmission projects would potentially accelerate future construction, and federal reliability standards for transmission and distribution systems could create incentives for system investment and maintenance. We also consider renewable energy, including solar and wind generation facilities, to be an ongoing opportunity for our engineering, project management and installation services; however, the economic feasibility of these projects may depend on the availability of tax incentive programs and there is no assurance that existing incentive programs will be extended or that new incentive programs will be implemented.
Despite these positive trends, the regulatory and environmental permitting processes remain a hurdle for some proposed transmission and renewable energy projects, and these factors continue to create uncertainty as to timing of projects and customer spending. In the near term, margins for our electric power infrastructure services operations have been impacted by regulatory and permitting delays and unfavorable economic and market conditions, particularly for larger transmission projects. We anticipate many of these issues to be resolved over the long term, as a number of these projects are currently underway, and we expect this segment’s backlog to remain strong during 2018.
Our customers are also seeking additional specialized labor resources to address an aging utility workforce and labor availability issues, increasing pressure to reduce costs and improve reliability, and increasing duration and complexity of customer capital programs. We believe these trends will continue, possibly to the point where customer demand for labor resources will outpace the supply of industry resources. Our ability to take advantage of this opportunity is limited by our ability to employ, train and retain the necessary skilled personnel. We are taking proactive steps to develop our workforce, including through the establishment and expansion of our training facility, our recent acquisition of a postsecondary educational institution that provides pre-apprenticeship training and programs for experienced linemen, and other strategic relationships.
With respect to our communications service offerings, consumer and commercial demand in North America and Latin America for communication and data-intensive, high-bandwidth wireline and wireless services and applications is driving significant investment in infrastructure and the deployment of new technologies. In particular, we believe there is increasing demand to upgrade or build fiber optic networks that are closer or connected to the end user, and in North America there are plans for new wireless networks and improvements to existing wireless networks. As a result of these near- and longer-term industry trends, we believe there will be meaningful demand for our services.
Oil and Gas Infrastructure Services Segment
We continue to see growth opportunities in our Oil and Gas Infrastructure Services segment, primarily with respect to installation and maintenance of larger pipeline systems and related facilities and services related to pipeline integrity, natural gas distribution, horizontal directional drilling and downstream industrial services. A number of larger pipeline projects from the North American shale formations and Canadian oil sands to power plants, refineries and other demand centers are in various stages of development. While there is risk the projects will not move forward or could be delayed, we believe many of our customers remain committed to them given the cost and time required to move from conception to construction. We expect to continue to execute on a significant number of larger pipeline projects during 2018.
Due to its abundant supply and current low price, we believe the demand for North American natural gas will continue to increase in the future and that natural gas will be the fuel of choice for both primary power generation and backup power generation for renewable-driven power plants. In certain areas of North America, the existing pipeline system infrastructure is insufficient to support this expected future development. Furthermore, the abundance of low price natural gas in the United States, Canada and Australia has also resulted in efforts to develop liquefied natural gas (LNG) export facilities to serve higher-price international markets, which could provide pipeline and related facilities development opportunities for us. Although fluctuating commodity prices, regulatory issues and changing economic conditions may impact the number of projects that ultimately move forward, we believe our comprehensive service offerings and broad geographic presence enable us to competitively pursue opportunities that become available.
We also believe there are growth opportunities for some of our other pipeline services over the long term, including pipeline integrity, rehabilitation and replacement services. Regulatory measures have and could continue to increase the frequency or stringency of pipeline integrity testing requirements, which we expect to result in increased capital expenditures by our customers. We have also experienced an increase in demand for our natural gas distribution services as a result of improved economic conditions, lower natural gas prices and a significant need to upgrade and replace aging infrastructure.
Despite these positive trends, a challenging regulatory and permitting environment has caused the delay of some larger pipeline projects during the past several years. These dynamics resulted in a below average number of larger pipeline construction opportunities for us and the industry during that period, and negatively impacted our segment margins, in part as a result of our inability to adequately cover certain fixed costs. Margins for larger pipeline projects are also subject to significant performance risk, which can arise from adverse weather conditions, challenging geography, customer decisions and crew productivity. Specific opportunities for larger pipeline projects are also sometimes difficult to predict because of the seasonality of bidding and construction cycles.
Additionally, the oil and gas industry is highly cyclical and subject to volatility as a result of fluctuations in natural gas, natural gas liquids and oil prices. Certain of our end markets remain challenged as the broader energy market has not fully recovered from the significant decline in prices that began in mid-2014. Exploration and production companies and midstream companies significantly reduced capital spending in response to the decline, and demand in areas where the price of oil is influential, such as Australia, the Canadian Oil Sands, certain oil-driven U.S. shale formations and the Gulf of Mexico, has been adversely impacted by low oil prices. If oil and natural gas prices decline further or remain at lower levels over the long term, our outlook may change and demand for our services could be materially impacted.
We have also recently expanded our industrial services offerings, including high-pressure and critical-path turnaround services to the downstream and midstream energy markets, and enhanced our capabilities with respect to instrumentation and electrical services, piping, fabrication and storage tank services. While these services have been negatively impacted in the short term by historic adverse weather events in the U.S. Gulf Coast region, we believe, looking at trends and estimates for process
facility utilization rates and overall refining capacity, North America will be the largest downstream maintenance market in the world over the next several years. Furthermore, we believe processing facilities located along the U.S. Gulf Coast region should have certain strategic advantages due to their access and proximity to affordable hydrocarbon resources.
Overall, we remain optimistic about this segment’s operations. From a near- and medium-term perspective, we continue to believe that larger pipeline opportunities can provide significant profitability, although these projects are often subject to more cyclicality and execution risk than our other service offerings. We have also taken steps to diversify our operations in this segment through other services, such as pipeline integrity, pipeline logistics, and downstream industrial services.
Strategic Acquisitions and Investments
We continue to evaluate potential strategic acquisitions and investments to broaden our customer base, expand our geographic area of operations, grow our portfolio of services and increase opportunities across our operations. We believe that attractive growth opportunities exist primarily due to the highly fragmented and evolving nature of the industries in which we operate and adjacent industries, along with the inability of many companies to expand and modernize due to capital or liquidity constraints. We will pursue opportunities designed to enhance our core business and leadership position in the industries we serve and provide innovative solutions to our customers. We also believe our unique operating model and entrepreneurial mindset will continue to be attractive to acquisition candidates.
Supplementary Data).
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 revenues, net income, earnings per share, margins, weighted average shares outstanding, capital expenditures, tax rates and other projections of operating or financial results;
Expectations regarding our business or financial outlook growth,and opportunities, trends or opportunitieseconomic and regulatory conditions in particular markets;markets or industries;
Expectations regarding our plans and strategies, including plans, effects and other matters relating to our exit from our Latin American operations;
The expected value of contracts or intended contracts with customers;
Future capital allocation initiatives;
Thecustomers, as well as the scope, services, term andor results of any projects awarded or expected to be awarded for services to be provided by us;projects;
The development of larger electric transmission and oil and natural gas pipeline projects, andas well as the level of oil, natural gas and natural gas liquids prices and their impact on our business or demand for our services;
Future capital allocation initiatives, including the amount, timing and strategies with respect to any future stock repurchases, and expectations regarding the declaration, amount and timing of any future cash dividends;
The impact of existing or potential legislation or regulation, including the Tax Act;regulation;
Potential opportunities that may be indicated by bidding activity or similar discussions with customers;
The future demand for and availability of labor resources in the industries we serve;
The expected realization of remaining performance obligations or backlog;
The potential benefits from investments or acquisitions, including Stronghold;acquisitions;
The expected outcome of pending or threatened litigation;legal proceedings;
Beliefs and assumptions about the collectability of receivables;
The business plans or financial condition of our customers;
Our plans and strategies;
Possible recovery onof pending or contemplated insurance claims, change orders or otherand claims asserted against customers or third parties; and
The current economic and regulatory conditions and trends in the industries we serve.parties.
These forward-looking statements are not guarantees of future performance, involve or rely on a number of risks, uncertainties, and assumptions that are difficult to predict or are beyond our control, and reflect management’s beliefs and assumptions based
on information available 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 inaccurate or incorrect. Those statements can be affected by inaccurate assumptions and by known or unknown risks and uncertainties, including the following:
Market, conditions;
The effects of industry, economic, financial or political conditions outside our control, including weakness in the capital markets;markets or any actual or potential shutdown, sequester, default or similar event or occurrence involving the U.S. federal government;
Quarterly variations in our operating results;and financial results, liquidity, financial condition, capital requirements, and reinvestment opportunities;
Trends and growth opportunities in relevant markets;markets, including our ability to obtain future project awards;
The time and costs required to exit our Latin American operations and our ability to effect related transactions on acceptable terms, as well as the business and political climate in Latin America;
Delays, reductions in scope or cancellations of anticipated, pending or existing projects, including as a result of weather, regulatory or permitting issues, environmental processes, project performance issues, claimed force majeure events, protests legal challenges or other political activity, legal challenges or our customers’customer capital constraints;
The successful negotiation, execution, performance and completion of anticipated, pending and existing contracts, includingcontracts;
Risks associated with operational hazards that arise due to the ability to obtain awardsnature of projects onthe services we provide and the conditions in which we bidoperate, including, among others, wildfires and explosions;
Unexpected costs, liabilities, fines or penalties that may arise from legal proceedings, indemnity obligations, reimbursement obligations associated with letters of credit or bonds, multiemployer pension plans (e.g., underfunding of liabilities, termination or withdrawal liability) or other claims or actions asserted against us, including amounts that are not covered by, or are otherwise discussing with customers;in excess of, our third-party insurance;
Potential unavailability or cancellation of third-party insurance coverage, as well as the exclusion of coverage for certain losses, potential increases in premiums for coverage deemed beneficial to us, or the unavailability of coverage deemed beneficial to us at reasonable and competitive rates;
Damage to our brands or reputation arising as a result of cyber-security breaches, environmental and occupational health and safety matters, corporate scandal, failure to successfully perform a high-profile project, involvement in a catastrophic event (e.g., fire, explosion) or other negative incidents;
Our dependence on suppliers, subcontractors, equipment manufacturers and other third-party contractors;
Estimates and assumptions related to our financial results, remaining performance obligations and backlog;
Our ability to attract and the potential shortage of skilled employees and our ability to retain key personnel and qualified employees;
Our dependence on fixed price contracts and the potential to incur losses with respect to these contracts;
Estimates relating to our use of percentage-of-completion accounting;
Adverse weather conditions or events;natural disasters, including wildfires, pandemics, hurricanes, tropical storms, floods, earthquakes and other geological- and weather-related hazards;
Our ability to generate internal growth;
Competition in our business, including our ability to effectively compete for new projects and market share;
The effect of natural gas, natural gas liquids and oil prices on our operations and growth opportunities and on our customers’ capital programs and demand for our services;
The future development of natural resources;
The failure of existing or potential legislative actions and initiatives to result in increased demand for our services;
Liabilities associatedFluctuations of prices of certain materials used in our business, including as a result of the imposition of tariffs or changes in U.S. trade relationships with multiemployer pension plans, including underfunding of liabilities and termination or withdrawal liabilities;
Unexpected costs or liabilities that may arise from pending or threatened litigation, indemnity obligations or other claims asserted against us, including liabilities and costs for which we are not covered by third-party insurance;
The outcome of pending or threatened litigation;
Risks relating to the potential unavailability or cancellation of third-party insurance, the exclusion of coverage for certain losses, and potential increases in premiums for coverage deemed beneficial to us;
countries;
Cancellation provisions within our contracts and the risk that contracts expire and are not renewed or are replaced on less favorable terms;
Loss of customers with whom we have long-standing or significant relationships;
The potential that participation in joint ventures or similar structures exposes us to liability and/or harm to our reputation for acts or omissions by our partners;
Our inability or failure to comply with the terms of our contracts, which may result in additional costs, unexcused delays, warranty claims, failure to meet performance guarantees, damages or contract terminations;
The inability or refusal of our customers or third-party contractors to pay for services, including failure to collect our outstanding receivables;
Thereceivables, failure to recover amounts billed to customers in bankruptcy, or failure to recover on payment claims against project ownerschange orders or third-party contractors or to obtain adequate compensation for customer-requested change orders;
The failure of our customers to comply with regulatory requirements applicable to their projects, which may result in project delays and cancellations;contract claims;
Budgetary or other constraints that may reduce or eliminate tax incentives or government funding for projects, which may result in project delays or cancellations;
Estimates and assumptions in determining our financial results and backlog;
Our ability to successfully complete our remaining performance obligations or realize our backlog;
Risks associated with operating in international markets, including instability of foreign governments, currency fluctuations, tax and investment strategies, as well as compliance with foreign legal systems and cultural practices, the U.S. Foreign Corrupt Practices Act and other applicable anti-bribery and anti-corruption laws;
| |
| ��� | Risks associated with operating in international markets, including instability of foreign governments, currency exchange fluctuations, and compliance with unfamiliar foreign legal systems and cultural practices, the U.S. Foreign Corrupt Practices Act and other applicable anti-bribery and anti-corruption laws, and complex U.S. and foreign tax regulations and international treaties; |
Our ability to successfully identify, complete, integrate and realize synergies from acquisitions, including Stronghold;the ability to retain key personnel from acquired businesses;
The potential adverse impact resulting from uncertainty surrounding acquisitions and investments, including the ability to retain key personnel from an acquired business and the potential increase in risks already existing in our operations;operations and poor performance or decline in value of our investments;
The adverse impact of impairments of goodwill, other intangible assets, receivables, long-lived assets or investments;
Our growth outpacing our decentralized management and infrastructure;
Requirements relating to governmental regulation and changes thereto;
Inability to enforce our intellectual property rights or the obsolescence of such rights;
Risks related to the implementation of new information technology solutions;
The impact of our unionized workforce on our operations, including labor stoppages or interruptions due to strikes or lockouts;
Potential liabilitiesThe ability to access sufficient funding to finance desired growth and other adverse effects arising from occupational health and safety matters;
The cost of borrowing, availability of cash and credit,operations, including our ability to access capital markets on favorable terms, as well as fluctuations in the price and volume of our common stock, debt covenant compliance, interest rate fluctuations and other factors affecting our financing and investing activities;
Fluctuations of prices of certain materials used in our business;
The ability to access sufficient funding to finance desired growth and operations;
Our ability to obtain performance bonds;
Potential exposure to environmental liabilities;bonds and other project security;
Our ability to meet the regulatory requirements applicable to us and our subsidiaries, including the Sarbanes-Oxley Act of 2002;2002 and the U.S. Investment Advisers Act of 1940;
Rapid technological and other structural changes that could reduce the demand for our services;
Risks related to the implementation of new information technology systems;
New or changed tax laws, treaties or regulations;
Increased healthcare costs arising from healthcare reform legislation
Our ability to realize deferred tax assets;
Legislative or other legislative action;
Regulatoryregulatory changes that result in increased costs, including with respect of labor and healthcare costs;
Significant fluctuations in foreign currency exchange rates; and
The other risks and uncertainties described elsewhere herein and in 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.
| |
| • | The other risks and uncertainties described elsewhere herein and in Item 1A. Risk Factors in this Annual Report 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 update or revise any forward-looking statements to reflect events or circumstances after the date of this report or otherwise.
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ITEM 7A. | Quantitative and Qualitative Disclosures about Market Risk |
ITEM 7A.Quantitative and Qualitative Disclosures about Market Risk
Our primary exposure to market risk relates to unfavorable changes in concentration of credit risk, interest rates and currency exchange rates.
Credit Risk. We are subject to concentrations of credit risk related to our cash and cash equivalents and our net receivable position with customers, which includes amounts related to billed and unbilled accounts receivable and costs and estimated earnings in excess of billings on uncompleted contractscontract assets net of advanced billings with the same customer. Substantially all of our cash and cash equivalents are managed by what we believe to be high credit quality financial institutions. In accordance with our investment policies, these institutions are authorized to invest cash and cash equivalents in a diversified portfolio of what we believe to be high-quality investments, which primarily include interest-bearing demand deposits, money market investments and money market mutual funds with original maturities of three months or less.funds. Although we do not currently believe the principal amounts of these cash and cash equivalents are subject to any material risk of loss, changes in economic conditions could impact the interest income we receive from these investments.
In addition, as we grant credit under normal payment terms, generally without collateral, wecollateral; and therefore, are subject to potential credit risk related to our customers’ abilityinability to pay for services provided. ThisFor example, in January 2019 one of our largest customers, PG&E, filed for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code, as amended. See Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Concentration of Credit Risk for additional information regarding our pre-petition receivables and this bankruptcy matter. Furthermore, the risk of nonpayment may be heightened as a result of depressed economic and financial market conditions. However, weWe believe the concentration of credit risk related to billed and unbilled receivables and costs and estimated earnings in excess of billings on uncompleted contractscontract assets is limited because of the diversity of our customers. Wecustomers, and we perform ongoing credit risk assessments of our customers and financial institutions and in some cases we obtain collateral or other security from our customers.
Interest Rate Risk. As of December 31, 2017,2019, we had no derivative financial instruments to manage interest rate risk. As such, we were exposed to earnings and fair value risk due to changes in interest rates with respect to our long-term obligations. As of December 31, 2017,2019, the fair value of our variable rate debt of $668.4 million$1.35 billion approximated book value. Our weighted average interest rate on our variable rate debt for the year ended December 31, 20172019 was 2.7%3.8%. The annual effect on our pretax earnings of a hypothetical 50 basis point increase or decrease in variable interest rates would be approximately $3.3$6.7 million based on our December 31, 20172019 balance of variable rate debt.
Foreign Currency Risk. The U.S. dollar is the functional currency for the majority of our operations, which are primarily located within the United States. The functional currency for our foreign operations, which are primarily located in Canada Australia and Latin America,Australia, is typically the currency of the country in which the foreign operating unit is located. Accordingly, our financial performance is subject to fluctuation due to changes in foreign currency exchange rates relative to the U.S. dollar. During 2017,2019, revenues from our foreign operations accounted for 26.2%15.9% of our consolidated revenues. Fluctuations in foreign exchange rates during the year ended December 31, 20172019 caused an increasea decrease of approximately $53$57 million in foreign revenues compared to the year ended December 31, 2016.2018. Fluctuations in foreign exchange rates during the year ended December 31, 20162018 caused a decrease of approximately $41$18 million in foreign revenues compared to the year ended December 31, 2015.2017.
We are also subject to foreign currency risk with respect to sales, purchases and borrowings that are denominated in a currency other than the respective functional currencies of our operating units. To minimize the risk from changes in foreign
currency exchange rates, we may enter into foreign currency derivative contracts to hedge our foreign currency risk on a cash flow basis. There were no outstanding foreign currency derivative contracts at December 31, 2017.2019.
We also have foreign exchange risk related to cash and cash equivalents in foreign banks. Based on the balance of cash and cash equivalents in foreign banks of $55.2$34.0 million as of December 31, 2017,2019, an assumed 5% adverse change to foreign exchange rates would result in a fair value decline in cash of $2.8$1.5 million. Fluctuations in fair value are recorded in “Accumulated other comprehensive income (loss)”, a separate component of stockholders’ equity.
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ITEM 8. | Financial Statements and Supplementary Data |
ITEM 8.Financial Statements and Supplementary Data
INDEX TO QUANTA SERVICES, INC.’S CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF MANAGEMENT
Management’s 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 system’s 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.
Management’s 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 company’s 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 (2013) 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, 20172019 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, 20172019 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in its report which appears herein.
Management’s assessment of the effectiveness of our internal control over financial reporting as of December 31, 20172019 excluded the three acquisitionsseven businesses we completedacquired in 2017.2019. Such exclusion was in accordance with SEC guidance that an assessment of recently acquired businesses may be omitted in management’s report on internal control over financial reporting, provided the acquisition took place within twelve months of management’s evaluation. These acquisitions comprised approximately 2.5%2.1% and 2.2%1.8% of our consolidated assets and revenues as of and for the year ended December 31, 20172019.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Quanta Services, Inc.:
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Quanta Services, Inc. and its subsidiaries (the “Company”) as of December 31, 20172019 and 2016,2018, and the related consolidated statements of operations, of comprehensive income, of equity and of cash flows and equity for each of the three years in the period ended December 31, 2017,2019, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company’s internal control over financial reporting as of December 31, 2017,2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 20172019 and 2016,2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 20172019 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, 2017,2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Change in Accounting Principle
As discussed in Note 3 to the consolidated financial statements, the Company changed the manner in which it accounts for leases in 2019.
Basis for Opinions
The Company’s management is responsible for these consolidated 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 Management’s Report on Internal Control overOver Financial Reporting. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB")(PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. 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 described in Management’s Report on Internal Control overOver Financial Reporting, management has excluded its 2017 acquisitionsseven acquired businesses from its assessment of internal control over financial reporting as of December 31, 20172019 because they were acquired by the Company in purchase business combinations during 2017.2019. We have also excluded the 2017 acquisitionsthese seven acquired businesses from our audit of internal control over financial reporting. The 2017 acquisitionsThese acquired businesses, each of which is wholly-owned, comprised, in the Company and its related subsidiaries are wholly-owned subsidiaries whoseaggregate, total assets and total revenues excluded from management’s assessment and our audit of internal control over financial reporting represent 2.5%of approximately 2.1% and 2.2%,1.8% of consolidated total assets and consolidated total revenues, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2017.
2019.
Definition and Limitations of Internal Control over Financial Reporting
A company’s 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 company’s 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 company’s 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.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that (i) relate to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Revenue Recognition - Determination of Total Estimated Contract Costs for Contracts Recognized Over Time
As described in Note 2 to the consolidated financial statements, the Company generally recognizes revenue over time as it performs its obligations because there is a continuous transfer of control of the deliverable to the customer. Under unit-price contracts with more than an insignificant amount of partially completed units and fixed price contracts, revenue is recognized as performance obligations are satisfied over time, with the percentage completion generally measured as the percentage of costs incurred to the total estimated costs for such performance obligation. During the year ended December 31, 2019, approximately 50% of the Company’s revenue recognized were associated with this revenue recognition method. Contract costs include all direct materials, labor and subcontract costs and indirect costs related to contract performance, such as indirect labor, supplies, tools, repairs and depreciation costs. As described by management, actual revenues and project costs can vary, sometimes substantially, from previous estimates due to changes in a variety of factors, including unforeseen or changed circumstances not included in Quanta’s cost estimates or covered by its contracts. The estimating process is based on the professional knowledge and experience of Quanta’s project estimators, project managers and finance professionals. Some of the factors that may lead to changes in estimates include concealed or unknown site conditions; changes in the cost of equipment, commodities, materials or labor; unanticipated costs or claims due to delays caused by customers or third parties; customer failure to provide required materials or equipment; errors in engineering, specifications or designs; project modifications or contract termination; adverse weather conditions and natural disasters; changes in estimates related to the length of time to complete a performance obligation; and performance and quality issues requiring rework or replacement.
The principal considerations for our determination that performing procedures relating to revenue recognition for contracts recognized over time is a critical audit matter are that there was significant judgment by management when estimating the total contract costs. This in turn led to a high degree of auditor judgment, effort and subjectivity in performing procedures and evaluating audit evidence relating to management’s estimate of the total costs of the contracts recognized over time.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the revenue recognition process including controls over the determination of total estimated contract cost for contracts recognized over time.These procedures also included, among others, (i) evaluating and testing management’s process for determining the total estimated contract cost for a sample of contracts, which included evaluating the contracts and other documents that support those estimates, and testing of underlying contract costs; (ii) evaluating management’s ability to reasonably estimate total contract costs by performing a comparison of the actual total estimated contract cost as compared with prior period estimates, including evaluating the timely identification of circumstances that may warrant a modification to the total estimated contract cost and (iii) evaluating management’s methodologies and the consistency of management’s methodologies over the life of the contract.
Acquisition of The Hallen Construction Co. - Fair Value of the Customer Relationships
As described in Notes 2 and 4 to the consolidated financial statements, the Company completed the acquisition of The Hallen Construction Co. (“Hallen”) on August 30, 2019, which resulted in $175 million of intangible assets recorded, principally the customer relationships. The fair value of customer relationships is estimated as of the date a business is acquired based on the
value-in-use concept utilizing the income approach, specifically the multi-period excess earnings method. This method discounts to present value the projected cash flows attributable to the customer relationships, with consideration given to customer contract renewals and estimated customer attrition rates. The significant estimates used by management in determining the fair values of customer relationship intangible assets include future revenues, discount rates and customer attrition rates.
The principal considerations for our determination that performing procedures relating to the acquisition of Hallen is a critical audit matter are (i) there was a high degree of auditor judgment and subjectivity in applying procedures relating to the fair value measurement of the customer relationship intangible assets acquired due to the significant judgment by management when estimating the fair value of the customer relationship intangible assets, (ii) significant audit effort was required in evaluating the significant assumptions related to the fair value of the customer relationship intangible assets, such as the future revenues, the discount rates and customer attrition rate, and (iii) the audit effort involved the use of professionals with specialized skill and knowledge.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the acquisition accounting, including controls over management’s valuation of the customer relationship intangible assets and controls over development of significant assumptions, including future revenues, the discount rates and the customer attrition rate. These procedures also included, among others, (i) reading the purchase agreement, (ii) testing management’s process for estimating the fair value of the customer relationship intangible assets, (iii) evaluating the appropriateness of the valuation method and the reasonableness of significant assumptions, including the future revenues, the discount rates and the customer attrition rate for the customer relationship intangible assets, and (iv) testing the completeness, accuracy, and relevance of underlying data used in the estimate. Evaluating the reasonableness of the future revenues and customer attrition rate assumptions involved considering the past performance of the acquired business, as well as economic forecasts. Professionals with specialized skill and knowledge were used to assist in the evaluation of the Company’s valuation method and significant assumptions, including the discount rates and customer attrition rate.
/s/ PricewaterhouseCoopers LLP
Houston, Texas
February 28, 20182020
We have served as the Company’s auditor since 2002.
QUANTA SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share information)
| | | | | December 31, | | | | | |
| | | 2017 | | 2016 | | December 31, |
| | | (In thousands, except share information) | | 2019 | | 2018 |
| ASSETS | | | | | | | | |
| Current Assets: | | |
| | |
| | |
| | |
|
| Cash and cash equivalents | | $ | 138,285 |
| | $ | 112,183 |
| | $ | 164,798 |
| | $ | 78,687 |
|
| Accounts receivable, net of allowances of $4,465 and $2,752 | | 1,985,077 |
| | 1,500,115 |
| |
| Costs and estimated earnings in excess of billings on uncompleted contracts | | 497,292 |
| | 473,308 |
| |
| Accounts receivable, net of allowances of $9,398 and $5,839 | | | 2,747,911 |
| | 2,354,737 |
|
| Contract assets | | | 601,268 |
| | 576,891 |
|
| Inventories | | 80,890 |
| | 88,548 |
| | 55,719 |
| | 107,732 |
|
| Prepaid expenses and other current assets | | 168,363 |
| | 114,591 |
| | 261,290 |
| | 208,057 |
|
| Total current assets | | 2,869,907 |
| | 2,288,745 |
| | 3,830,986 |
| | 3,326,104 |
|
| Property and equipment, net of accumulated depreciation of $981,275 and $862,825 | | 1,288,602 |
| | 1,174,094 |
| |
| Property and equipment, net of accumulated depreciation of $1,250,197 and $1,092,440 | | | 1,386,654 |
| | 1,276,032 |
|
| Operating lease right-of-use assets | | | 284,369 |
| | — |
|
| Other assets, net | | 189,866 |
| | 101,028 |
| | 393,264 |
| | 293,592 |
|
| Other intangible assets, net of accumulated amortization of $335,507 and $297,313 | | 263,179 |
| | 187,023 |
| |
| Other intangible assets, net of accumulated amortization of $437,886 and $372,081 | | | 413,734 |
| | 280,180 |
|
| Goodwill | | 1,868,600 |
| | 1,603,169 |
| | 2,022,675 |
| | 1,899,879 |
|
| Total assets | | $ | 6,480,154 |
| | $ | 5,354,059 |
| | $ | 8,331,682 |
| | $ | 7,075,787 |
|
| LIABILITIES AND EQUITY | | | | | | | | |
| Current Liabilities: | | |
| | |
| | |
| | |
|
| Current maturities of long-term debt and short-term debt | | $ | 1,220 |
| | $ | 7,563 |
| | $ | 74,869 |
| | $ | 65,646 |
|
| Current portion of operating lease liabilities | | | 92,475 |
| | — |
|
| Accounts payable and accrued expenses | | 1,057,460 |
| | 922,819 |
| | 1,489,559 |
| | 1,314,520 |
|
| Billings in excess of costs and estimated earnings on uncompleted contracts | | 433,387 |
| | 274,846 |
| |
| Contract liabilities | | | 606,146 |
| | 425,961 |
|
| Total current liabilities | | 1,492,067 |
| | 1,205,228 |
| | 2,263,049 |
| | 1,806,127 |
|
| Long-term debt and notes payable, net of current maturities | | 670,721 |
| | 353,562 |
| |
| Long-term debt, net of current maturities | | | 1,292,195 |
| | 1,040,532 |
|
| Operating lease liabilities, net of current portion | | | 196,521 |
| | — |
|
| Deferred income taxes | | 179,381 |
| | 192,834 |
| | 214,779 |
| | 219,115 |
|
| Insurance and other non-current liabilities | | 342,356 |
| | 259,733 |
| | 311,307 |
| | 404,560 |
|
| Total liabilities | | 2,684,525 |
| | 2,011,357 |
| | 4,277,851 |
| | 3,470,334 |
|
| Commitments and Contingencies | |
|
| |
|
| |
|
| |
|
|
| Equity: | | |
| | |
| | |
| | |
|
| Common stock, $.00001 par value, 600,000,000 shares authorized, 155,219,154 and 144,710,773 shares issued, and 153,342,326 and 144,710,773 shares outstanding | | 2 |
| | 1 |
| |
| Exchangeable Shares, no par value, 486,112 and 6,515,453 shares issued and outstanding | | — |
| | — |
| |
| Series F Preferred Stock, $.00001 par value, 0 and 1 share authorized, issued and outstanding | | — |
| | — |
| |
| Series G Preferred Stock, $.00001 par value, 1 share authorized, issued and outstanding | | — |
| | — |
| |
| Common stock, $.00001 par value, 600,000,000 shares authorized, 159,415,540 and 157,333,046 shares issued, and 142,324,318 and 141,103,900 shares outstanding | | | 2 |
| | 2 |
|
| Exchangeable shares, no par value, 36,183 and 486,112 shares issued and outstanding | | | — |
| | — |
|
| Series G Preferred Stock, $.00001 par value, 0 and 1 share authorized, issued and outstanding | | | — |
| | — |
|
| Additional paid-in capital | | 1,889,356 |
| | 1,749,306 |
| | 2,024,610 |
| | 1,967,354 |
|
| Retained earnings | | 2,191,059 |
| | 1,876,081 |
| | 2,854,271 |
| | 2,477,291 |
|
| Accumulated other comprehensive loss | | (203,395 | ) | | (271,673 | ) | | (241,818 | ) | | (286,048 | ) |
| Treasury stock, 1,876,828 and 0 common shares | | (85,451 | ) | | (14,288 | ) | |
| Treasury stock, 17,091,222 and 16,229,146 common shares | | | (586,773 | ) | | (554,440 | ) |
| Total stockholders’ equity | | 3,791,571 |
| | 3,339,427 |
| | 4,050,292 |
| | 3,604,159 |
|
| Non-controlling interests | | 4,058 |
| | 3,275 |
| | 3,539 |
| | 1,294 |
|
| Total equity | | 3,795,629 |
| | 3,342,702 |
| | 4,053,831 |
| | 3,605,453 |
|
| Total liabilities and equity | | $ | 6,480,154 |
| | $ | 5,354,059 |
| | $ | 8,331,682 |
| | $ | 7,075,787 |
|
The accompanying notes are an integral part of these consolidated financial statements.
QUANTA SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
|
| | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2017 | | 2016 | | 2015 |
| | | (In thousands, except per share information) |
| Revenues | | $ | 9,466,478 |
| | $ | 7,651,319 |
| | $ | 7,572,436 |
|
| Cost of services (including depreciation) | | 8,224,618 |
| | 6,637,519 |
| | 6,648,771 |
|
| Gross profit | | 1,241,860 |
| | 1,013,800 |
| | 923,665 |
|
| Selling, general and administrative expenses | | 777,920 |
| | 653,338 |
| | 592,863 |
|
| Amortization of intangible assets | | 32,205 |
| | 31,685 |
| | 34,848 |
|
| Asset impairment charges | | 58,057 |
| | 7,964 |
| | 58,451 |
|
| Change in fair value of contingent consideration liabilities | | (5,171 | ) | | — |
| | — |
|
| Operating income | | 378,849 |
| | 320,813 |
| | 237,503 |
|
| Interest expense | | (20,946 | ) | | (14,887 | ) | | (8,024 | ) |
| Interest income | | 832 |
| | 2,423 |
| | 1,493 |
|
| Other income (expense), net | | (4,978 | ) | | (663 | ) | | (2,297 | ) |
| Income from continuing operations before income taxes | | 353,757 |
| | 307,686 |
| | 228,675 |
|
| Provision for income taxes | | 35,532 |
| | 107,246 |
| | 97,472 |
|
| Net income from continuing operations | | 318,225 |
| | 200,440 |
| | 131,203 |
|
| Net income (loss) from discontinued operations | | — |
| | (342 | ) | | 190,621 |
|
| Net income | | 318,225 |
| | 200,098 |
| | 321,824 |
|
| Less: Net income attributable to non-controlling interests | | 3,247 |
| | 1,715 |
| | 10,917 |
|
| Net income attributable to common stock | | $ | 314,978 |
| | $ | 198,383 |
| | $ | 310,907 |
|
| | | | | | | |
| Amounts attributable to common stock: | | | | | | |
| Net income from continuing operations | | $ | 314,978 |
| | $ | 198,725 |
| | $ | 120,286 |
|
| Net income (loss) from discontinued operations | | — |
| | (342 | ) | | 190,621 |
|
| Net income attributable to common stock | | $ | 314,978 |
| | $ | 198,383 |
| | $ | 310,907 |
|
| | | | | | | |
| Basic earnings per share attributable to common stock: | | | | | | |
| Continuing operations | | $ | 2.02 |
| | $ | 1.26 |
| | $ | 0.62 |
|
| Discontinued operations | | — |
| | — |
| | 0.97 |
|
| Net income attributable to common stock | | $ | 2.02 |
| | $ | 1.26 |
| | $ | 1.59 |
|
| | | | | | | |
| Weighted average basic shares outstanding | | 156,124 |
| | 157,287 |
| | 195,113 |
|
| | | | | | | |
| Diluted earnings per share attributable to common stock: | | |
| | |
| | |
|
| Continuing operations | | $ | 2.00 |
| | $ | 1.26 |
| | $ | 0.62 |
|
| Discontinued operations | | — |
| | — |
| | 0.97 |
|
| Net income attributable to common stock | | $ | 2.00 |
| | $ | 1.26 |
| | $ | 1.59 |
|
| | | | | | | |
| Weighted average diluted shares outstanding | | 157,155 |
| | 157,288 |
| | 195,120 |
|
The accompanying notes are an integral part of these consolidated financial statements.
QUANTA SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOMEOPERATIONS
(In thousands, except per share information)
|
| | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2017 | | 2016 | | 2015 |
| | | (In thousands) |
| Net income | | $ | 318,225 |
| | $ | 200,098 |
| | $ | 321,824 |
|
| Other comprehensive income (loss), net of tax provision: | | | | | | |
| Foreign currency translation adjustment, net of tax of $0, $0 and $0 | | 67,404 |
| | 23,137 |
| | (171,458 | ) |
| Other, net of tax of $(347), $46 and $(28) | | 874 |
| | (121 | ) | | 59 |
|
| Other comprehensive income (loss) | | 68,278 |
| | 23,016 |
| | (171,399 | ) |
| Comprehensive income | | 386,503 |
| | 223,114 |
| | 150,425 |
|
| Less: Comprehensive income attributable to non-controlling interests | | 3,247 |
| | 1,715 |
| | 10,917 |
|
| Total comprehensive income attributable to Quanta stockholders | | $ | 383,256 |
| | $ | 221,399 |
| | $ | 139,508 |
|
|
| | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2019 | | 2018 | | 2017 |
| Revenues | | $ | 12,112,153 |
| | $ | 11,171,423 |
| | $ | 9,466,478 |
|
| Cost of services (including depreciation) | | 10,511,901 |
| | 9,691,459 |
| | 8,224,618 |
|
| Gross profit | | 1,600,252 |
| | 1,479,964 |
| | 1,241,860 |
|
| Selling, general and administrative expenses | | 955,991 |
| | 857,574 |
| | 777,920 |
|
| Amortization of intangible assets | | 62,091 |
| | 43,994 |
| | 32,205 |
|
| Asset impairment charges | | 13,892 |
| | 49,375 |
| | 58,057 |
|
| Change in fair value of contingent consideration liabilities | | 13,404 |
| | (11,248 | ) | | (5,171 | ) |
| Operating income | | 554,874 |
| | 540,269 |
| | 378,849 |
|
| Interest expense | | (66,890 | ) | | (36,945 | ) | | (20,946 | ) |
| Interest income | | 927 |
| | 1,555 |
| | 832 |
|
| Other income (expense), net | | 83,376 |
| | (47,213 | ) | | (4,978 | ) |
| Income before income taxes | | 572,287 |
| | 457,666 |
| | 353,757 |
|
| Provision for income taxes | | 165,472 |
| | 161,659 |
| | 35,532 |
|
| Net income | | 406,815 |
| | 296,007 |
| | 318,225 |
|
| Less: Net income attributable to non-controlling interests | | 4,771 |
| | 2,661 |
| | 3,247 |
|
| Net income attributable to common stock | | $ | 402,044 |
| | $ | 293,346 |
| | $ | 314,978 |
|
| | | | | | | |
| Earnings per share attributable to common stock: | | | | | | |
| Basic | | $ | 2.76 |
| | $ | 1.92 |
| | $ | 2.02 |
|
| Diluted | | $ | 2.73 |
| | $ | 1.90 |
| | $ | 2.00 |
|
| | | | | | | |
| Shares used in computing earnings per share: | |
|
| |
|
| |
|
|
| Weighted average basic shares outstanding | | 145,710 |
| | 152,963 |
| | 156,124 |
|
| Weighted average diluted shares outstanding | | 147,534 |
| | 154,226 |
| | 157,155 |
|
| | | | | | | |
| Cash dividends declared per share | | $ | 0.17 |
| | $ | 0.04 |
| | $ | — |
|
The accompanying notes are an integral part of these consolidated financial statements.
QUANTA SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWSCOMPREHENSIVE INCOME
(In thousands)
|
| | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2017 | | 2016 | | 2015 |
| | | | | (In thousands) | | |
| Cash Flows from Operating Activities of Continuing Operations: | | | | |
| | |
|
| Net income | | $ | 318,225 |
| | $ | 200,098 |
| | $ | 321,824 |
|
| Adjustments to reconcile net income to net cash provided by operating activities of continuing operations — | | | | | | |
| (Income) loss from discontinued operations | | — |
| | 342 |
| | (190,621 | ) |
| Depreciation | | 183,808 |
| | 170,240 |
| | 162,845 |
|
| Amortization of intangible assets | | 32,205 |
| | 31,685 |
| | 34,848 |
|
| Asset impairment charges | | 58,057 |
| | 7,964 |
| | 58,451 |
|
| Change in fair value of contingent consideration liabilities | | (5,171 | ) | | — |
| | — |
|
| Equity in losses of unconsolidated affiliates | | 10,945 |
| | 979 |
| | 466 |
|
| Amortization of debt issuance costs | | 1,321 |
| | 1,356 |
| | 1,251 |
|
| Gain on sale of property and equipment | | (549 | ) | | (734 | ) | | (2,773 | ) |
| Foreign currency loss | | 409 |
| | 880 |
| | 2,490 |
|
| Provision for (recovery of) doubtful accounts | | 87 |
| | (543 | ) | | 224 |
|
| Deferred income tax benefit | | (32,130 | ) | | (15,695 | ) | | (19,403 | ) |
| Non-cash stock-based compensation | | 46,448 |
| | 42,843 |
| | 36,939 |
|
| Changes in operating assets and liabilities, net of non-cash transactions | | (241,180 | ) | | (49,228 | ) | | 222,108 |
|
| Net cash provided by operating activities of continuing operations | | 372,475 |
| | 390,187 |
| | 628,649 |
|
| Cash Flows from Investing Activities of Continuing Operations: | | |
| | |
| | |
|
| Proceeds from sale of property and equipment | | 23,348 |
| | 21,975 |
| | 26,178 |
|
| Additions of property and equipment | | (244,651 | ) | | (212,555 | ) | | (209,968 | ) |
| Cash paid for acquisitions, net of cash acquired | | (361,217 | ) | | (68,788 | ) | | (112,914 | ) |
| Investments in and return of equity from unconsolidated affiliates | | 8,986 |
| | (10,309 | ) | | (6,074 | ) |
| Cash received from (paid for) other investments, net | | 275 |
| | 4,752 |
| | (4,338 | ) |
| Cash withdrawn from (deposited to) restricted cash | | (2,566 | ) | | (1,119 | ) | | 214 |
|
| Cash paid for intangible assets | | — |
| | — |
| | (211 | ) |
| Net cash used in investing activities of continuing operations | | (575,825 | ) | | (266,044 | ) | | (307,113 | ) |
| Cash Flows from Financing Activities of Continuing Operations: | | |
| | |
| | |
|
| Borrowings under credit facility | | 2,932,338 |
| | 2,744,453 |
| | 3,349,385 |
|
| Payments under credit facility | | (2,624,404 | ) | | (2,860,673 | ) | | (2,935,752 | ) |
| Payments on other long-term debt | | (5,361 | ) | | (6,959 | ) | | (2,683 | ) |
| Borrowings of short-term debt | | — |
| | 2,754 |
| | 4,872 |
|
| Payments on short-term debt | | (2,783 | ) | | (4,711 | ) | | (5,170 | ) |
| Debt issuance and amendment costs | | (1,507 | ) | | — |
| | (3,795 | ) |
| Distributions to non-controlling interests, net of contributions received | | (2,001 | ) | | (761 | ) | | (18,915 | ) |
| Payments related to tax withholding for share-based compensation | | (18,543 | ) | | (8,340 | ) | | (9,797 | ) |
| Exercise of stock options | | 25 |
| | 401 |
| | 372 |
|
| Repurchase of common stock, including accelerated stock repurchases | | (50,000 | ) | | — |
| | (1,606,361 | ) |
| Net cash provided by (used in) financing activities of continuing operations | | 227,764 |
| | (133,836 | ) | | (1,227,844 | ) |
| Discontinued operations: | | | | | | |
| Net cash provided by (used in) operating activities | | — |
| | (1,035 | ) | | 22,342 |
|
| Net cash provided by (used in) investing activities | | — |
| | (6,080 | ) | | 825,376 |
|
| Net cash provided by (used in) discontinued operations | | — |
| | (7,115 | ) | | 847,718 |
|
| Effect of foreign exchange rate changes on cash and cash equivalents | | 1,688 |
| | 220 |
| | (3,154 | ) |
| Net increase (decrease) in cash and cash equivalents | | 26,102 |
| | (16,588 | ) | | (61,744 | ) |
| Cash and cash equivalents, beginning of year | | 112,183 |
| | 128,771 |
| | 190,515 |
|
| Cash and cash equivalents, end of year | | $ | 138,285 |
| | $ | 112,183 |
| | $ | 128,771 |
|
|
| | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2019 | | 2018 | | 2017 |
| Net income | | $ | 406,815 |
| | $ | 296,007 |
| | $ | 318,225 |
|
| Other comprehensive income (loss), net of taxes: | | | | | | |
| Foreign currency translation adjustment, net of tax of $0, $0 and $0 | | 43,535 |
| | (84,484 | ) | | 67,404 |
|
| Other, net of tax of $(200), $(677) and $(347) | | 695 |
| | 1,831 |
| | 874 |
|
| Other comprehensive income (loss), net of taxes | | 44,230 |
| | (82,653 | ) | | 68,278 |
|
| Comprehensive income | | 451,045 |
| | 213,354 |
| | 386,503 |
|
| Less: Comprehensive income attributable to non-controlling interests | | 4,771 |
| | 2,661 |
| | 3,247 |
|
| Total comprehensive income attributable to Quanta stockholders | | $ | 446,274 |
| | $ | 210,693 |
| | $ | 383,256 |
|
The accompanying notes are an integral part of these consolidated financial statements.
QUANTA SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITYCASH FLOWS
(In thousands)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | Accumulated | | | | | | | | |
| | | | | | Exchangeable | | Series F | | Series G | | Additional | | | | Other | | | | Total | | | | |
| | Common Stock | | Shares | | Preferred Stock | | Preferred Stock | | Paid-In | | Retained | | Comprehensive | | Treasury | | Stockholders’ | | Non-controlling | | Total |
| | Shares | | Amount | | Shares | | Amount | | Shares | | Amount | | Shares | | Amount | | Capital | | Earnings | | Income (Loss) | | Stock | | Equity | | Interests | | Equity |
| | (In thousands, except share information) |
| Balance, December 31, 2014 | 210,819,790 |
| | $ | 2 |
| | 7,325,971 |
| | $ | — |
| | 1 |
| | $ | — |
| | 1 |
| | $ | — |
| | $ | 3,592,906 |
| | $ | 1,366,791 |
| | $ | (123,290 | ) | | $ | (321,936 | ) | | $ | 4,514,473 |
| | $ | 11,067 |
| | $ | 4,525,540 |
|
| Other comprehensive loss | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (171,399 | ) | | — |
| | (171,399 | ) | | — |
| | (171,399 | ) |
| Acquisitions | 461,037 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 10,127 |
| | — |
| | — |
| | — |
| | 10,127 |
| | (748 | ) | | 9,379 |
|
| Restricted stock and restricted stock unit activity | 395,427 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 37,309 |
| | — |
| | — |
| | (10,368 | ) | | 26,941 |
| | — |
| | 26,941 |
|
| Stock options exercised | 32,390 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 431 |
| | — |
| | — |
| | — |
| | 431 |
| | — |
| | 431 |
|
| Exchange of exchangeable shares | 449,929 |
| | — |
| | (449,929 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Income tax impact from long-term incentive plans | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 375 |
| | — |
| | — |
| | — |
| | 375 |
| | — |
| | 375 |
|
| Common stock repurchases | (59,251,407 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (1,456,361 | ) | | (1,456,361 | ) | | — |
| | (1,456,361 | ) |
| Accelerated stock repurchases not yet settled | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (150,000 | ) | | — |
| | — |
| | — |
| | (150,000 | ) | | — |
| | (150,000 | ) |
| Vests in deferred compensation plan | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 6,592 |
| | — |
| | — |
| | (6,592 | ) | | — |
| | — |
| | — |
|
| Distributions to non-controlling interests, net of contributions received | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (18,915 | ) | | (18,915 | ) |
| Net income | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 310,907 |
| | — |
| | — |
| | 310,907 |
| | 10,917 |
| | 321,824 |
|
| Balance, December 31, 2015 | 152,907,166 |
| | 2 |
| | 6,876,042 |
| | — |
| | 1 |
| | — |
| | 1 |
| | — |
| | 3,497,740 |
| | 1,677,698 |
| | (294,689 | ) | | (1,795,257 | ) | | 3,085,494 |
| | 2,321 |
| | 3,087,815 |
|
| Other comprehensive income | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 23,016 |
| | — |
| | 23,016 |
| | — |
| | 23,016 |
|
| Acquisitions | 70,840 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 1,508 |
| | — |
| | — |
| | — |
| | 1,508 |
| | — |
| | 1,508 |
|
| Restricted stock and restricted stock unit activity | 760,395 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 42,843 |
| | — |
| | — |
| | (8,338 | ) | | 34,505 |
| | — |
| | 34,505 |
|
| Stock options exercised | 25,423 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 425 |
| | — |
| | — |
| | — |
| | 425 |
| | — |
| | 425 |
|
| Exchange of exchangeable shares | 360,589 |
| | — |
| | (360,589 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Income tax impact from long-term incentive plans | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (3,904 | ) | | — |
| | — |
| | — |
| | (3,904 | ) | | — |
| | (3,904 | ) |
| Settlement of accelerated stock repurchases | (9,413,640 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 150,000 |
| | — |
| | — |
| | (150,000 | ) | | — |
| | — |
| | — |
|
| Vests in deferred compensation plan | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 6,822 |
| | — |
| | — |
| | (6,822 | ) | | — |
| | — |
| | — |
|
| Retirement of treasury stock | — |
| | (1 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (1,946,128 | ) | | — |
| | — |
| | 1,946,129 |
| | — |
| | — |
| | — |
|
| Distributions to non-controlling interests | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (761 | ) | | (761 | ) |
| Net income | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 198,383 |
| | — |
| | — |
| | 198,383 |
| | 1,715 |
| | 200,098 |
|
| Balance, December 31, 2016 | 144,710,773 |
| | 1 |
| | 6,515,453 |
| | — |
| | 1 |
| | — |
| | 1 |
| | — |
| | 1,749,306 |
| | 1,876,081 |
| | (271,673 | ) | | (14,288 | ) | | 3,339,427 |
| | 3,275 |
| | 3,342,702 |
|
| Other comprehensive income | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 68,278 |
| | — |
| | 68,278 |
| | — |
| | 68,278 |
|
| Acquisitions | 2,982,346 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 89,604 |
| | — |
| | — |
| | — |
| | 89,604 |
| | — |
| | 89,604 |
|
| Restricted stock unit activity | 1,000,935 |
| | 1 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 47,825 |
| | — |
| | — |
| | (18,567 | ) | | 29,259 |
| | — |
| | 29,259 |
|
| Stock options exercised | 1,223 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 25 |
| | — |
| | — |
| | — |
| | 25 |
| | — |
| | 25 |
|
| Exchange of exchangeable shares | 6,029,341 |
| | — |
| | (6,029,341 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Common stock repurchases | (1,382,292 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (50,000 | ) | | (50,000 | ) | | — |
| | (50,000 | ) |
| Vests in deferred compensation plan | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 2,596 |
| | — |
| | — |
| | (2,596 | ) | | — |
| | — |
| | — |
|
| Retirement of preferred stock | — |
| | — |
| | — |
| | — |
| | (1 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Distributions to non-controlling interests | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (2,001 | ) | | (2,001 | ) |
| Buyout of a non-controlling interest | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (463 | ) | | (463 | ) |
| Net income | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 314,978 |
| | — |
| | — |
| | 314,978 |
| | 3,247 |
| | 318,225 |
|
| Balance, December 31, 2017 | 153,342,326 |
| | $ | 2 |
| | 486,112 |
| | $ | — |
| | — |
| | $ | — |
| | 1 |
| | $ | — |
| | $ | 1,889,356 |
| | $ | 2,191,059 |
| | $ | (203,395 | ) | | $ | (85,451 | ) | | $ | 3,791,571 |
| | $ | 4,058 |
| | $ | 3,795,629 |
|
|
| | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2019 | | 2018 | | 2017 |
| Cash Flows from Operating Activities: | | | | |
| | |
|
| Net income | | $ | 406,815 |
| | $ | 296,007 |
| | $ | 318,225 |
|
| Adjustments to reconcile net income to net cash provided by operating activities — | | | | | | |
| Depreciation | | 218,107 |
| | 202,519 |
| | 183,808 |
|
| Amortization of intangible assets | | 62,091 |
| | 43,994 |
| | 32,205 |
|
| Asset impairment charges | | 13,892 |
| | 49,375 |
| | 58,057 |
|
| Change in fair value of contingent consideration liabilities | | 13,404 |
| | (11,248 | ) | | (5,171 | ) |
| Equity in (earnings) losses of unconsolidated affiliates | | (76,801 | ) | | 52,867 |
| | 10,945 |
|
| Amortization of debt issuance costs | | 1,870 |
| | 1,270 |
| | 1,321 |
|
| (Gain) loss on sale of property and equipment | | (5,797 | ) | | 3,296 |
| | (549 | ) |
| Provision for doubtful accounts | | 11,249 |
| | 7,169 |
| | 87 |
|
| Deferred income tax expense (benefit) | | (7,919 | ) | | 61,974 |
| | (32,130 | ) |
| Non-cash stock-based compensation | | 52,013 |
| | 52,484 |
| | 46,448 |
|
| Foreign currency and other (gain) loss | | (5,568 | ) | | (385 | ) | | 409 |
|
| Changes in operating assets and liabilities, net of non-cash transactions | | (156,805 | ) | | (400,533 | ) | | (241,764 | ) |
| Net cash provided by operating activities | | 526,551 |
| | 358,789 |
| | 371,891 |
|
| Cash Flows from Investing Activities: | | |
| | |
| | |
|
| Capital expenditures | | (261,762 | ) | | (293,595 | ) | | (244,651 | ) |
| Proceeds from sale of property and equipment | | 31,142 |
| | 31,780 |
| | 23,348 |
|
| Proceeds from insurance settlements related to property and equipment | | 1,964 |
| | 714 |
| | 1,175 |
|
| Cash paid for acquisitions, net of cash, cash equivalents and restricted cash acquired | | (387,966 | ) | | (94,917 | ) | | (361,217 | ) |
| Investments in unconsolidated affiliates and other entities | | (47,056 | ) | | (36,909 | ) | | (56,528 | ) |
| Cash received from investments in unconsolidated affiliates and other entities | | 46,590 |
| | 4,705 |
| | 65,789 |
|
| Cash paid for intangible assets | | (508 | ) | | (14,448 | ) | | — |
|
| Net cash used in investing activities | | (617,596 | ) | | (402,670 | ) | | (572,084 | ) |
| Cash Flows from Financing Activities: | | |
| | |
| | |
|
| Borrowings under credit facility | | 6,175,558 |
| | 4,491,782 |
| | 2,932,338 |
|
| Payments under credit facility | | (5,903,069 | ) | | (4,076,460 | ) | | (2,624,404 | ) |
| Payments on other long-term debt | | (2,203 | ) | | (1,298 | ) | | (5,361 | ) |
| Net borrowings (repayments) of short-term debt | | (28,292 | ) | | 33,790 |
| | (2,783 | ) |
| Debt issuance and amendment costs | | (2,309 | ) | | (1,976 | ) | | (1,507 | ) |
| Distributions to non-controlling interests, net of contributions received | | (2,526 | ) | | (4,038 | ) | | (2,001 | ) |
| Payments related to tax withholding for share-based compensation | | (16,144 | ) | | (15,218 | ) | | (18,543 | ) |
| Exercise of stock options | | — |
| | — |
| | 25 |
|
| Payments of dividends | | (23,236 | ) | | — |
| | — |
|
| Repurchase of common stock | | (20,092 | ) | | (443,152 | ) | | (50,000 | ) |
| Net cash provided by (used in) financing activities | | 177,687 |
| | (16,570 | ) | | 227,764 |
|
| Effect of foreign exchange rate changes on cash, cash equivalents and restricted cash | | (153 | ) | | (68 | ) | | 1,794 |
|
| Net increase (decrease) in cash, cash equivalents and restricted cash | | 86,489 |
| | (60,519 | ) | | 29,365 |
|
| Cash, cash equivalents and restricted cash, beginning of year | | 83,256 |
| | 143,775 |
| | 114,410 |
|
| Cash, cash equivalents and restricted cash, end of year | | $ | 169,745 |
| | $ | 83,256 |
| | $ | 143,775 |
|
The accompanying notes are an integral part of these consolidated financial statements.
QUANTA SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY
(In thousands, except share information)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | Accumulated | | | | | | | | |
| | | | | | Exchangeable | | Series F | | Series G | | Additional | | | | Other | | | | Total | | | | |
| | Common Stock | | Shares | | Preferred Stock | | Preferred Stock | | Paid-In | | Retained | | Comprehensive | | Treasury | | Stockholders’ | | Non-controlling | | Total |
| | Shares | | Amount | | Shares | | Amount | | Shares | | Amount | | Shares | | Amount | | Capital | | Earnings | | Loss | | Stock | | Equity | | Interests | | Equity |
| Balance at December 31, 2016 | 144,710,773 |
| | $ | 1 |
| | 6,515,453 |
| | $ | — |
| | 1 |
| | $ | — |
| | 1 |
| | $ | — |
| | $ | 1,749,306 |
| | $ | 1,876,081 |
| | $ | (271,673 | ) | | $ | (14,288 | ) | | $ | 3,339,427 |
| | $ | 3,275 |
| | $ | 3,342,702 |
|
| Other comprehensive income | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 68,278 |
| | — |
| | 68,278 |
| | — |
| | 68,278 |
|
| Acquisitions | 2,982,346 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 89,604 |
| | — |
| | — |
| | — |
| | 89,604 |
| | — |
| | 89,604 |
|
| Stock-based compensation activity | 1,000,935 |
| | 1 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 50,421 |
| | — |
| | — |
| | (21,163 | ) | | 29,259 |
| | — |
| | 29,259 |
|
| Stock options exercised | 1,223 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 25 |
| | — |
| | — |
| | — |
| | 25 |
| | — |
| | 25 |
|
| Exchange of exchangeable shares | 6,029,341 |
| | — |
| | (6,029,341 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Common stock repurchases | (1,382,292 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (50,000 | ) | | (50,000 | ) | | — |
| | (50,000 | ) |
| Retirement of preferred stock | — |
| | — |
| | — |
| | — |
| | (1 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Distributions to non-controlling interests | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (2,001 | ) | | (2,001 | ) |
| Buyout of non-controlling interest | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (463 | ) | | (463 | ) |
| Net income | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 314,978 |
| | — |
| | — |
| | 314,978 |
| | 3,247 |
| | 318,225 |
|
| Balance at December 31, 2017 | 153,342,326 |
| | 2 |
| | 486,112 |
| | — |
| | — |
| | — |
| | 1 |
| | — |
| | 1,889,356 |
| | 2,191,059 |
| | (203,395 | ) | | (85,451 | ) | | 3,791,571 |
| | 4,058 |
| | 3,795,629 |
|
| Revenue recognition cumulative effect adjustment | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (1,276 | ) | | — |
| | — |
| | (1,276 | ) | | — |
| | (1,276 | ) |
| Other comprehensive loss | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (82,653 | ) | | — |
| | (82,653 | ) | | — |
| | (82,653 | ) |
| Acquisitions | 679,668 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 22,882 |
| | — |
| | — |
| | — |
| | 22,882 |
| | — |
| | 22,882 |
|
| Stock-based compensation activity | 998,631 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 55,116 |
| | — |
| | — |
| | (17,699 | ) | | 37,417 |
| | — |
| | 37,417 |
|
| Common stock repurchases | (13,916,725 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (451,290 | ) | | (451,290 | ) | | — |
| | (451,290 | ) |
| Dividends declared | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (5,838 | ) | | — |
| | — |
| | (5,838 | ) | | — |
| | (5,838 | ) |
| Distributions to non-controlling interests | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (4,038 | ) | | (4,038 | ) |
| Buyout of a non-controlling interest | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (1,387 | ) | | (1,387 | ) |
| Net income | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 293,346 |
| | — |
| | — |
| | 293,346 |
| | 2,661 |
| | 296,007 |
|
| Balance at December 31, 2018 | 141,103,900 |
| | 2 |
| | 486,112 |
| | — |
| | — |
| | — |
| | 1 |
| | — |
| | 1,967,354 |
| | 2,477,291 |
| | (286,048 | ) | | (554,440 | ) | | 3,604,159 |
| | 1,294 |
| | 3,605,453 |
|
| Other comprehensive income | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 44,230 |
| | — |
| | 44,230 |
| | — |
| | 44,230 |
|
| Acquisitions | 60,860 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 1,791 |
| | — |
| | — |
| | — |
| | 1,791 |
| | — |
| | 1,791 |
|
| Stock-based compensation activity | 1,085,165 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 55,465 |
| | — |
| | — |
| | (20,379 | ) | | 35,086 |
| | — |
| | 35,086 |
|
| Exchange of exchangeable shares | 449,929 |
| | — |
| | (449,929 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Retirement of preferred stock | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (1 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Common stock repurchases | (375,536 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (11,954 | ) | | (11,954 | ) | | — |
| | (11,954 | ) |
| Dividends declared | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (25,064 | ) | | — |
| | — |
| | (25,064 | ) | | — |
| | (25,064 | ) |
| Distributions to non-controlling interests | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (2,526 | ) | | (2,526 | ) |
| Net income | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 402,044 |
| | — |
| | — |
| | 402,044 |
| | 4,771 |
| | 406,815 |
|
| Balance at December 31, 2019 | 142,324,318 |
| | $ | 2 |
| | 36,183 |
| | $ | — |
| | — |
| | $ | — |
| | — |
| | $ | — |
| | $ | 2,024,610 |
| | $ | 2,854,271 |
| | $ | (241,818 | ) | | $ | (586,773 | ) | | $ | 4,050,292 |
| | $ | 3,539 |
| | $ | 4,053,831 |
|
The accompanying notes are an integral part of these consolidated financial statements.
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| |
1. | BUSINESS AND ORGANIZATION: |
1.BUSINESS AND ORGANIZATION:
Quanta Services, Inc. (Quanta) is a leading provider of specialty contracting services, offeringdelivering comprehensive infrastructure solutions primarily tofor the electric power, oilenergy and gas and communicationcommunications industries in the United States, Canada, Australia Latin America and select other international markets. Quanta reports its results under two2 reportable segments: (1) Electric Power Infrastructure Services and (2) OilPipeline and GasIndustrial Infrastructure Services.
Electric Power Infrastructure Services Segment
The Electric Power Infrastructure Services segment provides comprehensive network solutions to customers in the electric power industry. Services performed by the Electric Power Infrastructure Services segment generally include the design, installation, upgrade, repair and maintenance of electric power transmission and distribution infrastructure and substation facilities along with other engineering and technical services. This segment also provides emergency restoration services, including the repair of infrastructure damaged by inclement weather, the energized installation, maintenance and upgrade of electric power infrastructure utilizing unique bare hand and hot stick methods and Quanta’s proprietary robotic arm technologies,techniques, and the installation of “smart grid” technologies on electric power networks. In addition, this segment designs, installs and maintainsprovides services that support the development of renewable energy generation, facilities, consisting ofincluding solar, wind, hydro power and certain types ofbackup natural gas generation facilities, and related switchyards and transmission infrastructure. To a lesser extent, theThis segment also provides comprehensive communications infrastructure services to wireline fiber and wireless carriertelecommunications companies, cable multi-system operators and other customers within the communications industry;industry (including services in connection with 5G wireless deployment); services in connection with the construction of electric power generation facilities; and the design, installation, maintenance and repair of commercial and industrial wiring;wiring. This segment also includes a majority of Quanta’s postsecondary educational institution’s financial results, which specializes in pre-apprenticeship training, apprenticeship training and specialized utility task training for electric workers, as well as training for the installation of traffic networkspipeline and cableindustrial and control systems for light rail lines.communications industries.
OilPipeline and GasIndustrial Infrastructure Services Segment
The OilPipeline and GasIndustrial Infrastructure Services segment provides comprehensive networkinfrastructure solutions to customers involved in the development, transportation, distribution, storage and processing of natural gas, oil and other pipeline products. Services performed by the OilPipeline and GasIndustrial Infrastructure Services segment generally include the design, installation, upgrade, repair and maintenance of pipeline transmission and distribution systems, gathering systems, production systems, storage systems and compressor and pump stations, as well as related trenching, directional boring and mechanized welding services. In addition, this segment’s services include pipeline protection, integrity testing, rehabilitation and replacement, and the fabrication of pipeline support systems and related structures and facilities.facilities for natural gas utilities and midstream companies. Quanta also serves the offshore and inland water energy markets, primarily providing services to oil and gas exploration platforms, including mechanical installation (or “hook-ups”), electrical and instrumentation, pre-commissioning and commissioning, coatings, shallow water pipeline installation, fabrication and marine asset repair. To a lesser extent, this segment designs, installs and maintains fueling systems, as well as water and sewer infrastructure. Through a recent acquisition discussed below, Quanta expanded its service offerings in this segment to includeprovides high-pressure and critical-path turnaround services to the downstream and midstream energy markets and enhanced its capabilities with respect to instrumentation and electrical services, piping, fabrication and storage tank services. To a lesser extent, this segment serves the offshore energy market and designs, installs and maintains fueling systems and water and sewer infrastructure.
Acquisitions
During the year ended December 31, 2019, Quanta acquired The Hallen Construction Co., Inc. (Hallen), a pipeline and industrial services business located in the United States that specializes in gas distribution and transmission services, and to a lesser extent, underground electric distribution and transmission services. During the year ended December 31, 2019, Quanta also acquired two specialty utility foundation and pole-setting contractors serving the southeast United States; an electric power specialty contracting business located in the United States that provides aerial power line and construction support services; a business located in the United States that provides technical training materials to electric utility workers; an electric power company specializing in project management and, to a lesser extent, water and wastewater projects located in the United States; and an electrical infrastructure services business located in Canada. Beginning on the respective acquisition dates, the results of the acquired businesses have been included in Quanta’s consolidated financial statements, with the results of Hallen generally included in the Pipeline and Industrial Infrastructure Services segment and the other acquired businesses generally included in the Electric Power Infrastructure Services segment.
During the year ended December 31, 2018, Quanta acquired an electrical infrastructure services business specializing in substation construction and relay services, a postsecondary educational institution that provides training and programs for workers in the industries Quanta serves, and two communications infrastructure services businesses, all of which are located in the United States. Beginning on the respective acquisition dates, the results of the acquired businesses have been included in Quanta’s consolidated financial statements, generally within the Electric Power Infrastructure Services segment.
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
On July 20, 2017, Quanta acquired Stronghold, Ltd. and Stronghold Specialty, Ltd. (collectively Stronghold), a specialized services business located in the United States that provides high-pressure and critical-path solutions to the downstream and midstream energy markets. The results of the acquired business are generally included in Quanta’s Oil and Gas Infrastructure Services segment and have been included in Quanta’s consolidated financial statements beginning on the acquisition date.
During the year ended December 31, 2017, Quanta also acquired a communications infrastructure services contractor and an electrical and communications contractor, both of which are located in the United States. TheBeginning on the respective acquisition dates, the results of thesethe acquired businesses arehave been included in Quanta’s consolidated financial statements, with the results of Stronghold generally included in Quanta’s Pipeline and Industrial Infrastructure Services segment and the results of the other acquired businesses generally included in Quanta’s Electric Power Infrastructure Services segment and have been included in Quanta’s consolidated financial statements beginning on the respective acquisition dates.
During 2016 and 2015, Quanta completed five and 11 acquisitions. The results have been included in Quanta’s consolidated financial statements beginning on the respective acquisition dates. See further discussion regarding these acquisitions in Note 5.
Disposition - Fiber Optic Licensing Operations
On April 29, 2015, Quanta entered into a stock purchase agreement with Crown Castle International Corp. (Crown Castle) pursuant to which Quanta agreed to sell its fiber optic licensing operations. The purchase agreement contained customary representations and warranties, covenants and indemnities. On August 4, 2015, Quanta completed the sale for a purchase price of
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
$1.00 billion in cash, resulting in after-tax net proceeds of $848.2 million. In the third quarter of 2015, Quanta recognized a net of tax gain of $171.0 million. Quanta has presented the results of operations, financial position, cash flows and disclosures of the fiber optic licensing operations as discontinued operations for all periods in the accompanying consolidated financial statements. These results were included in Quanta’s Fiber Optic Licensing and Other segment prior to the second quarter of 2015.
segment.
| |
| 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: |
Principles of Consolidation
The consolidated financial statements of Quanta include the accounts of Quanta Services, Inc. and its wholly ownedwholly-owned subsidiaries, which are also referred to as its operating units. The consolidated financial statements also include the accounts of certain of Quanta’s investments in joint ventures, which are either consolidated or proportionately consolidated, as discussed in the following summary of significant accounting policies. Investments in affiliated entities in which Quanta does not have a controlling financial interest, but over which Quanta has significant influence, usually because Quanta holds a voting interest of between 20% and 50%, are accounted for using the equity method. All significant intercompany accounts and transactions have been eliminated in consolidation. Unless the context requires otherwise, references to Quanta include Quanta Services, Inc. and its consolidated subsidiaries.
Reclassifications
Quanta reclassified certain prior period amounts related to stock-based compensation in the accompanying consolidated statements of cash flows to conform to the current period presentation under a recently adopted accounting update. Additionally, certain reclassifications have been made to Quanta’s prior year’s consolidated statements of operations to conform to classifications in the current year.
Use of Estimates and Assumptions
The preparation of financial statements in conformity with US GAAPgenerally accepted accounting principles 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 amounts of revenues and expenses recognized during the periods presented. Quanta reviews all significant estimates affecting its consolidated financial statements on a recurring basis and records the effect of any necessary adjustments prior to their publication. Judgments and estimates are based on Quanta’s beliefs and assumptions derived from information available at the time such judgments and estimates are made. Uncertainties with respect to such estimates and assumptions are inherent in the preparation of financial statements. Estimates are primarily used in Quanta’s assessment of the allowance for doubtful accounts, valuation of inventory, useful lives of assets, fair value assumptions in analyzing goodwill, other intangibles and long-lived asset impairments, equity and other investments, loan receivables, purchase price allocations, acquisition-related contingent consideration liabilities, liabilities for insurance and other claims and guarantees, multiemployer pension plan withdrawal liabilities, contingent liabilities associated with, among other things, legal proceedings and claims, parent guarantees and indemnity obligations, revenue recognition for construction contracts inclusive of contractual change orders and claims, share-basedestimated insurance claim recoveries, stock-based compensation, operating results of reportable segments, as well as the provision for income taxes and the calculation of uncertain tax positions.
CashRevenue Recognition
Contracts. Quanta designs, installs, upgrades, repairs and Cash Equivalentsmaintains infrastructure for customers in the electric power, energy and communications industries. These services may be provided pursuant to master service agreements (MSAs), repair and maintenance contracts and fixed price and non-fixed price installation contracts. These contracts are classified into three categories based on how transaction prices are determined and revenue is recognized: unit-price contracts, cost-plus contracts and fixed price contracts. Transaction prices for unit-price contracts are determined on a per unit basis, transaction prices for cost-plus contracts are determined by applying a profit margin to costs incurred on the contracts and transaction prices for fixed price contracts are determined on a lump-sum basis. All of Quanta’s revenues are recognized from contracts with its customers. In addition to the considerations described below, revenue is not recognized unless collectability under the contract is considered probable, the contract has commercial substance and the contract has been approved. Additionally, the contract must contain payment terms, as well as the rights and commitments of both parties.
Performance Obligations. A performance obligation is a promise in a contract with a customer to transfer a distinct good or service. Most of Quanta’s contracts are considered to have a single performance obligation, whereby Quanta had cashis required to integrate complex activities and cash equivalentsequipment into a deliverable for a customer. For contracts with multiple performance obligations, Quanta allocates a portion of $138.3 million and $112.2 million asthe total transaction price to each performance obligation using its best estimate of December 31, 2017 and 2016. Cash consistingthe standalone selling price of interest-bearing demand depositsthe distinct good or service associated with each performance obligation. Standalone selling price is carried at cost, which approximates fair value. Quanta considers all highly liquid investments with an original maturity of three months or less atestimated using the time of purchase to be cash equivalents, which are carried at fair value. expected costs plus a margin.
At December 31, 20172019 and 2016, cash equivalents were $7.1 million2018, the aggregate transaction price allocated to unsatisfied or partially satisfied performance obligations was approximately $5.30 billion and $8.8 million and consisted primarily of money market investments and money market mutual funds and are discussed further in Fair Value Measurements below. As of December 31, 2017 and 2016, cash and cash equivalents held in domestic bank accounts were $83.1 million and $19.5 million, and cash and cash equivalents held in foreign bank accounts were $55.2 million and $92.7 million.
As of December 31, 2017 and 2016, cash and cash equivalents held by joint ventures, which are either consolidated or proportionately consolidated, were $16.7 million and $11.5 million,$4.68 billion, of which $10.0 million59.5% and $10.0 million related66.2% were expected to domestic joint ventures. Cash and cash equivalents held by the joint ventures are available to support joint venture operations, but Quanta cannot utilize those assets to support its other operations. Quanta generally has no right to the joint ventures’ cash and cash equivalents other than participating in distributions andbe recognized in the eventsubsequent twelve months. These amounts represent management’s estimate of dissolution.the consolidated revenues that are expected to be
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
realized from the remaining portion of firm orders under fixed price contracts not yet completed or for which work had not yet begun. For purposes of calculating remaining performance obligations, Quanta includes all estimated revenues attributable to consolidated joint ventures and variable interest entities, revenues from funded and unfunded portions of government contracts to the extent they are reasonably expected to be realized and revenues from change orders and claims to the extent management believes additional contract revenues will be earned and are deemed probable of collection. Excluded from remaining performance obligations are potential orders under MSAs and non-fixed price contracts expected to be completed within one year.
Recognition of Revenue Upon Satisfaction of Performance Obligations. A transaction price is determined for each contract, and that amount is allocated to each performance obligation within the contract and recognized as revenue when, or as, the performance obligation is satisfied. Quanta generally recognizes revenue over time as it performs its obligations because there is a continuous transfer of control of the deliverable to the customer. Under unit-price contracts with an insignificant amount of partially completed units, Quanta recognizes revenue as units are completed based on contractual pricing amounts. Under unit-price contracts with more than an insignificant amount of partially completed units and fixed price contracts, Quanta recognizes revenues as performance obligations are satisfied over time, with the percentage completion generally measured as the percentage of costs incurred to total estimated costs for such performance obligation. Under cost-plus contracts, Quanta recognizes revenue on an input basis, as labor hours are incurred, materials are utilized and services are performed.
Under contracts where Quanta has a right to consideration in an amount that directly corresponds to the value of completed performance, Quanta recognizes revenue in such amount and does not include such performance as a remaining performance obligation. Also, contract consideration is not adjusted for a significant financing component if payment is expected to be collected less than one year from when the services are performed.
Contract costs include all direct materials, labor and subcontract costs and indirect costs related to contract performance, such as indirect labor, supplies, tools, repairs and depreciation costs. The majority of the materials associated with Quanta’s work are owner-furnished, and therefore not included in contract revenues and costs.
Additionally, Quanta may incur incremental costs to obtain certain contracts, such as selling and marketing costs, bid and proposal costs, sales commissions, and legal fees or initial set-up or mobilization costs, certain of which can be capitalized. Such costs were not material during the years ended December 31, 2019 and 2018.
Contract Estimates. Actual revenues and project costs can vary, sometimes substantially, from previous estimates due to changes in a variety of factors, including unforeseen or changed circumstances not included in Quanta’s cost estimates or covered by its contracts. The estimating process is based on the professional knowledge and experience of Quanta’s project estimators, project managers and finance professionals. Some of the factors that may lead to changes in estimates include concealed or unknown site conditions; changes in the cost of equipment, commodities, materials or labor; unanticipated costs or claims due to delays caused by customers or third parties; customer failure to provide required materials or equipment; errors in engineering, specifications or designs; project modifications or contract termination; adverse weather conditions and natural disasters; changes in estimates related to the length of time to complete a performance obligation; and performance and quality issues requiring rework or replacement. These factors, along with other risks inherent in performing services under fixed price contracts, are routinely evaluated by management. Any changes in estimates could result in changes to profitability or losses associated with the related performance obligations. For example, estimated costs for a performance obligation may increase from an original estimate and contractual provisions may not allow for adequate compensation or reimbursement for such additional costs. Changes in estimated revenues, costs and profit are recorded in the period they are determined to be probable and can be reasonably estimated. Contract losses are recognized in full when they are determined to be probable and can be reasonably estimated.
Changes in cost estimates on certain contracts may result in the issuance of change orders, which can be approved or unapproved by the customer, or the assertion of contract claims. Quanta determines the probability that costs associated with change orders and claims will be recovered based on, among other things, contractual entitlement, past practices with the customer, specific discussions or preliminary negotiations with the customer and verbal approvals by the customer. Quanta recognizes amounts associated with change orders and claims as revenue if it is probable that the contract price will be adjusted and the amount of any such adjustment can be reliably estimated. Most of Quanta’s change orders are for services that are not distinct from an existing contract and are accounted for as part of an existing contract on a cumulative catch-up basis. Quanta accounts for a change order as a separate contract if the additional goods or services are distinct from and increase the scope of the contract, and the price of the contract increases by an amount commensurate to Quanta’s standalone selling price for the additional goods or services.
As of December 31, 2019 and 2018, Quanta had recognized revenues of $170.0 million and $121.8 million related to change orders and claims included as contract price adjustments and that were in the process of being negotiated in the normal course of business. These aggregate amounts, which are included in “Contract assets” in the accompanying consolidated balance sheets, represent management’s estimates of additional contract revenues that have been earned and are probable of collection. However,
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Quanta’s estimates could change, and the amount ultimately realized could be significantly higher or lower than the estimated amount.
Variable consideration amounts, including performance incentives, early pay discounts and penalties, may also cause changes in contract estimates. The amount of variable consideration is estimated based on the most likely amount that is deemed probable of realization. Contract consideration is adjusted for variable consideration when it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur once the uncertainty related to the variable consideration is resolved.
Changes in contract estimates are recognized on a cumulative catch-up basis in the period in which the revisions to the estimates are made. Such changes in estimates can result in the recognition of revenue in a current period for performance obligations that were satisfied or partially satisfied in prior periods or the reversal of previously recognized revenue if the current estimate differs from the previous estimate. The impact of a change in estimate is measured as the difference between the revenue or gross profit recognized in the prior period as compared to the revenue or gross profit which would have been recognized had the revised estimate been used as the basis of recognition in the prior period.
Operating results for the years ended December 31, 2019 and 2018 were impacted by less than 5% as a result of aggregate changes in contract estimates related to projects that were in progress at December 31, 2018 and 2017.
Certain projects were materially impacted by changes to estimated contract revenues and/or project costs during the year ended December 31, 2019. The following amounts were recorded during the year ended December 31, 2019 but were related to prior periods. Quanta successfully completed an electric transmission project in Canada ahead of schedule during the three months ended March 31, 2019, which resulted in a reduction in estimated project costs and positively impacted gross profit related to work performed in prior periods by $30.1 million. Quanta also successfully executed through project risks on a larger pipeline transmission project, which resulted in a reduction of estimated project costs and positively impacted gross profit related to work performed in prior periods by $22.9 million. Quanta also settled claims related to a larger natural gas transmission project that experienced losses in 2018, which increased revenues and gross profit related to work performed in prior periods by $16.2 million. Additionally, Quanta experienced rework and start-up delays on a processing facility construction project, which resulted in additional estimated project costs and liquidated damages payable to the customer and negatively impacted gross profit related to work performed in prior periods by $29.4 million. As of December 31, 2019, this project had a contract value of approximately $144 million and was approximately 98% complete. Quanta also experienced unfavorable weather and labor-related impacts, as well as a project scope reduction, on an electric transmission project in southern California, which resulted in an increase in estimated project costs and a reduction in expected project earnings. These changes negatively impacted gross profit related to work performed in prior periods by $21.1 million. As of December 31, 2019, this project had a contract value of approximately $400 million and was approximately 73% complete. Additionally, the changes in contract estimates include the negative impact of the correction of $9.6 million of prior period errors related to the determination of total estimated project costs and the resulting revenue recognized on a large telecommunications project in Peru that was terminated during 2019.
Certain projects were materially impacted by changes to estimated contract revenues and/or project costs during the year ended December 31, 2018. The following amounts were recorded during the year ended December 31, 2018 but were related to prior periods. Quanta experienced engineering and production delays on the processing facility construction project discussed above, which resulted in additional estimated construction costs. These changes in estimates negatively impacted gross profit related to work performed in prior periods by $34.2 million. Quanta also experienced unexpected site conditions, adverse weather conditions and material delivery delays on a renewable energy power project in Australia that negatively impacted gross profit related to work performed in prior periods by $22.3 million. Additionally, a natural gas pipeline construction project in the northeast United States experienced weather delays and project performance issues resulting in additional estimated construction costs that negatively impacted gross profit related to work performed in prior periods by $17.3 million. Quanta also successfully executed through project procurement, winter schedule challenges and productivity risks on the electrical transmission project in Canada mentioned above, resulting in reductions to the estimated total costs necessary to complete the project. These changes positively impacted gross profit related to work performed in prior periods by $52.2 million.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Revenues by Category. The following tables present Quanta’s revenue disaggregated by geographic location, as determined by the job location, and contract type (in thousands):
|
| | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2019 | | 2018 |
| By primary geographic location: | | | | | | | | |
| United States | | $ | 10,190,684 |
| | 84.0 | % | | $ | 8,575,341 |
| | 78.6 | % |
| Canada | | 1,436,720 |
| | 11.9 | % | | 1,984,214 |
| | 16.4 | % |
| Australia | | 187,915 |
| | 1.6 | % | | 377,453 |
| | 3.1 | % |
| Latin America and Other | | 296,834 |
| | 2.5 | % | | 234,415 |
| | 1.9 | % |
| Total revenues | | $ | 12,112,153 |
| | 100.0 | % | | $ | 11,171,423 |
| | 100.0 | % |
|
| | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2019 | | 2018 |
| By contract type: | | | | | | | | |
| Unit-price contracts | | $ | 4,193,295 |
| | 34.6 | % | | $ | 3,828,997 |
| | 39.4 | % |
| Cost-plus contracts | | 3,304,161 |
| | 27.3 | % | | 2,507,025 |
| | 20.7 | % |
| Fixed price contracts | | 4,614,697 |
| | 38.1 | % | | 4,835,401 |
| | 39.9 | % |
| Total revenues | | $ | 12,112,153 |
| | 100.0 | % | | $ | 11,171,423 |
| | 100.0 | % |
As described above, under unit-price contracts with more than an insignificant amount of partially completed units and fixed price contracts, revenue is recognized as performance obligations are satisfied over time, with the percentage completion generally measured as the percentage of costs incurred to total estimated costs for such performance obligation. Approximately 50.0% and 57.7% of Quanta’s revenues recognized during the years ended December 31, 2019 and 2018 were associated with this revenue recognition method.
Contract Assets and Liabilities. With respect to Quanta’s contracts, interim payments are typically received as work progresses in accordance with agreed-upon contractual terms, either at periodic intervals or upon achievement of contractual milestones. As a result, under fixed price contracts the timing of revenue recognition and contract billings results in contract assets and contract liabilities. Contract assets represent revenues recognized in excess of amounts billed for fixed price contracts and are current assets that are transferred to accounts receivable when billed or the billing rights become unconditional. Contract assets are not considered a significant financing component as they are intended to protect the customer in the event Quanta does not perform on its obligations under the contract.
Conversely, contract liabilities represent billings in excess of revenues recognized for fixed price contracts. These arise under certain contracts that allow for upfront payments from the customer or contain contractual billing milestones, which result in billings that exceed the amount of revenues recognized for certain periods. Contract liabilities are current liabilities and are not considered a significant financing component, as they are used to meet working capital requirements that are generally higher in the early stages of a contract and are intended to protect Quanta from the other party failing to meet its obligations under the contract. Contract assets and liabilities are recorded on a performance obligation basis at the end of each reporting period.
Contract assets and liabilities consisted of the following (in thousands):
|
| | | | | | | | | | | | |
| | | December 31, 2019 | | December 31, 2018 | | December 31, 2017 |
| Contract assets | | $ | 601,268 |
| | $ | 576,891 |
| | $ | 497,292 |
|
| Contract liabilities | | $ | 606,146 |
| | $ | 425,961 |
| | $ | 433,387 |
|
As referenced previously, contract assets and liabilities fluctuate period to period based on various factors, including, among others, changes in the number and size of projects in progress at period end and variability in billing and payment terms, such as up-front or advance billings, interim or milestone billings, or deferred billings. The increase in contract assets from December 31, 2018 to December 31, 2019 was partially due to billing process changes for certain customers that impacted Quanta’s ability to timely invoice and collect for services performed. Offsetting these increases was a contract asset impairment of $29.4 million that was recognized during the year ended December 31, 2019 in connection with a charge to earnings on the large telecommunications project in Peru that was terminated during the period. The increase in contract assets from December 31, 2017 to December 31,
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
2018 was primarily due to an increase in the volume of fixed price contracts in process. The increase in contract liabilities from December 31, 2018 to December 31, 2019 was primarily due to the timing and number of contracts that include advance billing terms.
Revenues were positively impacted by $60.2 million during the year ended December 31, 2019 as a result of changes in estimates associated with performance obligations on fixed price contracts partially satisfied prior to December 31, 2018. During the year ended December 31, 2019, Quanta recognized revenue of approximately $370 million related to contract liabilities outstanding at December 31, 2018.
Current and Long-Term Accounts andReceivable, Notes Receivable and Allowance for Doubtful Accounts
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 theThe assessment of the allowance for doubtful accounts areinvolves certain judgments and estimates regarding, among other factors, the customer’s access to capital, the customer’s willingness or ability to pay, general economic and market conditions, the ongoing relationship with the customer and uncertainties related to the resolution of disputed matters. Quanta considers accounts receivable delinquent after 30 days but does not generally include delinquent accounts in its analysis of the allowance for doubtful accounts unless the accounts receivable have been outstanding for at least 90 days. Quanta also includes accounts receivable balances that relate to customers in bankruptcy or with other known difficulties in its analysis of the allowance for doubtful accounts. Material changes in customers’to a customer’s business, or cash flows or financial condition, which may be impacted by negative economic and market conditions, could affect Quanta’s ability to collect amounts due. Should anticipated recoveries relating to receivables fail to materialize, including anticipated recoveries relating to existing bankruptcies or other workout situations, Quanta could experience reduced cash flows and losses in excess of current allowances provided. As of December 31, 20172019 and 2016,2018, Quanta had allowances for doubtful accounts on current receivables of $4.5$9.4 million and $2.8$5.8 million. See Note 14 for additional information related to the bankruptcy matter involving PG&E Corporation and its primary operating subsidiary, Pacific Gas and Electric Company (collectively PG&E), a significant customer of Quanta.
Long-term accounts receivable are included within “Other assets, net” in the accompanying consolidated balance sheets. As of December 31, 2019 and 2018, long-term accounts receivable were $12.6 million and $25.9 million.
ShouldCertain contracts allow 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 excesswithhold a small percentage of current allowances provided.
The balances billed but not paid by customersbillings pursuant to retainage provisions, in certain contractsand such amounts are generally due upon completion of the contractscontract and acceptance of the project by the customer. Based on Quanta’s experience with similar contracts in recent years, the majority of thethese retainage balances at each balance sheet date are expected to be collected within the nextapproximately twelve months. Current retainage balances as of December 31, 20172019 and 20162018 were $300.5$299.6 million and $231.0$337.1 million and wereare included in “Accounts receivable.” Retainage balances with expected settlement dates beyond the next twelve months wereare included in “Other assets, net,” and as of December 31, 20172019 and 20162018 were $41.9$54.2 million and $5.2$99.6 million.
Within accounts receivable, Quanta recognizes unbilled receivables for non-fixed price contracts within “Accounts receivable” in certain circumstances, such as when revenues have been earned and recorded but the amount cannot be billed under the terms of the contract until a later date; costs have been incurred but are yet to be billed under cost-reimbursement type contracts;date or amounts arise from routine lags in billing (for example, work completed one month but not billed until the next month). These balances do not include revenues accruedrecognized for work performed under fixed-price contracts as these amounts are recorded as “Costs and estimated earnings in excess of billings on uncompleted contracts.“Contract assets.” At December 31, 20172019 and 2016, the balances of2018, unbilled receivables included in “Accounts receivable” were $303.9$524.3 million and $206.8$434.9 million. Quanta also recognizes unearned revenues for non-fixed price contracts when cash is received prior to recognizing revenues for the related performance obligation. Unearned revenues, which are included in “Accounts payable and accrued expenses,” were $33.2 million, $40.1 million and $16.0 million at December 31, 2019, 2018 and 2017.
Cash and Cash Equivalents
Amounts related to Quanta’s cash and cash equivalents based on geographic location of the bank accounts were as follows (in thousands):
|
| | | | | | | | |
| | | December 31, |
| | | 2019 | | 2018 |
| Cash and cash equivalents held in domestic bank accounts | | $ | 130,771 |
| | $ | 62,495 |
|
| Cash and cash equivalents held in foreign bank accounts | | 34,027 |
| | 16,192 |
|
| Total cash and cash equivalents | | $ | 164,798 |
| | $ | 78,687 |
|
Cash consisting of interest-bearing demand deposits is carried at cost, which approximates fair value. Quanta considers all highly liquid investments with an original maturity of three months or less at the time of purchase to be cash equivalents, which are carried at fair value. At December 31, 2019 and 2018, cash equivalents were $37.8 million and $37.2 million and consisted primarily of money market investments and money market mutual funds and are discussed further in Fair Value Measurements below.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Cash and cash equivalents held by joint ventures, which are either consolidated or proportionately consolidated, are available to support joint venture operations, but Quanta cannot utilize those assets to support its other operations. Quanta generally has no right to cash and cash equivalents held by a joint venture other than participating in distributions and in the event of dissolution. Amounts related to cash and cash equivalents held by joint ventures, which are included in Quanta’s total cash and cash equivalents balances, were as follows (in thousands):
|
| | | | | | | | |
| | | December 31, |
| | | 2019 | | 2018 |
| Cash and cash equivalents held by domestic joint ventures | | $ | 6,518 |
| | $ | 8,544 |
|
| Cash and cash equivalents held by foreign joint ventures | | 16 |
| | 441 |
|
| Total cash and cash equivalents held by joint ventures | | 6,534 |
| | 8,985 |
|
| Cash and cash equivalents not held by joint ventures | | 158,264 |
| | 69,702 |
|
| Total cash and cash equivalents | | $ | 164,798 |
| | $ | 78,687 |
|
Inventories
Inventories consist primarily of parts and supplies held for use in the ordinary course of business, which are valued by Quanta at the lower of cost or net realizable value. Cost is determined by using either the first-in, first-out (FIFO) method or the average costing method. Inventories also include certain job specific materials not yet installed, which are valued using the specific identification 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 expense related to property and equipment is recognized on a straight-line basis over the estimated useful lives of the assets and was $183.8$218.1 million, $170.2$202.5 million and $162.8$183.8 million for the years ended December 31, 2017, 20162019, 2018 and 2015, respectively.2017.
Accrued capital expenditures were $9.6$10.0 million and $12.7$2.7 million as of December 31, 20172019 and 2016.2018. The impact of these items has been excluded from Quanta’s capital expenditures in the accompanying consolidated statements of cash flows due to their non-cash nature.
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 lives 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 whenever events or changes in circumstances indicate that the carrying amount may not be realizable. Quanta also recorded asset impairments primarily related to certain international renewable energy services operations of $8.0 million in 2016 and $6.6 million in 2015. The 2016 impairment was primarily due to a pending
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
disposition of certain international renewable energy services operations that was completed in 2017, and the 2015 impairment was based on the estimated future undiscounted cash flows for the asset group as compared to their carrying amount.
When an evaluation is required, the estimated future undiscounted cash flows associated with the asset group are compared to the asset group’s carrying amount to determine if an impairment of such asset group is necessary. The effect of any impairment involves expensing the difference between the fair value of suchthe asset group and its carrying amount in the period incurred.
Quanta recorded asset impairments of $13.9 million during the year ended December 31, 2019 related to the winding down and exit of certain oil-influenced operations and assets, the replacement of an internally-developed software application and the planned sale and exit of certain foreign operations and assets. Quanta also recorded asset impairments of $49.4 million during the year ended December 31, 2018 primarily related to the winding down of certain oil-influenced operations and assets. The long-lived assets related to the December 31, 2018 impairment were written down to their estimated fair value of $14.0 million and were classified as assets held for sale and recorded in “Prepaid expenses and other current assets” in the accompanying December 31, 2018 consolidated balance sheet, $6.3 million of which remains in the accompanying December 31, 2019 consolidated balance sheet.
Other Assets, Net
Other assets, net consists primarily of long-term receivables, long-term retainage, deferred tax assets, debt issuance costs, equity and other investments, refundable security deposits for leased properties and insurance claims in excess of deductibles that are due from Quanta’s insurers.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Debt Issuance and Amendment Costs
Capitalized debt issuance and amendment costs related to Quanta’s senior secured revolving credit facility and any other debt outstanding at a given balance sheet date are included in other“Other assets, netnet” in the accompanying consolidated balance sheets and are amortized intoto interest expense on a straight-line basis over the terms of the respective agreements giving rise to the debt issuance costs, which Quanta believes approximates the effective interest rate method. During 20172019, 2018 and 2015,2017, Quanta incurred $1.5$2.3 million, $2.0 million and $3.8$1.5 million of debt issuance and amendment costs related to amendments and a restatement of its credit agreement. In 2017 and 2015, Quanta recorded a nominal charge to interest expense for the write-off of a portion of the debt issuance costs related to the prior facility. As of December 31, 20172019 and 2016,2018, capitalized debt issuance costs were $12.9$17.2 million and $11.4$14.9 million, with accumulated amortization of $7.4$10.5 million and $6.0$8.6 million. For the years ended December 31, 2017, 20162019, 2018 and 2015,2017, amortization expense related to capitalized debt issuance and amendment costs was $1.3$1.9 million, $1.4$1.3 million and $1.3 million, respectively.million.
Goodwill
Goodwill, net of accumulated impairment losses represents the excess of cost over the fair market value of net tangible and identifiable intangible assets of acquired businesses and is stated at cost. Quanta has recorded goodwill in connection with its historical acquisitions of companies.businesses. Upon acquisition, these companiesbusinesses were either combined into one of Quanta’s existing operating units or managed on a stand-alone basis as an individual operating unit. Goodwill recorded in connection with these acquisitions is subject to an annual assessment for impairment, which Quanta performs at the operating unit level for each operating unit that carries a balance of goodwill. Each of Quanta’s operating units isare organized into one of two internal2 divisions: the Electric Power Infrastructure Services Division and the OilPipeline and GasIndustrial Infrastructure Services Division. As most of the companies acquired by Quanta provide multiple types of services for multiple types of customers, these divisional designations are based on the predominant type of work performed by eachan operating unit at the point in time the divisional designation is made. Goodwill is required to be measured for impairment at the reporting unit level, which represents the operating segment level or one level below the operating segment level for which discrete financial information is available. Quanta has determined that its individual operating units represent its reporting units for the purpose of assessing goodwill impairments.impairment.
In January 2017, the Financial Accounting Standards Board (FASB) issued an update intended to simplify the subsequent measurement of goodwill by eliminating the second step in the two-step goodwillGoodwill is not amortized but is tested for impairment test. The update requires an entity to perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and to recognize an impairment charge for the amount by which the carrying amount exceeds the fair value. The income tax effect associated with an impairment of tax deductible goodwill is also considered in the measurement of the goodwill impairment. Quanta elected to adopt the provisions of the update in connection with its annual impairment test performedannually in the fourth quarter of 2017.
the fiscal year, or more frequently if events or circumstances arise which indicate that goodwill may be impaired. The assessment can be performed by first completing a qualitative assessment on none, some or all of Quanta’s reporting units. Quanta hascan also bypass the optionqualitative assessment for any reporting unit in any period and proceed directly to first assess qualitative factors to determine whether it is necessary to perform thea quantitative fair value-based impairment test, described below. and then resume the qualitative assessment in any subsequent period. Qualitative indicators that may trigger the need for annual or interim quantitative impairment testing include, among other things, deterioration in macroeconomic conditions, declining financial performance, deterioration in the operational environment, or an expectation of selling or disposing of a portion of a reporting unit. Additionally, an interim impairment test of an operating unit may be triggered by a significant change in market, management, business strategy or business climate; a loss of a significant customer; increased competition; a sustained decrease in share price; or a decrease in Quanta’s market capitalization below book value.
If Quanta believes that, as a result of its qualitative assessment, it is more likely than not that the fair value of a reporting unit is less than its carrying amount, the quantitative impairment test is required. Quanta can choose to perform the qualitative assessment on none, some, or all of its reporting units. Quanta can also bypass the qualitative assessment for any reporting unit in any period and proceed directly to the quantitative impairment test, and then resume the qualitative assessment in any subsequent period. Qualitative indicators including deterioration in macroeconomic conditions, declining financial performance, or a sustained decrease in share price, among other things, may trigger the need for annual or interim impairment testing of goodwill associated with one or all of the reporting units.
Quanta’s annual goodwill impairment assessment is performed in the fourth quarter of its fiscal year, or more frequently if events or circumstances arise which indicate that goodwill may be impaired. For instance, a decrease in Quanta’s market capitalization below book value, a significant change in business climate or loss of a significant customer, as well as the qualitative indicators referenced above, may trigger the need for interim impairment testing of goodwill for a reporting unit. The quantitative
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impairment test involves comparing the fair value of each of Quanta’s reporting units with its carrying amount, including goodwill. If the carrying amount of a reporting unit exceeds its fair value, an impairment loss is recorded as a reduction to goodwill with a corresponding charge to “Asset impairment charges” in the accompanying consolidated statements of operations. AnyThe income tax effect associated with an impairment of tax-deductible goodwill is also considered in the measurement of the goodwill impairment. A goodwill impairment for any reporting unit is limited to the total amount of goodwill allocated to thatsuch reporting unit.
Quanta determines the fair value of its reporting units using a weighted combination of the discountedincome approach (discounted cash flow market multiplemethod) and market capitalizationmultiples valuation approaches,techniques (market guideline transaction method and market guideline public company method), with heavier weightinggreater weight placed on the discounted cash flow method because management believes this method results in the most accurateappropriate calculation of fair value. Determining the fair value of a reporting unit requires judgment and the use of significant estimates and assumptions, including revenue growth rates, operating margins, discount rates, weighted average costs of capital and future market conditions. Quanta believes the estimates and assumptions used in its impairment assessments are reasonable and based on available market information, but variations in any of the assumptions could result in materially different calculations of fair value and determinationsreflects an expectation of whether or not an impairment is indicated.market value as determined by a “held and used” model.
Under the discounted cash flow method, Quanta determines fair value based on the estimated future cash flows offor each reporting unit, discounted to present value using a risk-adjusted industry discount rates,weighted average cost of capital, which reflectreflects the overall level of inherent risk of afor each reporting unit and the rate of return an outside investor would expect to earn. Cash flow projections are derived from budgeted amounts and operating forecasts (typically a one-year model) plus an estimate of later period cash flows, all of which are evaluated by management. Subsequentand subsequent period cash flows are developed for each reporting unit using growth rates that management believes are reasonably likely to occur, along with aoccur. A terminal value is derived from a multiple of the reporting unit’s earnings before interest, taxes, depreciation and amortization (EBITDA). The EBITDA multiples for each reporting unit are based on trailing twelve-month comparable industry data.observed purchase transactions for similar businesses adjusted for size, volatility and risk.
Under the market multipleguideline transaction and market capitalization approaches,guideline public company methods, Quanta determines the estimated fair value offor each of its reporting units by applying transaction multiples and public company multiples, respectively, to each reporting unit’s projected EBITDA and then averaging that estimate with similar historical calculations using either a one, two or three year average. The transaction multiples are based on observed purchase transactions for similar businesses adjusted for size,
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volatility and risk. The public company multiples are based on peer group multiples adjusted for size, volatility and risk. For the market capitalization approach,guideline public company method, Quanta adds a reasonable control premium, which is estimated as the premium that would be received in a sale ofappropriate to convert the reporting unit in an orderly transaction between market participants.value to a controlling interest basis.
The projected cash flows and estimated levels of EBITDA by reporting unit were used to determine fair value under the three approaches discussed herein. The following table presents the significant estimates used by management in determining the fair values of Quanta’s reporting units for which a quantitative assessment was performed at December 31, 2017, 20162019, 2018 and 2015:2017:
|
| | | | | | |
| | | 2019 | | 2018 | | 2017 |
| Years of cash flows before terminal value | | 5 years | | 5 years | | 5 years |
| Weighted average cost of capital | | 12.5% | | 12.0% to 15.0% | | 12.0% to 14.0% |
| Transaction multiple(s) applied to EBITDA | | 6.0 | | 6.5 to 9.0 | | 5.5 to 7.0 |
| Guideline public company multiple(s) applied to EBITDA | | 6.5 | | 6.5 to 9.5 | | 6.5 to 8.0 |
| Five-year revenue compounded annual growth rate(s) | | -9% | | -14% to 8% | | -14% to 17% |
| Weighting of three methods: | | | | | | |
| Discounted cash flows | | 70% | | 70% | | 70% |
| Market multiple | | 15% | | 15% | | 15% |
| Market capitalization | | 15% | | 15% | | 15% |
|
| | | | | | |
| | | 2017 | | 2016 | | 2015 |
| Years of cash flows before terminal value | | 5 years | | 5 years | | 5 years |
| Discount rates | | 12.0% to 14.0% | | 12.5% to 14.5% | | 12.0% to 16.0% |
| EBITDA multiples | | 5.5 to 7.0 | | 5.5 to 7.0 | | 5.0 to 6.5 |
| Weighting of three approaches: | | | | | | |
| Discounted cash flows | | 70% | | 70% | | 70% |
| Market multiple | | 15% | | 15% | | 15% |
| Market capitalization | | 15% | | 15% | | 15% |
For recently acquired reporting units, a quantitativeQuanta’s annual goodwill impairment test may indicate a fair value that is substantially similar to the reporting unit’s carrying amount. Such similarities in value are generally an indication that management’s estimates of future cash flows associated with the recently acquired reporting unit remain relatively consistent with the assumptions that were used to derive its initial fair value.
Duringassessment performed during the fourth quarter of 2017,2019, Quanta assessed qualitative factors to determine whether it was necessary to perform a quantitative fair-value basedfair value impairment analysis and identified 1 reporting unit for which a quantitative goodwill impairment analysisassessment was performed for each of Quanta’s reporting units, and no reporting units were evaluated solelydeemed appropriate based on a qualitative basis.financial performance indicators. The subsequent quantitative analysis indicated that the fair value of each of Quanta’sthe reporting units, with the exception of two reporting units in its Oil and Gas Infrastructure Services Division,unit was in excess of its carrying amount. Accordingly, Quanta did 0t record any impairment charges related to goodwill during the fourth quarter of 2019. In connection with the 2018 annual goodwill assessment, there were certain reporting units for which a quantitative goodwill impairment assessment was determined appropriate based on either changes in market conditions or specific performance indicators. NaN impairment charges resulted from the 2018 assessment. In connection with the 2017 annual goodwill assessment, Quanta recorded a $57.0 million non-cash charge in the fourth quarter of 2017 for the impairment of goodwill associated with the two2 reporting units. Specifically, a reporting unit that provides material handling services had experienced lower operating margins and iswas expected to continue to face a highly competitive environment in its select markets, and a reporting unit that provides marine and offshore services had experienced prolonged periods of reduced revenues and operating margins and iswas expected to continue to experience lower levels of activity in the U.S. Gulf of Mexico and other offshore markets.
As discussed generally above, when evaluating the 2017 quantitative impairment test results, management considered many factors in determining whether an impairmentThe determination of goodwill for anya reporting unit was reasonably likely to occur in future periods,
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including future market conditionsunit’s fair value requires judgment and the economic environment. Additionally,use of significant estimates and assumptions. Quanta believes the estimates and assumptions used in its impairment assessments are reasonable and based on available market information obtained from relevant industry sources; however, variations in any of the assumptions could result in materially different calculations of fair value and impairment determinations. Accordingly, management considered the sensitivity of its fair value estimates to changes in certain valuation assumptions. After taking into account a 10% decrease in the fair value of each of Quanta’s reporting units, one additionalthe reporting unit within Quanta’s Oil and Gas Infrastructure Services Division would havefor which a quantitative impairment test was performed, the reporting unit’s fair value belowexceeded its carrying amount. The fair value determined in 2017 for this reporting unit was consistent with the fair value determined in 2016. Circumstances such as market declines, unfavorable economic conditions, loss of a major customer or other factors could increase the risk of impairment of goodwill for this reporting unit in future periods.
If an operating unit experiences prolonged periods of declining revenues, operating margins or both, it may be at risk of failing the quantitative goodwill impairment test. In addition to theThe reporting unitsunit referenced above, certain operating units havefor which a quantitative goodwill impairment assessment was performed in the fourth quarter of 2019, experienced declines over the short-term primarily due to challenging macroeconomic conditionslosses attributable to a project which are not expected to recur.
Due to the cyclical nature of Quanta’s business, and the other factors described above, the profitability of its individual reporting units may suffer from decreases in certain geographic areascustomer demand and low oil and natural gas prices, whichother factors. These factors may have negatively impacted customer spending and resulted in project cancellations and delays. Additionally, customer capital spending has been constraineda disproportionate impact on individual reporting units as compared to Quanta as a resultwhole and might adversely affect the fair value of an increasingly complex regulatory and permitting environment. Certain operating units withinindividual reporting units. If material adverse conditions occur, Quanta’s Oil and Gas Infrastructure Services Division that primarily operate withinfuture estimates of fair value may not support the midstream and smaller-scale transmission market, including the reporting unit referenced above, have continued to be negatively impacted by these factors. Goodwill and intangible assets associated with these operating units were $50.1 million and $14.7 million at December 31, 2017. Quanta monitors these conditions and others to determine if it is necessary to perform the quantitative fair-value based impairment test forcarrying amount of one or more operating units prior to the annual impairment assessment. Although Quanta is not aware of circumstances that would lead to additional goodwill impairments at this time, circumstances such as a continued market decline, the loss of a major customer or other factors could impact the valuation of goodwill in the future.
The goodwill analysis performed for each reporting unit was based on estimates and comparisons obtained from the electric power and oil and gas industries. Quanta assigned a higher weighting to the discounted cash flow approach in all periods to reflect increased expectations of market value being determined from a “held and used” model. As stated previously, cash flows are derived from budgeted amounts and operating forecasts that have been evaluated by management. In connection with the 2017 assessment, reporting unit annual compounded revenue growth rates during the cash flow projection period varied from negative 14% to positive 17%.
Estimating future cash flows requires significant judgment, and Quanta’s projections may vary from cash flows eventually realized. Changes in Quanta’s judgments and projections could result in a significantly different estimate of the fair values 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 the amount of any 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. Goodwill impairments are included within “Asset impairment charges” on Quanta’s consolidated statements of operations.
Based on the goodwill impairment analysis, Quanta compared the sum of fair values of its reporting units, to its market capitalization at December 31, 2017 and determined that the excess of the aggregate fair value of all reporting units to its market capitalization reflected a reasonable control premium. Quanta’s market capitalization at December 31, 2017 was approximately $6.02 billion, and its total stockholders’ equity was approximately $3.79 billion. If the price of Quanta’s common stock were to decline to a level that causes its market capitalizationrelated goodwill would need to be lower than the value of its stockholders’ equity, this would be another factor that could increase the risk of further impairment of goodwill in future periods. Increases in the carryingwritten down to an amount of individual reporting units that may be indicated by Quanta’s impairment tests are not recorded, therefore Quanta may record goodwill impairments in the future, even when the aggregate fair value of its reporting units as a whole may increase.
During the fourth quarter of 2015, management concluded that goodwill was impaired at two reporting units in Quanta’s Oil and Gas Infrastructure Services Division and recorded a $39.8 million non-cash charge for the impairment of goodwill, which primarily resulted from lower levels of expected activity in the U.S. Gulf of Mexico and, to a lesser extent, the extended low commodity price environment for certain directional drilling operations in Australia.
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considered recoverable.
Other Intangible Assets
Quanta’s intangible assets include customer relationships, backlog, trade names, non-compete agreements, patented rights and developed technology and curriculum, all of which are subject to amortization, as well as an engineering license, which is not subject to amortization. The fair value of customer relationships is estimated as of the date a business is acquired based on the value-in-use concept utilizing the income approach, specifically the multi-period excess earnings method. This analysismethod discounts to present value the projected cash flows attributable to the customer relationships, with consideration given to customer contract renewals and estimated customer attrition rates. The following table presents the significant estimates used by management in determining the fair values of
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customer relationships associated withrelationship intangible assets include future revenues, discount rates and customer attrition rates. The following table presents the range of rates used for acquisitions in the years ended December 31, 2017, 20162019, 2018 and 2015:2017:
|
| | | | | | |
| | | 2019 | | 2018 | | 2017 |
| Discount rates | | 19% to 24% | | 20% to 27% | | 17% to 25% |
| Customer attrition rates | | 5% to 37% | | 20% to 33% | | 15% to 78% |
|
| | | | | | |
| | | 2017 | | 2016 | | 2015 |
| Discount rates | | 17% to 25% | | 20% to 23% | | 18% to 22% |
| Customer attrition rates | | 15% to 78% | | 10% to 70% | | 14% to 70% |
Quanta values backlog for acquired businesses as of the acquisition date based upon the contractual nature of the backlog within each service line, discounted to present value. The valuevalues of trade names isand curriculum are estimated using the relief-from-royalty method of the income approach. This approach, which is based on the assumption that in lieu of ownership, a company would be willing to pay a royalty for use of the trade name.name or curriculum. The value of a non-compete agreement is estimated based on the difference between the present value of the prospective cash flows with the agreement in place and the present value of the prospective cash flows without the agreement in place. The value of the engineering license is based on cash paid to acquire the asset.
Quanta amortizes the intangible assets that are subject to amortization based upon the estimated consumption of their economic benefits, or on a straight-line basis if the pattern of economic benefit cannot otherwise be reliably estimated. Intangible assets subject to amortization are reviewed for impairment and tested for recoverability whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. For instance, a significant change in business climate or a loss of a significant customer, among other things, may trigger the need for interim impairment testing of intangible assets. An impairment loss is recognized if the carrying amount of an intangible asset is not recoverable and its carrying amount exceeds its fair value. Intangible asset impairments are included within “Asset impairment charges” in the accompanying consolidated statements of operations.operations, when applicable.
DuringLeases
As described further in Note 3, effective January 1, 2019, Quanta adopted the fourth quarternew lease accounting standard utilizing the transition method that allows recognition of 2017, a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption, if applicable. Quanta’s financial results for reporting periods beginning on or after January 1, 2019 are presented under the new standard, while financial results for prior periods continue to be reported in accordance with the prior standard and Quanta’s historical accounting policy. The adoption of the new standard resulted in the recording of operating lease right-of-use assets and operating lease liabilities of $301.1 million as of January 1, 2019. Lease liabilities are recognized as the present value of the future minimum lease payments over the lease term as of the commencement date. Lease assets are recognized as the present value of future minimum lease payments over the lease term as of the commencement date, plus any initial direct costs incurred and lease payments made, less any lease incentives received. Although the adoption of the new standard had a material impact on Quanta’s consolidated balance sheet, there was not a material impact on its consolidated statements of operations, comprehensive income, cash flows or equity.
Quanta determines if an arrangement contains a lease at inception. If an arrangement is considered a lease, Quanta determines at the commencement date whether the lease is an operating or finance lease. In accordance with the new standard, finance leases are leases that meet any of the following criteria: the lease transfers ownership of the underlying asset at the end of the lease term; the lessee is reasonably certain to exercise an option to purchase the underlying asset; the lease term is for the major part of the remaining economic life of the underlying asset (except when the commencement date falls at or near the end of such economic life); the present value of the sum of the lease payments and any additional residual value guarantee by the lessee equals or exceeds substantially all of the fair value of the underlying asset; or the underlying asset is of such a specialized nature that it is expected to have no alternative use to the lessor at the end of the lease term. A lease that does not meet any of these criteria is considered an operating lease. After the commencement date, lease cost for an operating lease is recognized over the remaining lease term on a straight-line basis, while lease cost for a finance lease is based on the depreciation of the lease asset and interest on the lease liability.
The terms of Quanta’s lease arrangements vary, and certain leases include one or more of the following: renewal option(s), a cancellation option, a residual value guarantee, a purchase option or an escalation clause. An option to extend or terminate a lease is accounted for when assessing a lease term when it is reasonably certain that Quanta will exercise such option. Quanta has made a policy election to classify leases with an initial lease term of 12 months or less as short-term leases, and these leases are not recorded an impairment charge of $1.1 millionin the accompanying consolidated balance sheets unless the lease contains a purchase option that is reasonably certain to be exercised. Lease cost related to short-term leases is recognized on a customer relationship intangible asset, which primarily resulted from a strategic decisionstraight-line basis over the lease term.
Determinations with respect to restructure a business within a reporting unit inlease term (including any extension thereof), discount rate, variable lease cost and future minimum lease payments require the Oiluse of judgment based on the facts and Gas Infrastructure Services Division.
During the fourth quarter of 2015, Quanta recorded an impairment charge of $12.1 millioncircumstances related to customer relationship, trade nameeach lease. Quanta considers various factors, including economic incentives and non-compete agreement intangible assets,penalties and business need, to determine the likelihood that a renewal option will be exercised. Unless a renewal option is reasonably certain to be exercised, which primarily resulted from lower levelsis typically at Quanta’s sole discretion, the
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initial non-cancelable lease term is used. Quanta generally uses its incremental borrowing rates to determine the present value of expected activity in the U.S. Gulf of Mexico and, to a lesser extent, the extended low commodity price environment for certain directional drilling operations in Australia. The two reporting units impacted also had related goodwill impairments, as discussed above, and are in Quanta’s Oil and Gas Infrastructure Services Division.future minimum lease payments.
Investments in Affiliates and Other Entities
In the normal course of business, Quanta enters into various types of investment arrangements, each having unique terms and conditions. These investments may include equity interests held by Quanta in business entities, including general or limited partnerships, contractual joint ventures, or other forms of equity or profit participation. These investments may also include Quanta’s participation in different financing structures, such as the extension of loans to project specificproject-specific entities, the acquisition of convertible notes issued by project specific entities, or other strategic financing arrangements. Quanta also enters into strategic partnerships with customers and infrastructure investors to provide fully integrated infrastructure services on certain projects, including planning and feasibility analyses, engineering, design, procurement, construction and project operation and maintenance. These projects include public-private partnerships private infrastructure projects and concessions, along with private infrastructure projects such as build, own, operate and transfer(and in some cases transfer) and build-to-suit arrangements. As part of this strategy, during the year ended December 31, 2017, Quanta formed a partnership with select investors that provides up to $1.0 billion of capital, including approximately $80.0 million from Quanta, available to invest in certain of these infrastructure projects through August 2024. Wholly owned subsidiaries of Quanta serve as the general partner of this partnership and as a separately operated registered investment adviser that manages the invested capital.
Quanta determines whether investments involve a variable interest entity (VIE) based on the characteristics of the subject entity. If the entity is determined to be a VIE, then management determines if Quanta is the primary beneficiary of the entity and whether or not consolidation of the VIE is required. The primary beneficiary consolidating the VIE must normally have both (i) the power to direct the activities that most significantly affect the VIE’s economic performance and (ii) the obligation to absorb significant losses of, or the right to receive significant benefits, from the VIE. When Quanta is deemed to be the primary beneficiary, the VIE is consolidated and the other party’s equity interest in the VIE is accounted for as a non-controlling interest. In cases where Quanta determines that it has an undivided interest in the assets, liabilities, revenues and profits of an unincorporated VIE (e.g.,
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a general partnership interest), such amounts are consolidated on a basis proportional to Quanta’s ownership interest in the unincorporated entity.
Investments in entities of which Quanta is not the primary beneficiary, but over which Quanta has the ability to exercise significant influence, are accounted for using the equity method of accounting. Quanta’s share of net income or losses from unconsolidated equity investments is reported as equity in earnings (losses) of unconsolidated affiliates, which is included in “Other income (expense)”, net” in the accompanying consolidated statements of operations. Equity investments are reviewed for impairment by assessing whether anythere has been a decline in the fair value of the investment below the carrying amount and the decline is other than temporary.other-than-temporary. In making this determination, factors such as the ability to recover the carrying amount of the investment and the inability of the investee to sustain anits earnings capacity are evaluated in determining whether a loss in value should be recognized. Any impairment losses related to investments would be recognized in equity in earnings (losses) of unconsolidated affiliates. Equity method investments are carried at original cost and are included in “Other assets, net” in Quanta’s consolidated balance sheets and are adjusted for Quanta’s proportionate share of the investees’ income, losses and distributions.distributions and are included in “Other assets, net” in the accompanying consolidated balance sheets.
Investments in entities which Quanta is not the primary beneficiary, and over which Quanta does not have the ability to exercise significant influence, are accounted for using the cost method of accounting. These investments are required to be measured at fair value with changes in fair value recognized in net income unless the investments do not have readily determinable fair values, in which case the investments are measured at cost minus impairment, if any, plus or minus observable price changes in orderly transactions for an identical or similar investment in the same company.
As part of Quanta’s investment strategy, Quanta formed a partnership with select investors that provides up to $1.0 billion of capital, including approximately $80.0 million from Quanta, available to invest in certain specified infrastructure projects through August 2024. Wholly-owned subsidiaries of Quanta serve as the general partner of this partnership and as a separately operated registered investment adviser that manages the invested capital. As of December 31, 2019, Quanta had contributed $20.0 million to this partnership in connection with certain investments. However, in October 2019, due to certain management changes at the registered investment adviser, the partnership entered into a 180-day period during which the investors and Quanta will evaluate the partnership. During this period, the partnership may make additional investments with the consent of the investors, and, at the end of the period, the investors or Quanta may elect to end the investment period for any future investments or dissolve the partnership.
Quanta hashad a minority ownership interest in a limited partnership that was selected during 2014 to build, own and operate a new 500-kilometer electric transmission line and two2 500 kV substations in Alberta, Canada.Canada and has accounted for this interest as an equity-method investment. The limited partnership contracted with a Quanta subsidiary to perform the engineering, procurement and construction (EPC)EPC services for the project, and the Quanta subsidiary recognizesrecognized revenue and related cost of services as performance progressesprogressed on the project. However, due to Quanta’s ownership interest, a proportional amount of the EPC profit iswas deferred until the electric transmission line and related substations arewere constructed and ownership of the assets iswas deemed to be transferred to the third party customer.third-party customer, which occurred in the three months ended March 31, 2019. The profit deferral has beenof earnings and recognition of such earnings deferral were recorded as a decrease to the equity method investment included in “Other assets, net” in the accompanying consolidated balance sheets and as a componentcomponents of equity in earnings (losses) of unconsolidated affiliates, which is included in “Other income (expense)”, net” in the accompanying consolidated statements of operations. See Notes 11 and 15 for additional disclosures related to investments.
Revenue Recognition
Quanta provides its services pursuant to master service agreements, repair and maintenance contracts and fixed price and non-fixed price installation contracts. Pricing under these contracts may be competitive unit price, cost-plus/hourly (or time and materials basis) or fixed price (or lump sum basis), andDuring the final terms and prices of these contracts are frequently negotiated with the customer. Under unit-based contracts, the utilization of an output-based measurement is appropriate for revenue recognition, and Quanta recognizes revenue as units are completed based on pricing established with the customer for each delivered unit, which best reflects the pattern in which the obligation to the customer is fulfilled. Under cost-plus/hourly and time and materials type contracts, Quanta recognizes revenue on an input basis, as labor hours are incurred and services are performed.
Revenues from fixed price contracts are recognized using the percentage-of-completion method, measured by the percentage of costs incurred to date to total estimated costs for each contract. Such contracts provide that the customer accept completion of progress to date and compensate Quanta for services rendered, which may be measured in terms of units installed, hours expended, costs incurred to date compared to total estimated contract costs or some other measure of progress. Contract costs include all direct materials, labor and subcontract costs and those indirect costs related to contract performance, such as indirect labor, supplies, tools, repairs and depreciation costs. Much of the material associated with Quanta’s work is owner-furnished and is therefore not included in contract revenues and costs. The cost estimation process is based on professional knowledge and experience of Quanta’s engineers, project managers and financial professionals. Changes in job performance, job conditions and final contract settlements are factors that influence management’s assessment of contract value and estimated costs, and as a result, the profit recognized.
As discussed in Note 3, Quanta will adopt new revenue recognition guidance using the modified retrospective transition method effective for the quarter endingthree months ended March 31, 2018, applying the guidance to contracts with customers that were not substantially complete as of January 1, 2018. Quanta’s financial results for reporting periods after January 1, 2018 will be presented under the new guidance, while financial results for prior periods will continue to be reported in accordance with the prior guidance and Quanta’s historical accounting policy. Quanta has substantially completed its evaluation of the impact of the new guidance on its contracts with customers, including identification of differences that will result from the new requirements. Based on this evaluation, Quanta estimates that the net cumulative adjustment to retained earnings from adoption as of January 1, 2018, will be less than $10.0 million. With respect to ongoing revenues generated from master service agreements, repair and maintenance contracts and fixed price and non-fixed price installation contracts, Quanta does not anticipate any significant changes to the pattern of revenue recognition and does not believe that the guidance surrounding identification of contracts and performance obligations or measurement of variable consideration will have a material impact on the revenue recognition for these arrangements. Quanta expects its disclosures related to revenue recognition will expand to address new quantitative and qualitative requirements regarding the nature, amount and timing of revenue from contracts with customers and additional information related to contract assets and liabilities.2019,
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Actual revenuesdeferred earnings of $60.3 million were recognized, the majority of which was attributable to profit earned and project costs can vary, sometimes substantially, from previous estimates duedeferred in the years ended December 31, 2018 and 2017. During the three months ended December 31, 2019, Quanta sold its minority ownership interest in the limited partnership and recognized a gain of $13.0 million related to changesthe sale. The gain was recorded in equity in earnings (losses) of unconsolidated affiliates, which is included in “Other income (expense), net” in the accompanying consolidated statements of operations.
During 2018, Quanta acquired a 30% equity interest in a varietywater and gas pipeline infrastructure contractor located in Australia for $22.2 million. This investment includes an option to acquire the remaining equity of factors, including unforeseenthe company and provides for certain additional earnings and distribution participation rights during a designated 25-month post-investment period, as well as preferential liquidation rights. Quanta’s equity interest has been recorded at cost and will be adjusted for impairment, if any, plus or changed circumstances not included in Quanta’s cost estimates or covered by its contracts for which it cannot obtain adequate compensation or reimbursement. Some of them include concealed or unknown environmental conditions;minus observable changes in the costvalue of equipment, commodities, materials or labor; unanticipated costs or claims due to delays caused by customers or third parties; customer failure to provide required materials or equipment; errors in engineering, specifications or designs; project modifications or contract termination; weather conditions; and quality issues requiring rework or replacement. These factors, along with other risks inherent in performing fixed price contracts, may cause actual revenues and gross profits for a project to differ from previous estimates and could result in reduced profitability or lossesthe investee’s equity. Earnings on projects. Changes in these factors may result in revisions to costs and income, and their effectsthis investment are recognized as dividends are received and are reported in “Other income (expense), net” in the periodaccompanying consolidated statements of operations. Quanta recognized $1.1 million and $3.9 million in which the revisions are determined. These factors are routinely evaluated oncash dividends from this investment during 2019 and 2018. During 2018, Quanta also acquired a project-by-project basis throughout the project term,49% equity interest in an electric power infrastructure services company together with certain related customer relationship and the impact of any such revisions in management’s estimates of contract value, contract costother intangible assets for $12.3 million. See Notes 11 and contract profit are recorded as necessary in the period in which the revisions are determined. Provisions14 for losses on uncompleted contracts are made in the period in which such losses are determined to be probable and the amount can be reasonably estimated.
Quanta’s operating results for the year ended December 31, 2017 were impacted by less than 5% as a result of aggregate changes in contract estimatesadditional information related to projects that were in progress at December 31, 2016. Quanta’s operating results for the year ended December 31, 2016 were impacted by less than 5% as a result of aggregate changes in contract estimates related to projects that were in progress at December 31, 2015. However, operating results for the year ended December 31, 2016 included losses of $54.8 million on a power plant construction project in Alaska due to performance issues that increased the estimated costs of the project. This project was substantially completed during the fourth quarter of 2016. The losses on this project were partially offset by the aggregate positive impact of numerous individually immaterial changes in profitability generally due to better than expected performance for projects that were ongoing at December 31, 2015. Quanta’s operating results for the year ended December 31, 2015 were impacted by numerous individually immaterial changes in contract estimates related to projects that were in progress at December 31, 2014; however, the aggregate impact was less than 5% despite losses of $44.9 million recorded during 2015 on the same Alaska power plant construction project.
The current asset “Costs and estimated earnings in excess of billings on uncompleted contracts” represents revenues recognized in excess of amounts billed for contracts accounted for under the percentage-of-completion method. The current liability “Billings in excess of costs and estimated earnings on uncompleted contracts” represents billings in excess of revenues recognized for contracts accounted for under the percentage-of-completion method.
Quanta may incur costs subject to change orders, whether approved or unapproved by the customer, and/or claims related to certain contracts. Quanta determines the probability that such costs will be recovered based upon evidence such as past practices with the customer, specific discussions or preliminary negotiations with the customer or verbal approvals. Quanta treats items as costs of contract performance in the period incurred if it is not probable that the costs will be recovered or will recognize additional revenue if it is probable that the contract price will be adjusted and can be reliably estimated.
As of December 31, 2017 and 2016, Quanta recognized revenues of $144.0 million and $137.8 million related to change orders and/or claims that were in the process of being negotiated and approved in the normal course of business. These aggregate contract price adjustments represent management’s best estimate of additional contract revenues which have been earned and which management believes are probable of collection. The amounts ultimately realized by Quanta upon final acceptance by its customers could be higher or lower than such estimated amounts; however, such amounts cannot currently be estimated.investments.
Income Taxes
Quanta follows the liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recorded forbased on 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, including in connection with changes in tax laws affecting these assets.laws. The estimation of required valuation allowances includes estimates of future taxable income. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Quanta considers projected future taxable income and tax planning strategies in making this assessment. If actual future taxable income differs from these estimates, Quanta may not realize deferred tax assets to the extent estimated.
Quanta records reserves for income taxes related to certain tax positions in those instances where Quantawhen management considers it more likely than not that additional taxes may be due in excess of amounts reflected on income tax returns filed. When recording these reserves, for expected tax consequences of uncertain positions, Quanta assumes that taxing authorities have full knowledge of the position
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and all relevant facts. Quanta continually reviews exposure to additional tax obligations, and as further information is known or events occur, changes in tax reserves may be recorded. To the extent interest and penalties may be assessed by taxing authorities on any underpayment of income tax, such amounts have been accrued and included in the provision for income taxes.
As of December 31, 2017,2019, the total amount of unrecognized tax benefits relating to uncertain tax positions was $36.2$40.9 million, an increasea $0.2 million decrease from December 31, 2016 of $1.0 million.2018. This increasedecrease resulted primarily from a $7.0favorable settlement of $9.1 million related to certain non-U.S. income tax obligations of an acquired business and the expiration of U.S. state income tax statutes, partially offset by a $7.7 million increase in reserves for uncertain tax positions expected to be taken for 2017in 2019 and a $2.2$1.2 million net increase for uncertain tax positions related to prior years, partially offset by an $8.3 million decrease in reserves for uncertain tax positions resulting from the expiration of statute of limitations periods. Although the Internal Revenue Service (IRS) completed its examination related to tax years 2010, 2011taken in prior years. Quanta and 2012 during the year ended December 31, 2016, certain subsidiaries remain under examination by various U.S. state and Canadian and other foreign tax authorities for multiple periods. Quanta believes it is reasonably possible that within the next 12 months unrecognized tax benefits may decrease by up to $13.7$6.3 million as a result of settlement of these examinations or as a result of the expiration of certain statute of limitations periods.
U.S. federal and state and foreign income tax laws and regulations are voluminous and are often ambiguous. As such, Quanta is required to make many subjective assumptions and judgments regarding its tax positions that could materially affect amounts recognized in its future consolidated balance sheets, consolidated statements of operations and consolidated statements of comprehensive income. For example, the Tax Cuts and Jobs Act of 2017 (the Tax Act) significantly revised the U.S. corporate tax regime andwhich, among other things, resulted in a reduction of Quanta’s current and estimated future effective tax rate and a remeasurement of Quanta’sits deferred tax assets and liabilities and is anticipated to significantly reduce its future effective tax rate.liabilities. For additional information on the status of Quanta’s provisional analysis of the Tax Act, refer to Note 10.
Earnings Per Share
Basic and diluted earnings per share attributable to common stock are computed using the weighted average number of shares of common sharesstock outstanding during the applicable period. Exchangeable shares that were issued pursuant to certain of Quanta’s historical acquisitions (as further discussed in Note 11), which are exchangeable on a one-for-one1-for-one basis with shares of Quanta common stock, have been included in the calculation of weighted average shares outstanding for basic and diluted earnings per share attributable to common stock for the portion of the periods that they were outstanding. Additionally, unvested stock-based awards that contain non-forfeitable rights to dividends or dividend equivalents (participating)(participating securities) have been included
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in the calculation of basic and diluted earnings per share attributable to common stock for the portion of the periods that theythe awards were outstanding. Diluted earnings per share attributable to common stock is computed using the weighted average number of shares of common sharesstock outstanding during the period adjusted for all potentially dilutive common stock equivalents, except in cases where the effect of the common stock equivalents would be antidilutive.
Insurance
Quanta is insured for employer’s liability, workers’ compensation, auto liability and general liability claims. Under these programs, the deductible for employer’s liability is $1.0 million per occurrence, the deductible for workers’ compensation is $5.0 million per occurrence, and the deductibles for auto liability and general liability are $10.0 million per occurrence. Quanta manages and maintains a portion of its casualty risk through its wholly-owned captive insurance company, which insures all claims up to the amount of the applicable deductible of its third-party insurance programs. In connection with Quanta’s casualty insurance programs, Quanta is required to issue letters of credit to secure its obligations. Quanta also has employee health care benefit plans for most employees not subject to collective bargaining agreements, of which the primary plan is subject to a deductible of $0.4$0.5 million per claimant per year.
Losses under all of these insurance programs are accrued based upon Quanta’s estimate of the ultimate liability for claims reported and an estimate of claims incurred but not reported, with assistance from third-party actuaries. These insurance liabilities are difficult to assess and estimate due to unknown factors, including the severity of an injury, the extent of damage, the determination of Quanta’s liability in proportion to other parties and the number of incidents not reported. The accruals are based upon known facts and historical trends, and management believes such accruals are adequate.
Collective Bargaining Agreements
SomeCertain of Quanta’s operating units are parties to various collective bargaining agreements with unions that represent certain of their employees. The collective bargaining agreements expire at various times and have typically been renegotiated and renewed on terms similar to those in the expiring agreements. The agreements require the operating units to pay specified wages, provide certain benefits to their union employees and contribute certain amounts to multiemployer pension plans and employee benefit trusts.trusts pursuant to specified rates. Quanta’s multiemployer pension plan contribution rates generally are specified in the collective bargaining agreements (usually on an annual basis), and contributions are made to the plans on a “pay-as-you-go” basis based on its union employee payrolls. The location and number of union employees that Quanta employs at any given time and the plans in which they may participate vary depending on the projects Quanta has ongoing at that time and theQuanta’s need for union resources in connection with
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those its ongoing projects. Therefore, Quanta is unable to accurately predict theits union employee payroll and the amount of the resulting multiemployer pension plan contribution obligationobligations for future periods.
Stock-Based Compensation
Quanta recognizes compensation expense for restricted stock restricted stock units (RSUs) and performance stock units (PSUs) to be settled in common stock based on the fair value of the awards, net of estimated forfeitures. The fair value of these awards is generally determined based on the number of shares or units granted and the closing price of Quanta’s common stock on the date of grant; however,grant. However, for PSUs with market-based performance metrics, the fair value of performance units with market-based metrics is determined using a Monte Carlo simulation valuation methodology. An estimate of future forfeitures, based on historical data, is also utilized to determine compensation expense for the period, expense. Suchand these forfeiture estimates are subject to change and may impact the value that will ultimately be recognized as compensation expense. The resulting compensation expense for performance unitPSU and time-based RSU awards is recognized on a straight-line basis over the requisite service period, which is generally the vesting period, and the resulting compensation expense for performance-based RSU awards is recognized using the graded vesting method over the requisite service period. The compensation expense related to performance unitsoutstanding PSUs can also vary from period to period based on changes in forecasted achievement of established performance goals and the total number of performance unitsshares of common stock that Quanta anticipates will vest.be issued upon vesting of such PSUs. Payments made by Quanta to satisfy employee tax withholding obligations associated with awards settled in common stock are classified as financing cash flows.
Compensation expense associated with liability-based awards, such as RSUs that are expected to or may settle in cash, is recognized based on a remeasurement of the fair value of the award at the end of each reporting period. Upon settlement, the holders receive for each RSU an amount in cash equal to the fair market value on the settlement date of one1 share of Quanta common stock on the settlement date, as specified in the applicable award agreement. For additional information on Quanta’s restricted stock, RSU and performance unitPSU awards, see Note 12.
Functional Currency and Translation of Financial Statements
The U.S. dollar is the functional currency for the majority of Quanta’s operations, which are primarily located within the United States. The functional currency for Quanta’s foreign operations, which are primarily located in Canada Australia and Latin America,Australia, is typically the currency of the country where the foreign operating unit is located and transacts the majority of its activities, including billings, financing, payroll and other expenditures. The treatment of foreign currency translation gains or losses is dependent upon management’s determination of the functional currency, and whenWhen preparing its consolidated financial statements, Quanta translates the
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financial statements of its foreign operating units from their functional currency into U.S. dollars. Statements of operations, comprehensive income and cash flows are translated at average monthly rates, while balance sheets are translated at month-end exchange rates. The translation of the balance sheet results in translation gains or losses, which are included as a separate component of equity under “Accumulated other comprehensive income (loss).” Gains and losses arising from transactions not denominated in functional currencies are included within “Other income (expense)”, net” in the accompanying consolidated statements of operations.
Comprehensive Income
Components of comprehensive income include all changes in equity during a period, except those resulting from changes in Quanta’s capital relatedcapital-related accounts. Quanta records other comprehensive income (loss) for foreign currency translation adjustments related to its foreign operations and for other revenues, expenses, gains and losses that are included in comprehensive income but excluded from net income.
Litigation Costs and Reserves
Quanta records reserves when the likelihood of incurring a loss is probable and the amount of loss can be reasonably estimated. Costs incurred for litigation are expensed as incurred. Further details are presented inSee Note 15.14 for additional information related to legal proceedings and other contingencies.
Fair Value Measurements
For disclosure purposes, qualifying assets and liabilities are categorized into three broad levels based on the priority of the inputs used to determine their fair values. The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). Certain assumptions and other information as they relate to these qualifying assets and liabilities are described below.
Contingent Consideration Liabilities. As of December 31, 20172019 and 2016,2018, financial instruments required to be measured at fair value on a recurring basis consisted primarily of Quanta’s liabilities related to contingent consideration associated with certain acquisitions, the payment of which is contingent upon the future financialachievement of certain performance ofobjectives by the acquired businesses during designated post-acquisition periods and, if earned, would be payable to the former owners of the acquired businesses. The liabilities recorded represent the estimated fair values of
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future amounts payable to the former owners andof the fair valuesacquired businesses and are estimated by management based on entity-specific assumptions that are evaluated on an ongoing basis. AsQuanta expects a significant portion of December 31, 2017 and 2016, the aggregatethese liabilities to be settled by late 2020 or early 2021.
Aggregate fair valuevalues of these outstanding and unearned contingent consideration liabilities totaled $65.7 million and $19.5 million, which was included in “Insurance and other non-current liabilities”their classification in the accompanying consolidated balance sheets.sheets were as follows (in thousands):
|
| | | | | | | | |
| | | December 31, 2019 | | December 31, 2018 |
| Accounts payable and accrued expenses | | $ | 77,618 |
| | $ | — |
|
| Insurance and other non-current liabilities | | 6,542 |
| | 70,756 |
|
| Total contingent consideration liabilities | | $ | 84,160 |
| | $ | 70,756 |
|
The fair values of each contingent consideration liability as of December 31, 2017 wasthese liabilities were primarily determined using a Monte Carlo simulation valuation methodology based on probability-weighted financial performance projections and other inputs, including a discount rate and an expected volatility factor for each acquisition. The discount ratesexpected volatility factor ranged from 0.9%20.4% to 2.3% depending30.0% based on historical asset volatility of selected guideline public companies. Depending on contingent consideration payment terms, the settlement methods available andpresent values of the estimated payments are generallydiscounted based on a risk-free rate and/or Quanta’s cost of debt. The expected volatility factorsdebt and ranged from 23.0%1.6% to 32.7% based on historical asset volatility of selected guideline public companies.3.9%. The fair value determinations incorporate significant inputs not observable in the market. Accordingly, the level of inputs used for these fair value measurements is the lowest level (Level 3). Significant changes in any of these assumptions could result in a significantly higher or lower potential liability. Quanta expects a significant portion of these liabilities to be settled by late 2020 or early 2021.
The majority of Quanta’s contingent consideration liabilities are subject to a maximum payment amount, and the aggregate maximum payout amount for these liabilities was $139.5which aggregated to $157.2 million as of December 31, 2017.2019. One contingent consideration liability is not subject to a maximum payout amount, and thethat liability had a fair value of that liability was $1.0 million as of December 31, 2017.2019.
Quanta’s aggregate contingent consideration liabilities can change due to additional business acquisitions, payments to settlesettlement of outstanding liabilities, changes in the fair value of amounts owed based on performance in post-acquisition periods and foreign currency translation gains or losses.accretion in present value. During the yearsyear ended December 31, 2017, 2016 and 2015, acquisitions increased Quanta’s2019, Quanta recognized a net increase in the fair value of its aggregate contingent consideration liabilities by $51.1of $13.4 million, $18.7 million and $1.0 million. Quanta made no payments related to contingent consideration liabilitieswhile during the years ended December 31, 20172018 and 2015 and a nominal payment during the year ended December 31, 2016. During the year ended December 31, 2017, Quanta recognized a decrease in the fair value
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net decreases of contingent consideration liabilities of$11.2 million and $5.2 million. NoThese changes in fair value of contingent consideration liabilities were recognized in 2016 and 2015. Changes in fair value of contingent consideration liabilities are includedreflected in “Change in fair value of contingent consideration liabilities” on Quanta’sin the accompanying consolidated statements of operations.
Goodwill and Other Intangible Assets. In connection with Quanta’s acquisitions,As discussed in the Goodwill and Other Intangible Assets sections within this Note 2 above, Quanta has recorded goodwill and identifiable intangible assets acquired typically include goodwill, backlog, customer relationships, trade names, covenants not-to-compete, patented rights and developed technology.in connection with certain of its historical business acquisitions. Quanta utilizes the fair value premise as the primary basis for its impairment valuation procedures, which is a market-based approach to determine the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. Quanta periodically engages the services of an independent valuation firm when a new business is acquired to assist management with this valuation process, including assistance with the selection of appropriate valuation methodologiesprocedures. The Goodwill and the development of market-based valuation assumptions. Based on these considerations, management utilizes variousOther Intangible Assets sections provide information regarding valuation methods, including anthe income approach, a market approach and a cost approach, and assumptions used to determine the fair value of intangiblethese assets acquired based on the appropriateness of each method in relation to the type of asset being valued. The assumptions used in these valuation methods are analyzed and compared, where possible, to available market data, such as industry-based weighted average costs of capital and discount rates, trade name royalty rates, public company valuation multiples and recent market acquisition multiples. In accordance with its annual impairment test during the quarter ended December 31, 2017, the carrying amounts of such assets, including goodwill, were compared to their fair values. The level of inputs used for these fair value measurements is the lowest level (Level 3). Quanta uses the assistance of third party specialists to develop valuation assumptions. Quanta believes that these valuation methods appropriately represent the methods that would be used by other market participants in determining fair value.value, and periodically engages the services of an independent valuation firm when a new business is acquired to assist management with the valuation process, including assistance with the selection of appropriate valuation methodologies and the development of market-based valuation assumptions. The level of inputs used for these fair value measurements is the lowest level (Level 3).
Investments and Financial Instruments. Quanta also uses fair value measurements in connection with the valuation of its investments in private company equity interests and financial instruments. These valuations require significant management judgment due to the absence of quoted market prices, the inherent lack of liquidity and thetheir long-term nature of such assets.nature. Typically, the initial costs of these investments are considered to represent fair market value, as such amounts are negotiated between willing market participants. On a quarterly basis, Quanta performs an evaluation of its investments to determine if an other-than-temporary decline in the value of each investment has occurred and whether the recorded amount of each investment will be realizable.recoverable. If an other-than-temporary decline in the value of an investment occurs, a fair value analysis would beis performed to determine the degree to which the investment wasis impaired and a corresponding charge to earnings would beis recorded during the period. These types of fair market value assessments are similar to other nonrecurring fair value measures used by Quanta, which include the use of significant judgmentjudgments and available relevant market data. Such market data may include observations of the valuation of comparable companies, risk adjustedrisk-adjusted discount rates and an evaluation of the expected performance of the underlying portfolio asset, including historical and projected levels of profitability or cash flows. In addition, a variety of additional factors may be reviewed by management, including, but not limited to, contemporaneous financing and sales transactions with third parties, changes in market outlook and the third-party financing environment. The level of inputs used for these fair value measurements is the lowest level (Level 3).
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Other. The carrying amounts of cash equivalents, accounts receivable and accounts payable and accrued expenses approximate fair value due to the short-term nature of these instruments. The carrying amount of variable rate debt also approximates fair value. All of Quanta’s cash equivalents were categorized as Level 1 assets at December 31, 20172019 and 2016,2018, as all values were based on unadjusted quoted prices for identical assets in an active market that Quanta has the ability to access.
The carrying amount of variable rate debt also approximates fair value.
| |
| 3. | NEW ACCOUNTING PRONOUNCEMENTS: |
Adoption of New Accounting Pronouncements
In July 2015,February 2016, the FASBFinancial Accounting Standards Board (FASB) issued an update that requires inventorythe recognition of operating lease right-of-use assets and corresponding lease liabilities on an entity’s balance sheet. Effective January 1, 2019, Quanta adopted the new lease accounting standard utilizing the transition method that allowed the recognition of a cumulative-effect adjustment to be measured at the loweropening balance of either cost or net realizable value. When evidence exists that the net realizable value of inventory is lower than its cost, the difference will be recognized as a loss inretained earnings in the period in which it occurs. Quanta adopted this guidance effective January 1, 2017, and theof adoption, of the update did not have a significant impact on its consolidated financial statements or related disclosures.
In March 2016, the FASB issued an update that amends the accounting for share-based payments in several key areas, including the treatment and cash flow presentation of tax effects related to the settlement of share-based payments and the accounting for forfeitures of share-based awards. The new guidance requires companies with share-based payments to record all related tax effects at settlement (or expiration) through income tax expense on the statement of operations rather than through additional paid-in capital (APIC) within equity. This update also requires excess tax benefits to be classified as an operating activity on the statement of cash flows rather than classified as a financing activity and requires cash paid by an employer when withholding shares for the employee portion of taxes to be presented as a financing activity. The update also allows companies to either account for forfeitures of share-based payments as they occur or to estimate forfeitures. This guidance is required to be applied prospectively except for the classification of cash related to tax withholding, which requires retrospective application. Quanta adopted this guidance effective January 1, 2017 and will continue to estimate forfeitures of share-based payments. Quanta experienced increased volatility of income tax expense after adoption of this guidance and anticipates that trend to continue. During the year ended December 31, 2017, Quanta recorded income tax benefits of $5.1 million related to the settlement of share-based awards. APIC was not adjusted for amounts recorded prior to 2017, and therefore Quanta’s retained earnings were not affected by the adoption of this guidance. Additionally, $8.3 million and $9.8 million were reclassified from operating activities to financing activities on the statements of cash flows for the years ended December 31, 2016 and 2015 associated with cash paid by Quanta to satisfy tax withholding obligations for share-settled awards. Further, the presentation of excess tax benefits on the statements of cash flows is now shown as cash flows from operating activities rather than in financing activities. The excess tax benefits reclassified to operating activities for each of the years ended December 31, 2016 and 2015 was $0.7 million.
In October 2016, the FASB issued an update that amends the consolidation guidance related to how a reporting entity that is the single decision maker of a VIE should treat indirect interests in the VIE held through related parties that are under common control with the reporting entity when determining whether it is the primary beneficiary of a VIE. A reporting entity has an indirect interest in a VIE if it has a direct interest in a related party that, in turn, has a direct interest in the VIE. Quanta adopted this guidance effective January 1, 2017, and the adoption of the update did not have a significant impact on its consolidated financial statements or related disclosures.
In January 2017, the FASB issued an update intended to simplify the subsequent measurement of goodwill by eliminating the second step in the two-step goodwill impairment test. As permitted under this guidance, Quanta elected to adopt this guidance for its annual goodwill impairment test during the fourth quarter of 2017 (see Note 2 for further detail on this update and a description of the quantitative goodwill impairment test).
Accounting Standards Not Yet Adopted
To be adopted effective January 1, 2018:
In May 2014, the FASB issued an update that supersedes most current revenue recognition guidance, as well as certain cost recognition guidance. The update, together with other clarifying updates, requires that the recognition of revenue related to the transfer of goods or services to customers reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The update also requires new qualitative and quantitative disclosures about the nature, amount, timing and uncertainty of revenues and cash flows arising from customer contracts, including significant judgments and changes in judgments, information about contract balances and performance obligations, and assets recognized from costs incurred to obtain or fulfill a contract. The new guidance is effective for fiscal years beginning on or after December 15, 2017 and can be applied on a full retrospective or modified retrospective basis, whereby the entity records a cumulative effect of initially applying this update at the date of initial application.
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Quanta will adopt the new revenue recognition guidance using the modified retrospective transition method effective for the quarter ending March 31, 2018, applying the guidance to contracts that were not substantially complete as of January 1, 2018.applicable. Quanta’s financial results for reporting periods beginning on or after January 1, 2018 will be2019 are presented under the new guidance,standard, while financial results for prior periods will continue to be reported in accordance with the prior guidancestandard and Quanta’s historical accounting policy. Quanta has substantially completed its evaluation of the impactThe adoption of the new guidance on its contracts with customers, including identificationstandard resulted in the recording of differences that will result from the new requirements. Based on this evaluation, we estimate that the net cumulative adjustment to retained earnings from adoptionoperating lease right-of-use assets and operating lease liabilities of $301.1 million as of January 1, 2018, will be less than $10.0 million. With respect to ongoing revenues generated from master service agreements, repair and maintenance contracts and fixed price and non-fixed price installation contracts, Quanta does not anticipate any significant changes to2019. Although the patternadoption of revenue recognition and does not believe that the guidance surrounding identification of contracts and performance obligations or measurement of variable consideration will havenew standard had a material impact on Quanta’s consolidated balance sheet, there was not a material impact on its consolidated statements of operations, comprehensive income, cash flows or equity. Additionally, the revenue recognition for these arrangements. Quanta expects its disclosures related to revenue recognition will expand to address new quantitative and qualitative requirements regarding the nature, amount and timing of revenue from contracts and additional information related to contract assets and liabilities.
In January 2016, the FASB issued an update that addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments to provide users of financial statements with more decision-useful information. This update requires equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. However, an entity may choose to measure equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. The new standard is effective for interim and annual periods beginning after December 15, 2017, and Quanta will adopt the new standard effective January 1, 2018. Quanta’s equity investments that are within the scopeadoption of this update dostandard did not have readily determinable fair values. Accordingly, Quanta intends to continue to measure these investments at cost less any impairments and will also consider changes resulting from any observable price changes as described above. The new standard is not expected to have a material impact on Quanta’s consolidated financial statements in the near-term based on the equity investments it held as of December 31, 2017.debt covenant compliance under its senior secured credit facility.
In August 2016, the FASB issued an update intended to standardize the classification ofQuanta elected certain transactions on the statements of cash flows. These transactions include contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate-owned life insurance policies and distributions received from equity method investments. The new standard is effective for interim and annual reporting periods beginning after December 15, 2017 and requires application using a retrospective transition method. Quanta will adopt this guidance effective January 1, 2018 and does not expect it to have a material impact on its consolidated financial statements.
In October 2016, the FASB issued an updatepractical expedients that, will require a reporting entity to recognize the tax expense from the sale of an asset in the seller’s tax jurisdiction when the transfer occurs, even though the pre-tax effects of that transaction are eliminated in consolidation. Any deferred tax asset that arises in the buyer’s jurisdiction would also be recognized at the time of the transfer. The new guidance will not apply to intra-entity transfers of inventory. The income tax consequences from the sale of inventory from one member of a consolidated entity to another will continue to be deferred until the inventory is sold to a third party. The new standard is effective for interim and annual reporting periods beginning after December 15, 2017. The modified retrospective method will be required for transition to the new guidance, with a cumulative-effect adjustment recorded in retained earnings as of the beginning of the period of adoption, if applicable. Quanta will adopt this guidance effective January 1, 2018 and does not expect it to have a material impact on its consolidated financial statements.
In November 2016, the FASB issued an update intended to standardize the classification of restricted cash and cash equivalents transactions on the statement of cash flows. The new guidance requires net cash withdrawn from (deposited to) restricted cash to be removed from investing activities of continuing operations. Additionally, restricted cash balances for each period will be included with “Cash and cash equivalents” in order to obtain beginning and ending balances for consolidated statement of cash flow purposes, and any activity between “Cash and cash equivalents” and restricted cash will no longer be reported on Quanta’s consolidated statements of cash flows. The new standard is effective for interim and annual reporting periods beginning after December 15, 2017. The retrospective transition method will be required for this new guidance. Quanta will adopt this guidance effective January 1, 2018 and does not expect it to have a material impact on its consolidated financial statements.
In January 2017, the FASB issued an update intended to clarify whether transactions should be accounted for as acquisitions or disposals of assets or businesses. When substantially all of the fair value of the gross assets acquired or disposed of is concentrated in a single identifiable asset or group of similar identifiable assets, the asset or group is not a business. The update will require, among other things, permit the identification and classification of leases in accordance with the previous guidance. Additionally, certain of Quanta’s real estate and equipment arrangements contain both lease and non-lease components (e.g., maintenance services). Quanta elected the practical expedient that allows an entity to not separate lease components from their associated non-lease components for such arrangements and accounted for both lease and non-lease components under the new standard. Quanta also made an accounting policy election allowed under the new standard whereby leases with terms of twelve months or less are not recorded on the balance sheet unless they contain a purchase option that is reasonably certain to be considered a business, a setexercised. The new lease standard requires new disclosures that are designed to enable users of assetsfinancial statements to assess the amount, timing, and activities must include, at a minimum, an inputuncertainty of cash flows arising from leases, which are included in Notes 2, 9 and a substantive process that together significantly contribute16. Quanta implemented new internal controls related to the ability to create output. Additionally,preparation of financial information necessary for adoption of the update removes thenew standard.
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evaluation of whether a market participant could replace missing elements in order to consider the set of assets and activities a business, provides more stringent criteria for sets without outputs and narrows the definition of output. The update is effective for interim and annual reporting periods beginning after December 15, 2017, and the prospective transition method will be required for this new guidance. Accordingly, Quanta will adopt this guidance effective January 1, 2018 and does not expect it to impact its consolidated financial statements prior to such date.
In MayAugust 2017, the FASB issued an update providingthat amends and simplifies existing guidance about which changes tofor presenting the terms or conditionseconomic effects of a share-based payment award requirerisk management activities in an entity to apply modification accounting. A modification should be accounted for unless the following characteristics of the award are unchanged: the fair value, the vesting conditions and the classification as an equity instrument or a liability instrument.entity’s financial statements. The update is effective for interim and annual periods beginning after December 15, 20172018. The amended presentation and disclosure guidance is required to be applied prospectively. Accordingly,only prospectively, but certain amendments, if applicable, could require a cumulative-effect adjustment. Quanta will adopt this guidanceadopted the new standard effective January 1, 2018 and does not expect it to impact its consolidated financial statements prior to such date.2019; however, as of December 31, 2019, Quanta had no outstanding hedging relationships or other activities covered by the update.
To be adopted subsequent to January 1, 2018:
In February 2016, the FASB issued an update that requires companies to recognize on the balance sheet the contractual right to use assets and liabilities corresponding to the rights and obligations created by lease contracts. The new standard is effective for interim and annual periods beginning after December 15, 2018. While Quanta continues to evaluate the effect of the standard on its consolidated financial statements, it is anticipated that the adoption of the standard will materially impact its consolidated balance sheets. Quanta will adopt this guidance by January 1, 2019.Accounting Standards Not Yet Adopted
In June 2016, the FASB issued an update that will change the way companies measurefor measuring credit losses foron most financial assets and certain other instruments that are not measured at fair value through net income. The update will require companiesamends the impairment model to useutilize an “expected loss” modelexpected loss methodology in place of the incurred loss methodology for financial instruments, measured at amortized costincluding trade receivables, and off-balance sheet credit exposures. The amendment requires entities to record allowances for available-for-sale debt securities rather than reduce the carrying amounts.consider a broader range of information to estimate expected credit losses, which may result in earlier recognition of losses. The update will also require disclosure of information regarding how a company developed its allowance, including changes in the factors that influenced management’s estimate of expected credit losses and the reasons for those changes. Companies will apply this standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. The new standard is effective for interim and annual reporting periods beginning after December 15, 2019. Quanta is currently evaluating the potentialanticipates this guidance will not have a material impact of this authoritative guidance on its consolidated financial statements and will adopt thisthe guidance byeffective January 1, 2020.
In August 2017,2018, the FASB issued an update whichthat amends the disclosure requirements related to fair value measurements. Pursuant to this update, certain disclosure requirements will be removed, such as the valuation processes for Level 3 fair value measurements, and simplifies existing guidance for presentingother disclosure requirements will be modified or added, including a new requirement to disclose the economic effectsrange and weighted average (or a more reasonable and rational method to reflect the distribution) of risk management activities in the financial statements. Thesignificant unobservable inputs used to develop Level 3 fair value measurements. This update is effective for interim and annual periods beginning after December 15, 2018. The amended presentation2019, and disclosure guidance is required only prospectively, but certain amendments if applicable, could requireshould be applied prospectively, while other amendments should be applied retrospectively. Quanta anticipates this guidance will not have a cumulative-effect adjustment. Quanta is evaluating thematerial impact of this new standard on its consolidated financial statements and will adopt the new standard byguidance effective January 1, 2019; however,2020.
In December 2019, the FASB issued an update that, among other things, amends the guidance related to accounting for tax law changes when an entity has a year-to-date loss in an interim period and provides guidance on how to evaluate whether a step-up in tax basis of goodwill relates to a business combination or a separate transaction. This update is effective for interim and annual periods beginning after December 15, 2020, and certain amendments should be applied prospectively, while other amendments should be applied on a modified retrospective basis. Quanta is evaluating the potential impact of this guidance on its consolidated financial statements and will adopt the guidance effective January 1, 2021.
In January 2020, the FASB issued an update that clarified the interactions between accounting guidance to account for certain equity securities relating to increasing or decreasing ownership or degree of influence and forward contracts and purchased options. This update is effective for interim and annual periods beginning after December 15, 2020, and it will be applied prospectively. Quanta is evaluating the potential impact of this guidance on its consolidated financial statements and will adopt the guidance effective January 1, 2021.
On August 30, 2019, Quanta acquired Hallen, a pipeline and industrial services business located in the United States that specializes in gas distribution and transmission services, and to a lesser extent, underground electric distribution and transmission services. During the year ended December 31, 2019, Quanta also acquired two specialty utility foundation and pole-setting contractors serving the southeast United States; an electric power specialty contracting business located in the United States that provides aerial power line and construction support services; a business located in the United States that provides technical training materials to electric utility workers; an electric power company specializing in project management and, to a lesser extent, water and wastewater projects located in the United States; and an electrical infrastructure services business located in Canada. The aggregate consideration for these acquisitions was $399.3 million paid or payable in cash, subject to certain adjustments, and 60,860 shares of Quanta common stock, which had a fair value of $1.8 million as of December 31, 2017,the respective acquisition date. A portion of the cash consideration in connection with the Hallen acquisition was placed in an escrow account, which, subject to certain conditions, could be utilized to reimburse Quanta had no hedging relationships outstanding.
4. DISCONTINUED OPERATIONS:
On August 4, 2015,for obligations associated with certain contingent liabilities assumed by Quanta completedin the sale of its fiber optic licensing operationstransaction. See Legal Proceedings — Hallen Acquisition Assumed Liability in Note 14 for additional information related to Crown Castle for an aggregate purchase price of $1.00 billion in cash, resulting in estimated after-tax net proceeds of $848.2 million. In the third quarter of 2015, Quanta recognized a pre-tax gain of $271.8 million and a corresponding tax expense of $100.8 million, which resulted in a gainthese liabilities. Beginning on the sale, netrespective acquisition dates, the results of tax, of $171.0 million. Quanta remains liable for all taxes and insured claims associatedthe acquired businesses have been included in Quanta’s consolidated financial statements, with the fiber optic licensing operations arising on or before or outstanding asresults of August 4, 2015.
Hallen generally included in the Pipeline and Industrial Infrastructure Services segment and the other acquired businesses generally included in the Electric Power Infrastructure Services segment.
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Quanta has presented the results of operations, financial position, cash flows and disclosures related to its fiber optic licensing operations as discontinued operations in the accompanying consolidated financial statements. The results were included in Quanta’s Fiber Optic Licensing and Other segment prior to the second quarter of 2015. The following represents a reconciliation of the major classes of line items constituting income from discontinued operations primarily related to Quanta’s fiber optic licensing operations to the accompanying consolidated statements of operations (in thousands):
|
| | | | | | | | |
| | | Year Ended December 31, |
| | | 2016 | | 2015 |
| Major classes of line items constituting pretax income from discontinued operations: | | | | |
| Revenues | | $ | — |
| | $ | 59,998 |
|
| Expenses: | | | | |
| Cost of services (including depreciation) | | — |
| | 24,748 |
|
| Selling, general and administrative expenses | | (980 | ) | | 12,047 |
|
| Amortization of intangible assets | | — |
| | 963 |
|
| | | | | |
| Other income (expense) items that are not major | | — |
| | 10 |
|
| Net income before taxes of discontinued operations related to fiber optic licensing operations related to major classes of income before taxes | | 980 |
| | 22,250 |
|
| Pretax gain on the disposal of the fiber optic licensing operations | | — |
| | 271,833 |
|
| Total pretax gain on fiber optic licensing operations | | 980 |
| | 294,083 |
|
| Provision for income taxes related to fiber optic licensing operations | | 667 |
| | 103,462 |
|
| Net income from discontinued operations related to fiber optic licensing operations | | 313 |
| | 190,621 |
|
| Net loss from discontinued operations related to telecommunication operations | | (655 | ) | | — |
|
| Net income (loss) from discontinued operations as presented in the accompanying consolidated statements of operations | | $ | (342 | ) | | $ | 190,621 |
|
There were no assets or liabilities associated with fiber optic licensing operations at December 31, 2017 or 2016.
Additionally, on December 3, 2012, Quanta sold substantially all of its domestic telecommunications infrastructure services operations and related subsidiaries. During the year ended December 31, 2016, legal fees2018, Quanta acquired an electrical infrastructure services business specializing in substation construction and relay services, a postsecondary educational institution that provides training and programs for workers in the industries Quanta serves and two communications infrastructure services businesses, all of $1.0 million were recorded related to an ongoing legal matter associated with these discontinued operations. See Legal Proceedings — Lorenzo Benton v. Telecom Network Specialists, Inc., et al.which are located in Note 15 for additional information.the United States. The aggregate netconsideration for these acquisitions was $108.3 million paid or payable in cash, subject to certain adjustments, and 679,668 shares of tax impactQuanta common stock, which had a fair value of these legal fees was $0.7$22.9 million duringas of the year ended December 31, 2016.
2017 Acquisitionsrespective acquisition dates. Additionally, the acquisitions of the postsecondary educational institution and one of the communications infrastructure services businesses include the potential payment of up to $18.0 million of contingent consideration, payable if the acquired businesses achieve certain performance objectives over five- and three-year post-acquisition periods. Based on the estimated fair value of the contingent consideration, Quanta recorded $16.5 million of liabilities as of the respective acquisition dates. Beginning on the respective acquisition dates, the results of the acquired businesses have been included in Quanta’s consolidated financial statements, generally within the Electric Power Infrastructure Services segment.
On July 20, 2017, Quanta acquired Stronghold, a specialized services business located in the United States that provides high-pressure and critical-path solutions to the downstream and midstream energy markets. The aggregate consideration included $351.0 million in cash, subject to certain adjustments, and 2,693,680 shares of Quanta common stock, which had a fair value of $81.3 million atas of the acquisition date. Additionally, the acquisition includes the potential payment of up to $100.0 million of contingent consideration, payable if the acquired business achieves certain financial targetsperformance objectives over a three-year post-acquisition period. Based on the estimated fair value of thisthe contingent consideration, Quanta recorded a $51.1 million liability as of the acquisition date. The results of the acquired business have generally been included in Quanta’s Oil and Gas Infrastructure Services segment and consolidated financial statements since the acquisition date.
During the year ended December 31, 2017, Quanta also acquired a communications infrastructure services contractorbusiness and an electrical and communications contractor,business, both of which are located in the United States. The aggregate consideration for these acquisitions consisted of $11.9$12.0 million paid or payable in cash, subject to certain adjustments, and 288,666 shares of Quanta common stock, withwhich had a fair value of $8.3 million as of the respective acquisition dates. The results of the acquired businesses have generally been included in Quanta’s Electric Power Infrastructure Services segment and consolidated financial statements since the acquisition dates.
Quanta is in the process of finalizing its assessments of the fair values of the acquired assets and assumed liabilities related to businesses acquired during 2017, and further adjustments to the purchase price allocations may occur. As of December 31, 2017,
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
the estimated fair values of the net assets acquired were preliminary, with possible updates primarily related to certain tax estimates. The aggregate purchase consideration of the businesses acquired during 2017 was preliminarily allocated to acquired assets and assumed liabilities, which resulted in an allocation of $97.4 million to net tangible assets, $103.8 million to identifiable intangible assets and $302.4 million to goodwill.
2016 Acquisitions
During 2016, Quanta completed five acquisitions. The results of four of the acquired businesses are generally included in Quanta’s Electric Power Infrastructure Services segment. These businesses included an electrical infrastructure services business located in Australia, a utility contracting business located in Canada, a full service medium- and high-voltage powerline contracting business located in the United States and a communications services business located in Canada. Quanta also acquired a pipeline services contractor located in the United States, the results of which are generally included in Quanta’s Oil and Gas Infrastructure Services segment. The aggregate consideration for these acquisitions consisted of $75.9 million paid or payable in cash, subject to certain adjustments, 70,840 shares of Quanta common stock valued at $1.5 million as of the settlement date of the applicable acquisition, and contingent consideration payments of up to $39.5 million, payable if financial targets are achieved by certain of the acquired businesses. Basedbusiness. Beginning on the estimated fair value of this contingent consideration, Quanta recorded a total of $18.7 million in liabilities as ofrespective acquisition dates, the applicable acquisition dates. The results of the acquired businesses have been included in Quanta’s consolidated financial statements, sincewith the acquisition dates.
2015 Acquisitions
During 2015, Quanta acquired 11 businesses. The results of eightStronghold generally included in Quanta’s Pipeline and Industrial Infrastructure Services segment and the results of the other acquired businesses are generally included in Quanta’s Electric Power Infrastructure Services segment. These businesses included a foundation services business located in the United States, an electrical contracting business located in the United States, an electrical engineering business located in Australia, a powerline construction business located in the United States, an engineering business located in Canada, an engineering, procurement and construction services business based in the United States, an underground construction contracting business located in Canada, and a supplier and material procurement specialist for the power and utility industry in Canada. The results of the remaining three acquired businesses are generally included in Quanta’s Oil and Gas Infrastructure Services segment. These businesses include a business that services above-ground storage tanks in the United States, an underground utility distribution contractor that provides services to gas and electric utilities in Canada, and a business that specializes in the engineering, procurement, construction, and commissioning of compression and surface facilities for the high pressure gas industry in Australia. The aggregate consideration for these acquisitions consisted of $110.6 million paid or payable in cash, subject to certain adjustments, 461,037 shares of Quanta common stock valued at $10.1 million as of the settlement dates of the applicable acquisitions, and contingent consideration payments with an estimated fair value of $1.0 million as of the applicable acquisition date. The results of the acquired businesses have been included in Quanta’s consolidated financial statements since the acquisition dates.
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
2017, 2016 and 2015 Acquisitions
The following table summarizes the aggregate consideration paid or payable as of December 31, 20172019 for the 2017acquisitions completed in 2019 and 2016 acquisitions2018 and presents the allocation of these amounts to the net tangible and identifiable intangible assets based on their estimated fair values as of the respective acquisition dates, inclusive of any purchase price adjustments. This allocation requires aThese allocations require significant use of estimates and isare based on information that was available to management at the time these consolidated financial statements were prepared. Quanta uses a variety of information to estimate fair values, including quoted market prices, carrying valuesamounts and valuation techniques such as discounted cash flows. Third-partyWhen deemed appropriate, third-party appraisal firms are engaged to assist in fair value determination of fixed assets, intangible assets and certain other assets and liabilities.
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Quanta is finalizing its fair value assessments for the acquired assets and assumed liabilities when appropriaterelated to businesses acquired during 2019, and further adjustments to the purchase price allocations may occur. As of December 31, 2019, the estimated fair values of the net assets acquired were preliminary, with possible updates primarily related to pre-acquisition contingent liabilities, as further described in Legal Proceedings — Hallen Acquisition Assumed Liability in Note 14 and tax estimates. Consideration amounts are also subject to the finalization of closing working capital adjustments. The aggregate consideration paid or payable for businesses acquired during 2019 was allocated to acquired assets and assumed liabilities, which resulted in an allocation of $101.0 million to net tangible assets, $192.8 million to identifiable intangible assets, $110.4 million to goodwill and $3.1 million to bargain purchase gain (in thousands).
|
| | | | | | | | |
| | | 2019 | | 2018 |
| Consideration: | | | | |
| Cash paid or payable | | $ | 399,275 |
| | $ | 108,307 |
|
| Value of Quanta common stock issued | | 1,791 |
| | 22,882 |
|
| Contingent consideration | | — |
| | 16,471 |
|
| Fair value of total consideration transferred or estimated to be transferred | | $ | 401,066 |
| | $ | 147,660 |
|
| | | | | |
| Accounts receivable | | $ | 112,142 |
| | $ | 18,405 |
|
| Contract assets | | 11,869 |
| | 1,905 |
|
| Other current assets | | 14,290 |
| | 8,484 |
|
| Property and equipment | | 60,133 |
| | 23,674 |
|
| Other assets | | 149 |
| | 576 |
|
| Identifiable intangible assets | | 192,786 |
| | 52,364 |
|
| Contract liabilities | | (11,856 | ) | | (175 | ) |
| Other current liabilities | | (73,948 | ) | | (11,205 | ) |
| Deferred tax liabilities, net | | (6,398 | ) | | (4,208 | ) |
| Other long-term liabilities | | (5,345 | ) | | — |
|
| Total identifiable net assets | | 293,822 |
| | 89,820 |
|
| Goodwill | | 110,383 |
| | 57,840 |
|
| Fair value of net assets acquired | | 404,205 |
| | 147,660 |
|
| Bargain purchase gain | | (3,139 | ) | | — |
|
| Fair value of total consideration transferred or estimated to be transferred | | $ | 401,066 |
| | $ | 147,660 |
|
|
| | | | | | | | | | | | |
| | | 2017 | | 2016 |
| | | Stronghold | | Other Acquisitions | | All Acquisitions |
| Consideration: | | | | | | |
| Cash paid or payable | | $ | 351,014 |
| | $ | 11,904 |
| | $ | 75,941 |
|
| Value of Quanta common stock issued | | 81,337 |
| | 8,267 |
| | 1,508 |
|
| Contingent consideration | | 51,084 |
| | — |
| | 18,683 |
|
| Fair value of total consideration transferred or estimated to be transferred | | $ | 483,435 |
| | $ | 20,171 |
| | $ | 96,132 |
|
| | | | | | | |
| Accounts receivable | | $ | 77,478 |
| | $ | 7,157 |
| | $ | 14,414 |
|
| Costs and estimated earnings in excess of billings on uncompleted contracts | | 11,913 |
| | 193 |
| | 1,237 |
|
| Other current assets | | 20,914 |
| | 170 |
| | 8,582 |
|
| Property and equipment | | 51,258 |
| | 1,480 |
| | 44,863 |
|
| Other assets | | 1,513 |
| | 12 |
| | 2,553 |
|
| Identifiable intangible assets | | 95,700 |
| | 8,091 |
| | 11,467 |
|
| Current liabilities | | (71,835 | ) | | (2,798 | ) | | (12,097 | ) |
| Deferred tax liabilities, net | | — |
| | — |
| | (13,484 | ) |
| Other long-term liabilities | | (48 | ) | | — |
| | (5,326 | ) |
| Total identifiable net assets | | 186,893 |
| | 14,305 |
| | 52,209 |
|
| Goodwill | | 296,542 |
| | 5,866 |
| | 43,923 |
|
| | | $ | 483,435 |
| | $ | 20,171 |
| | $ | 96,132 |
|
Goodwill represents the excess ofamount by which the purchase price overfor an acquired business exceeds the net amountfair value of the fair values assigned to assets acquired and liabilities assumed.assumed, and a bargain purchase gain results when the amount of the net fair value of the assets acquired and liabilities assumed exceeds the purchase price for an acquired business. The 2017, 2016acquisition of the electrical infrastructure services business in Canada that occurred during the three months ended June 30, 2019 included the recognition of a bargain purchase gain of $3.1 million, which was recorded in “Other income (expense), net” in the accompanying consolidated statements of operations.
The acquisitions completed in 2019, 2018 and 2015 acquisitions2017 strategically expanded Quanta’s Canadian, Australiandomestic pipeline and industrial and domestic and international electric power oil and gas and communications service offerings, which Quanta believes contributes to the recognition of the goodwill. In connection with the 2017 acquisitions, asApproximately $90.6 million, $21.6 million and $251.4 million of the acquisition dates and inclusive of purchase price adjustments, goodwill of $5.9 million was recorded for the acquired businesses that were included within Quanta’s Electric Power Infrastructure Services Division, and goodwill of $296.5 million was recorded for Stronghold, which was included within Quanta’s Oil and Gas Infrastructure Services Division. In connection with the 2016 acquisitions, as of the acquisition dates and inclusive of purchase price adjustments, goodwill of $23.6 million was recorded for the acquired businesses included within Quanta’s Electric Power Infrastructure Services Division and goodwill of $20.3 million was recorded for the acquired business included within Quanta’s Oil and Gas Infrastructure Services Division. In connection with the 2015 acquisitions, as of the acquisition dates and inclusive of purchase price adjustments, goodwill of $31.5 million was recorded for acquired businesses that were included within Quanta’s Electric Power Infrastructure Services Division, and goodwill of $20.4 million was recorded for the acquired businesses that were included within Quanta’s Oil and Gas Infrastructure Services Division. Goodwill of $302.4 million related to the 2017 acquisitions is expected to be deductible for income tax purposes and goodwill of $2.0 million related to the 2016 acquisitions is expected to be deductible for income tax purposes.completed in 2019, 2018 and 2017.
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following table summarizes the estimated fair values of identifiable intangible assets for the 2017 acquisitions completed in 2019 as of the acquisition dates and the related weighted average amortization periods by type (in thousands, except for weighted average amortization periods, which are in years).
|
| | | | | | |
| | | Estimated | | Weighted Average |
| | | Fair Value | | Amortization Period in Years |
| Customer relationships | | $ | 167,262 |
| | 7.9 |
| Backlog | | 8,278 |
| | 1.0 |
| Trade names | | 11,752 |
| | 15.0 |
| Non-compete agreements | | 3,712 |
| | 4.3 |
| Curriculum | | 1,782 |
| | 10.0 |
| Total intangible assets subject to amortization related to acquisitions completed in 2019 | | $ | 192,786 |
| | 8.0 |
|
| | | | | | |
| | | Estimated | | Weighted Average |
| | | Fair Value | | Amortization Period in Years |
| Customer relationships | | $ | 76,213 |
| | 6.8 |
| Backlog | | 333 |
| | 2.0 |
| Trade names | | 18,815 |
| | 15.0 |
| Non-compete agreements | | 8,430 |
| | 5.0 |
| Total intangible assets subject to amortization acquired in 2017 acquisitions | | $ | 103,791 |
| | 8.1 |
The following unaudited supplemental pro forma results of operations for Quanta, which incorporates the acquisitions completed in 2019 and 2018, have been provided for illustrative purposes only and do not purport to be indicative of the actual results that would have been achieved by the combined companies for the periods presented or that may be achieved by the combined companies in the future. Future results may vary significantly from the results reflected in the following pro forma financial information because of future events and transactions, as well as other factors (in thousands, except per share amounts):
|
| | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2019 | | 2018 | | 2017 |
| Revenues | | $ | 12,574,771 |
| | $ | 11,894,866 |
| | $ | 9,848,386 |
|
| Gross profit | | $ | 1,699,924 |
| | $ | 1,635,777 |
| | $ | 1,356,515 |
|
| Selling, general and administrative expenses | | $ | 989,555 |
| | $ | 913,392 |
| | $ | 842,996 |
|
| Amortization of intangible assets | | $ | 78,320 |
| | $ | 79,454 |
| | $ | 49,918 |
|
| Net income | | $ | 437,399 |
| | $ | 332,973 |
| | $ | 333,386 |
|
| Net income attributable to common stock | | $ | 432,628 |
| | $ | 330,312 |
| | $ | 330,139 |
|
| | | | | | | |
| Earnings per share: | | | | | | |
| Basic | | $ | 2.97 |
| | $ | 2.16 |
| | $ | 2.08 |
|
| Diluted | | $ | 2.93 |
| | $ | 2.14 |
| | $ | 2.07 |
|
|
| | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2017 | | 2016 | | 2015 |
| Revenues | | $ | 9,712,820 |
| | $ | 8,183,104 |
| | $ | 7,770,744 |
|
| Gross profit | | $ | 1,301,322 |
| | $ | 1,129,661 |
| | $ | 956,925 |
|
| Selling, general and administrative expenses | | $ | 821,084 |
| | $ | 734,900 |
| | $ | 612,979 |
|
| Amortization of intangible assets | | $ | 40,356 |
| | $ | 46,579 |
| | $ | 39,947 |
|
| Net income from continuing operations | | $ | 320,768 |
| | $ | 207,956 |
| | $ | 136,608 |
|
| Net income from continuing operations attributable to common stock | | $ | 317,521 |
| | $ | 206,241 |
| | $ | 125,691 |
|
| | | | | | | |
| Earnings per share from continuing operations: | | | | | | |
| Basic | | $ | 2.01 |
| | $ | 1.29 |
| | $ | 0.64 |
|
| Diluted | | $ | 2.00 |
| | $ | 1.29 |
| | $ | 0.64 |
|
The pro forma combined results of operations for the years ended December 31, 2017 and 2016 were prepared by adjusting the historical results of Quanta to include the historical results of the 2017acquisitions completed in 2019 as if they occurred January 1, 2016. The pro forma combined results of operations for the year ended December 31, 2016 have also been prepared by adjusting the historical results of Quanta to include2018, the historical results of the 2016acquisitions completed in 2018 as if they occurred January 1, 2015. The pro forma combined results of operations for the year ended December 31, 2015 have been prepared by adjusting the historical results of Quanta to include2017 and the historical results of the 2016acquisitions completed in 2017 as if they occurred January 1, 2015 and the historical results of the 2015 acquisitions as if it occurred January 1, 2014.2016. These pro forma combined historical results were adjusted for the following: a reduction of interest expense as a result of the repayment of outstanding indebtedness of the acquired businesses; a reduction of interest income or an increase in interest expense as a result of the cash consideration paid net of cash received;paid; an increase in amortization expense due to the incremental intangible assets recorded; changes in depreciation expense within cost of services to adjust acquired property and equipment to the acquisition date fair value and to conform with Quanta’s accounting policies; an increase in the number of outstanding shares of Quanta common stock; and reclassifications to conform the acquired companies’businesses’ presentation to Quanta’s accounting policies. The pro forma combined results of operations do not include any adjustments to eliminate the impact of acquisition relatedacquisition-related costs or any cost savings or other synergies that resulted or may result from the acquisitions. As noted above, the pro forma results of operations do not purport to be indicative of the actual results that would have been achieved by the combined company for the periods presented or that may be achieved by the combined company in the future.
Revenues of approximately $223.3 million and income before income taxes of approximately $7.5 million, which included $22.1 million of acquisition-related costs, are included in Quanta’s consolidated results of operations for the year ended December 31, 2019 related to the acquisitions completed in 2019. Revenues of approximately $71.1 million and a loss before income taxes of approximately $8.9 million, which included $11.0 million of acquisition-related costs, are included in Quanta’s consolidated results of operations for the year ended December 31, 2018 related to the acquisitions completed in 2018. Revenues of approximately $207.4 million and a loss from continuing operations before income taxes of approximately $8.1 million, which included $5.4 million of acquisition-related costs, wereare included in Quanta’s consolidated results of operations for the year ended December 31, 2017 related to the 2017 acquisitions. Revenues of approximately $68.5 million and a loss from continuing operations before income taxes of approximately $5.6 million, which included $0.3 million of acquisition-related costs, were includedacquisitions completed in Quanta’s consolidated results of operations for the year ended December 31, 2016 related to the 2016 acquisitions. Additionally, revenues of approximately $104.6 million and income from continuing operations before income taxes of2017.
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
approximately $0.3 million, which included $3.6 million of acquisition-related costs, were included in Quanta’s consolidated results of operations for the year ended December 31, 2015 related to the 2015 acquisitions.
| |
6. | 5. GOODWILL AND OTHER INTANGIBLE ASSETS: |
A summary of changes in Quanta’s goodwill is as follows (in thousands):
|
| | | | | | | | | | | | |
| | | Electric Power Infrastructure Services Division | | Oil and Gas Infrastructure Services Division | | Total |
| Balance at December 31, 2015: | | | | | | |
| Goodwill | | $ | 1,226,245 |
| | $ | 366,306 |
| | 1,592,551 |
|
| Accumulated impairment | | — |
| | (39,893 | ) | | (39,893 | ) |
| | | 1,226,245 |
| | 326,413 |
| | 1,552,658 |
|
| | | | | | | |
| Goodwill recorded related to 2016 acquisitions | | 24,168 |
| | 21,018 |
| | 45,186 |
|
| Purchase price allocation adjustments | | 229 |
| | (214 | ) | | 15 |
|
| Foreign currency translation adjustments | | 3,337 |
| | 1,973 |
| | 5,310 |
|
| | | | | | | |
| Balance at December 31, 2016: | | | | | | |
| Goodwill | | 1,253,979 | | 388,923 | | 1,642,902 |
| Accumulated impairment | | — |
| | (39,733 | ) | | (39,733 | ) |
| | | 1,253,979 | | 349,190 | | 1,603,169 |
| | | | | | | |
| Goodwill recorded related to 2017 acquisitions | | 5,866 |
| | 296,542 |
| | 302,408 |
|
| Purchase price allocation adjustments | | (619 | ) | | (659 | ) | | (1,278 | ) |
| Goodwill impairment during 2017 | | — |
| | (57,011 | ) | | (57,011 | ) |
| Foreign currency translation adjustments | | 13,301 |
| | 8,011 |
| | 21,312 |
|
| | | | | | | |
| Balance at December 31, 2017: | | | | | | |
| Goodwill | | 1,272,527 |
| | 693,905 |
| | 1,966,432 |
|
| Accumulated impairment | | — |
| | (97,832 | ) | | (97,832 | ) |
| | | $ | 1,272,527 |
| | $ | 596,073 |
| | $ | 1,868,600 |
|
Adjustments primarily represent changes in deferred tax liability estimates and would not have had a material impact on Quanta’s consolidated financial statements in prior periods had these adjustments been booked at the respective acquisition dates. The goodwill impairment in the year ended December 31, 2017 was associated with two reporting units within the Oil and Gas Infrastructure Services Division. Specifically, a reporting unit that provides material handling services experienced lower operating margins and is expected to continue to face a highly competitive environment in its select markets, and a reporting unit that provides marine and offshore services experienced prolonged periods of reduced revenues and operating margins and is expected to continue to experience lower levels of activity in the U.S. Gulf of Mexico and other offshore markets.
Also, asAs described in Note 2, Quanta’s operating units are organized into one of Quanta’s two internal divisions, and accordingly, the goodwill associated with the operating units has been aggregated on a divisional basis in the table above.below. These divisions are closely aligned with Quanta’s reportable segments, and operating units are assigned to a division based on the predominant type of work performed. From time to time, an operating unit may be reorganized between divisions if warranted due to changes in its predominant business evolves.business.
A summary of changes in Quanta’s goodwill is as follows (in thousands):
|
| | | | | | | | | | | | |
| | | Electric Power Infrastructure Services Division | | Pipeline and Industrial Infrastructure Services Division | | Total |
| Balance at December 31, 2016: | | | | | | |
| Goodwill | | $ | 1,253,979 |
| | $ | 388,923 |
| | $ | 1,642,902 |
|
| Accumulated impairment | | — |
| | (39,733 | ) | | (39,733 | ) |
| | | 1,253,979 |
| | 349,190 |
| | 1,603,169 |
|
| | | | | | | |
| Goodwill related to acquisitions completed in 2017 | | 5,866 |
| | 296,542 |
| | 302,408 |
|
| Purchase price allocation adjustments | | (619 | ) | | (659 | ) | | (1,278 | ) |
| Goodwill impaired during 2017 | | — |
| | (57,011 | ) | | (57,011 | ) |
| Foreign currency translation adjustments | | 13,301 |
| | 8,011 |
| | 21,312 |
|
| | | | | | | |
| Balance at December 31, 2017: | | | | | | |
| Goodwill | | 1,272,527 |
| | 693,905 |
| | 1,966,432 |
|
| Accumulated impairment | | — |
| | (97,832 | ) | | (97,832 | ) |
| | | 1,272,527 |
| | 596,073 |
| | 1,868,600 |
|
| | | | | | | |
| Goodwill related to acquisitions completed in 2018 | | 56,337 |
| | — |
| | 56,337 |
|
| Purchase price allocation adjustments | | 51 |
| | — |
| | 51 |
|
| Foreign currency translation adjustments | | (15,837 | ) | | (9,272 | ) | | (25,109 | ) |
| | | | | | | |
| Balance at December 31, 2018: | | | | | | |
| Goodwill | | 1,313,078 | | 683,284 | | 1,996,362 |
| Accumulated impairment | | — |
| | (96,483 | ) | | (96,483 | ) |
| | | 1,313,078 | | 586,801 | | 1,899,879 |
| | | | | | | |
| Goodwill related to acquisitions completed in 2019 | | 43,183 |
| | 67,200 |
| | 110,383 |
|
| Purchase price allocation adjustments | | 1,503 |
| | — |
| | 1,503 |
|
| Foreign currency translation adjustments | | 7,399 |
| | 3,511 |
| | 10,910 |
|
| | | | | | | |
| Balance at December 31, 2019: | | | | | | |
| Goodwill | | 1,365,163 |
| | 753,938 |
| | 2,119,101 |
|
| Accumulated impairment | | — |
| | (96,426 | ) | | (96,426 | ) |
| | | $ | 1,365,163 |
| | $ | 657,512 |
| | $ | 2,022,675 |
|
Adjustments primarily represent changes in deferred tax liability estimates and would not have had a material impact on Quanta’s consolidated financial statements in prior periods had these adjustments been booked at the respective acquisition dates.
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The goodwill impairment in the year ended December 31, 2017 was associated with 2 reporting units within the Pipeline and Industrial Infrastructure Services Division. Specifically, a reporting unit that provides material handling services had experienced lower operating margins and was expected to continue to face a highly competitive environment in its select markets, and a reporting unit that provides marine and offshore services had experienced prolonged periods of reduced revenues and operating margins and was expected to continue to experience lower levels of activity in the U.S. Gulf of Mexico and other offshore markets.
Quanta’s intangible assets subject to amortization and the remaining weighted average amortization periods related to suchits intangible assets subject to amortization were as follows (in thousands except for weighted average amortization periods, which are in years):
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | As of |
| | | As of | | As of | | December 31, |
| | | December 31, 2019 | | December 31, 2018 | | 2019 |
| | | Intangible Assets | | Accumulated Amortization | | Intangible Assets, Net | | Intangible Assets | | Accumulated Amortization | | Intangible Assets, Net | | Remaining Weighted Average Amortization Period in Years |
| Customer relationships | | $ | 532,808 |
| | $ | (213,915 | ) | | $ | 318,893 |
| | $ | 359,967 |
| | $ | (165,715 | ) | | $ | 194,252 |
| | 6.5 |
| Backlog | | 144,704 |
| | (141,580 | ) | | 3,124 |
| | 135,578 |
| | (134,592 | ) | | 986 |
| | 2.8 |
| Trade names | | 93,396 |
| | (26,145 | ) | | 67,251 |
| | 81,058 |
| | (21,559 | ) | | 59,499 |
| | 14.6 |
| Non-compete agreements | | 43,281 |
| | (32,868 | ) | | 10,413 |
| | 40,728 |
| | (30,168 | ) | | 10,560 |
| | 3.1 |
| Patented rights and developed technology | | 22,719 |
| | (20,682 | ) | | 2,037 |
| | 22,482 |
| | (19,175 | ) | | 3,307 |
| | 2.2 |
| Curriculum | | 11,712 |
| | (2,696 | ) | | 9,016 |
| | 9,448 |
| | (872 | ) | | 8,576 |
| | 8.3 |
| Total intangible assets subject to amortization | | 848,620 |
| | (437,886 | ) | | 410,734 |
| | 649,261 |
| | (372,081 | ) | | 277,180 |
| | 7.7 |
| Engineering license | | 3,000 |
| | — |
| | 3,000 |
| | 3,000 |
| | — |
| | 3,000 |
| | |
| Total intangible assets | | $ | 851,620 |
| | $ | (437,886 | ) | | $ | 413,734 |
| | $ | 652,261 |
| | $ | (372,081 | ) | | $ | 280,180 |
| | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | As of | | As of | | As of |
| | | December 31, 2017 | | December 31, 2016 | | December 31, 2017 |
| | | Intangible Assets | | Accumulated Amortization | | Intangible Assets, Net | | Intangible Assets | | Accumulated Amortization | | Intangible Assets, Net | | Remaining Weighted Average Amortization Period in Years |
| Customer relationships | | $ | 327,334 |
| | $ | (137,333 | ) | | $ | 190,001 |
| | $ | 244,329 |
| | $ | (110,640 | ) | | $ | 133,689 |
| | 7.3 |
| Backlog | | 136,266 |
| | (135,847 | ) | | 419 |
| | 133,592 |
| | (132,441 | ) | | 1,151 |
| | 1.1 |
| Trade names | | 74,797 |
| | (17,057 | ) | | 57,740 |
| | 54,723 |
| | (12,855 | ) | | 41,868 |
| | 16.2 |
| Non-compete agreements | | 37,760 |
| | (27,659 | ) | | 10,101 |
| | 29,212 |
| | (25,546 | ) | | 3,666 |
| | 3.9 |
| Patented rights and developed technology | | 22,529 |
| | (17,611 | ) | | 4,918 |
| | 22,480 |
| | (15,831 | ) | | 6,649 |
| | 3.4 |
| Total intangible assets subject to amortization | | $ | 598,686 |
| | $ | (335,507 | ) | | $ | 263,179 |
| | $ | 484,336 |
| | $ | (297,313 | ) | | $ | 187,023 |
| | 9.1 |
Amortization expense for intangible assets was $32.2$62.1 million, $31.7$44.0 million and $34.8$32.2 million for the years ended December 31, 20172019, 20162018 and 2015, respectively. During the year ended December 31, 2017 Quanta recorded an impairment charge of $1.1 million related to a customer relationships intangible asset, which primarily resulted from a strategic decision to restructure a business within a reporting unit in Quanta’s Oil and Gas Infrastructure Services Division. The impairment charge recognized in 2017 is reflected in the December 31, 2017 accumulated amortization balances above. Additionally, during the year ended December 31, 2015, Quanta recorded an impairment charge of $12.1 million related to customer relationship, trade name and non-compete agreement intangible assets. These intangible asset impairments primarily resulted from lower levels of expected activity in the U.S. Gulf of Mexico and, to a lesser extent, due to the extended low commodity price environment with respect to certain directional drilling operations in Australia. The two reporting units impacted are in Quanta’s Oil and Gas Infrastructure Services Division. The impairment charges recognized in 2015 are reflected in the December 31, 2017 and 2016 accumulated amortization balances above..
The estimated future aggregate amortization expense of intangible assets subject to amortization as of December 31, 20172019 is set forth below (in thousands):
|
| | | | |
| Year Ending December 31: | | |
| 2020 | | $ | 70,455 |
|
| 2021 | | 67,804 |
|
| 2022 | | 62,848 |
|
| 2023 | | 54,421 |
|
| 2024 | | 41,437 |
|
| Thereafter | | 113,769 |
|
| Total | | $ | 410,734 |
|
|
| | | | |
| For the Fiscal Year Ending December 31, | | |
| 2018 | | $ | 39,188 |
|
| 2019 | | 37,038 |
|
| 2020 | | 35,639 |
|
| 2021 | | 33,295 |
|
| 2022 | | 29,764 |
|
| Thereafter | | 88,255 |
|
| Total | | $ | 263,179 |
|
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
| |
7.6. | PER SHARE INFORMATION: |
The amounts used to compute the basic and diluted earnings per share attributable to common stock for the years ended December 31, 2019, 2018 and 2017 2016 and 2015 are illustrated belowconsisted of the following (in thousands):
|
| | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2019 | | 2018 | | 2017 |
| Amounts attributable to common stock: | | |
| | |
| | |
|
| Net income attributable to common stock | | $ | 402,044 |
| | $ | 293,346 |
| | $ | 314,978 |
|
| Weighted average shares: | | |
| | |
| | |
|
| Weighted average shares outstanding for basic earnings per share attributable to common stock | | 145,710 |
| | 152,963 |
| | 156,124 |
|
| Effect of dilutive unvested non-participating stock-based awards | | 1,824 |
| | 1,263 |
| | 1,031 |
|
| Weighted average shares outstanding for diluted earnings per share attributable to common stock | | 147,534 |
| | 154,226 |
| | 157,155 |
|
|
| | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2017 | | 2016 | | 2015 |
| Amounts attributable to common stock: | | |
| | |
| | |
|
| Net income from continuing operations | | $ | 314,978 |
| | $ | 198,725 |
| | $ | 120,286 |
|
| Net income (loss) from discontinued operations | | — |
| | (342 | ) | | 190,621 |
|
| Net income attributable to common stock | | $ | 314,978 |
| | $ | 198,383 |
| | $ | 310,907 |
|
| Weighted average shares: | | |
| | |
| | |
|
| Weighted average shares outstanding for basic earnings per share attributable to common stock | | 156,124 |
| | 157,287 |
| | 195,113 |
|
| Effect of dilutive unvested non-participating stock-based awards | | 1,031 |
| | 1 |
| | 7 |
|
| Weighted average shares outstanding for diluted earnings per share attributable to common stock | | 157,155 |
| | 157,288 |
| | 195,120 |
|
For purposes of calculatingBasic and diluted earnings per share attributable to common stock there were no adjustments required to derive Quanta’s net income attributable toare computed using the weighted average number of shares of common stock.stock outstanding during the applicable period. Exchangeable shares that were issued pursuant to certain of Quanta’s historical acquisitions (as further discussed in Note 11), which are exchangeable on a one-for-one1-for-one basis with shares of Quanta common stock, have been included in the calculation of weighted average shares outstanding for basic and diluted earnings per share attributable to common stock for the portion of the periods that they were outstanding. Additionally, unvested stock-based awards that contain non-forfeitable rights to dividends or dividend equivalents (participating)(participating securities) have been included in the calculation of basic and diluted earnings per share attributable to common stock for the portion of the periods that theythe awards were outstanding. Weighted average shares outstanding for basic and diluted earnings per share attributable to common stock for the years ended December 31, 2019, 2018 and 2017 included 2.8 million, 2.6 million and 2.3 million weighted average participating securities.
For purposes of calculating diluted earnings per share attributable to common stock, there were no adjustments required to derive Quanta’s net income attributable to common stock. Diluted earnings per share attributable to common stock is computed using the weighted average number of shares of common sharesstock outstanding during the period adjusted for all potentially dilutive common stock equivalents, except in cases where the effect of the common stock equivalents would be antidilutive.
| |
8.7. | DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS: |
Activity in Quanta’s current and long-term allowance for doubtful accounts consisted of the following (in thousands):
|
| | | | | | | | |
| | | December 31, |
| | | 2019 | | 2018 |
| Balance at beginning of year | | $ | 5,839 |
| | $ | 4,465 |
|
| Charges to bad debt expense | | 11,249 |
| | 7,169 |
|
| Direct write-offs charged against the allowance | | (7,690 | ) | | (5,795 | ) |
| Balance at end of year | | $ | 9,398 |
| | $ | 5,839 |
|
|
| | | | | | | | |
| | | December 31, |
| | | 2017 | | 2016 |
| Balance at beginning of year | | $ | 2,752 |
| | $ | 5,226 |
|
| Charged to bad debt expense (recoveries of bad debt expense) | | 87 |
| | (543 | ) |
| Deductions for uncollectible receivables written off (recoveries of uncollectible receivables) | | 1,626 |
| | (1,931 | ) |
| Balance at end of year | | $ | 4,465 |
| | $ | 2,752 |
|
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Contracts in progress were as follows (in thousands):
|
| | | | | | | | |
| | | December 31, |
| | | 2017 | | 2016 |
| Costs incurred on contracts in progress | | $ | 7,912,999 |
| | $ | 6,687,484 |
|
| Estimated earnings, net of estimated losses | | 1,092,303 |
| | 766,560 |
|
| | | 9,005,302 |
| | 7,454,044 |
|
| Less — Billings to date | | (8,941,397 | ) | | (7,255,582 | ) |
| | | $ | 63,905 |
| | $ | 198,462 |
|
| | | | | |
| Costs and estimated earnings in excess of billings on uncompleted contracts | | $ | 497,292 |
| | $ | 473,308 |
|
| Less — Billings in excess of costs and estimated earnings on uncompleted contracts | | (433,387 | ) | | (274,846 | ) |
| | | $ | 63,905 |
| | $ | 198,462 |
|
Property and equipment consisted of the following (in thousands):
|
| | | | | | | | | |
| | Estimated Useful | | December 31, |
| | Lives in Years | | 2019 | | 2018 |
| Land | N/A | | $ | 67,560 |
| | $ | 61,305 |
|
| Buildings and leasehold improvements | 5-30 | | 231,920 |
| | 208,974 |
|
| Operating equipment and vehicles | 1-25 | | 2,068,644 |
| | 1,865,917 |
|
| Office equipment, furniture and fixtures and information technology systems | 3-10 | | 228,329 |
| | 212,769 |
|
| Construction work in progress | N/A | | 26,236 |
| | 19,507 |
|
| Finance lease assets and rental purchase options (see Note 9) | 5-20 | | 14,162 |
| | — |
|
| Property and equipment, gross | | | 2,636,851 |
| | 2,368,472 |
|
| Less — Accumulated depreciation and amortization | | | (1,250,197 | ) | | (1,092,440 | ) |
| Property and equipment, net of accumulated depreciation | | | $ | 1,386,654 |
| | $ | 1,276,032 |
|
|
| | | | | | | | | |
| | Estimated Useful | | December 31, |
| | Lives in Years | | 2017 | | 2016 |
| Land | N/A | | $ | 48,832 |
| | $ | 45,919 |
|
| Buildings and leasehold improvements | 5-30 | | 155,628 |
| | 137,515 |
|
| Operating equipment and vehicles | 5-25 | | 1,834,715 |
| | 1,634,850 |
|
| Office equipment, furniture and fixtures and information technology systems | 3-10 | | 170,115 |
| | 145,174 |
|
| Construction work in progress | N/A | | 60,587 |
| | 73,461 |
|
| | | | 2,269,877 |
| | 2,036,919 |
|
| Less — Accumulated depreciation and amortization | | | (981,275 | ) | | (862,825 | ) |
| Property and equipment, net | | | $ | 1,288,602 |
| | $ | 1,174,094 |
|
Accounts payable and accrued expenses consisted of the following (in thousands):
|
| | | | | | | | |
| | | December 31, |
| | | 2019 | | 2018 |
| Accounts payable, trade | | $ | 798,718 |
| | $ | 786,546 |
|
| Accrued compensation and related expenses | | 316,237 |
| | 279,107 |
|
| Contingent consideration liabilities, current portion | | 77,618 |
| | — |
|
| Accrued insurance, current portion | | 69,307 |
| | 56,552 |
|
| Income and franchise taxes payable | | 58,353 |
| | 13,094 |
|
| Unearned revenues, current portion | | 33,192 |
| | 40,083 |
|
| Sales and use taxes payable | | 28,721 |
| | 35,736 |
|
| Other accrued expenses | | 107,413 |
| | 103,402 |
|
| Accounts payable and accrued expenses | | $ | 1,489,559 |
| | $ | 1,314,520 |
|
|
| | | | | | | | |
| | | December 31, |
| | | 2017 | | 2016 |
| Accounts payable, trade | | $ | 632,931 |
| | $ | 529,608 |
|
| Accrued compensation and related expenses | | 225,193 |
| | 194,056 |
|
| Accrued insurance, current portion | | 64,112 |
| | 60,880 |
|
| Deferred revenues, current portion | | 15,967 |
| | 15,512 |
|
| Income and franchise taxes payable | | 19,635 |
| | 40,765 |
|
| Other accrued expenses | | 99,622 |
| | 81,998 |
|
| | | $ | 1,057,460 |
| | $ | 922,819 |
|
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Quanta’s long-term debt obligations consisted of the following (in thousands):
|
| | | | | | | |
| | December 31, |
| | 2019 | | 2018 |
| Borrowings under senior secured credit facility | $ | 1,346,290 |
| | $ | 1,070,299 |
|
| Other long-term debt | 13,275 |
| | 1,523 |
|
| Finance leases | 957 |
| | 934 |
|
| Total long-term debt obligations | 1,360,522 |
| | 1,072,756 |
|
| Less — Current maturities of long-term debt | 68,327 |
| | 32,224 |
|
| Total long-term debt obligations, net of current maturities | $ | 1,292,195 |
| | $ | 1,040,532 |
|
|
| | | | | | | |
| | December 31, |
| | 2017 | | 2016 |
| Borrowings under credit facility | $ | 668,427 |
| | $ | 351,341 |
|
| Other long-term debt, interest rates ranging from 2.4% to 4.3% | 1,810 |
| | 3,305 |
|
| Capital leases, interest rates ranging from 2.5% to 3.8% | 1,704 |
| | 3,744 |
|
| Total long-term debt obligations | 671,941 |
| | 358,390 |
|
| Less — Current maturities of long-term debt | 1,220 |
| | 4,828 |
|
| Total long-term debt obligations, net of current maturities | $ | 670,721 |
| | $ | 353,562 |
|
Quanta’s current maturities of long-term debt and short-term debt consisted of the following (in thousands):
|
| | | | | | | |
| | December 31, |
| | 2019 | | 2018 |
| Short-term debt | $ | 6,542 |
| | $ | 33,422 |
|
| Current maturities of long-term debt | 68,327 |
| | 32,224 |
|
| Current maturities of long-term debt and short-term debt | $ | 74,869 |
| | $ | 65,646 |
|
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
|
| | | | | | | |
| | December 31, |
| | 2017 | | 2016 |
| Short-term debt | $ | — |
| | $ | 2,735 |
|
| Current maturities of long-term debt | 1,220 |
| | 4,828 |
|
| Current maturities of long-term debt and short-term debt | $ | 1,220 |
| | $ | 7,563 |
|
Senior Secured Revolving Credit Facility
On December 18, 2015, Quanta entered into an amended and restatedhas a credit agreement with various lenders that provides for (i) a $1.81$2.14 billion senior secured revolving credit facility. On October 31, 2017,facility and (ii) a term loan facility with term loans in the aggregate initial principal amount of $1.29 billion. In addition, subject to the conditions specified in the credit agreement, Quanta andhas the lenders entered into an amendmentoption to increase the capacity of the credit facility, which,in the form of an increase in the revolving credit facility, incremental term loans or a combination thereof, from time to time, upon receipt of additional commitments from new or existing lenders by up to an additional (i) $400.0 million plus (ii) an additional amount that is unlimited so long as the Incremental Leverage Ratio Requirement (as defined in the credit agreement) is satisfied at the time of such increase. The Incremental Leverage Ratio Requirement requires, among other things, extendedafter giving pro forma effect to such increase and the use of proceeds therefrom, compliance with the credit agreement’s financial covenants as of the most recent fiscal quarter end for which financial statements were required to be delivered and that Quanta’s Consolidated Leverage Ratio (as defined below) does not exceed 2.5 to 1.0, subject to the conditions specified in the credit agreement.
Borrowings under the credit agreement are to be used to refinance existing indebtedness and for working capital, capital expenditures and other general corporate purposes. The maturity date from December 18, 2020 tofor both the revolving credit facility and the term loan facility is October 31, 2022, and adjustedQuanta is required to make quarterly principal payments on the interest rates applicableterm loan facility as described below.
With respect to certain borrowings. Thethe revolving credit facility, the entire amount available under the credit facility may be used by Quanta for revolving loans and letters of credit in U.S. dollars and certain alternative currencies. Up to $600.0 million of the credit facility may be used by certain subsidiaries of Quanta for revolving loans and letters of credit, including in certain alternative currencies. Upcurrencies, up to $100.0 million of the credit facility may be used for swing line loans in U.S. dollars, up to $50.0 million of the credit facility may be used for swing line loans in Canadian dollars and up to $30.0$50.0 million of the credit facility may be used for swing line loans in Australian dollars. In addition, subject
Quanta borrowed $600.0 million under the term loan facility in October 2018 and $687.5 million under the term loan facility in September 2019 and used the majority of such proceeds to the conditions specified inrepay outstanding revolving loans under the credit agreement,agreement. As of December 31, 2019, Quanta has the option to increase the revolving commitments by up to $400.0 million from time to time upon receipthad $1.35 billion of additional commitments from new or existing lenders. Borrowingsborrowings outstanding under the credit agreement, are to be used to refinance existing indebtednesswhich included $1.24 billion borrowed under term loans and for working capital, capital expenditures$104.9 million of outstanding revolving loans. Of the total outstanding borrowings, $1.25 billion were denominated in U.S. dollars, $61.6 million were denominated in Canadian dollars and other general corporate purposes.
As$39.3 million were denominated in Australian dollars. Quanta also had $383.8 million ofDecember 31, 2017, Quanta had $413.3 million of outstanding letters of credit and bank guaranteesissued under its senior securedthe revolving credit facility, $228.6 million of which $252.6 million were denominated in U.S. dollars and $184.7$131.2 million of which were denominated in currencies other than the U.S. dollar, primarily in Australian or Canadian dollars. Quanta also had $668.4 million of outstanding revolving loans under its credit facility, $645.0 million of which were denominated in U.S. dollars and $23.4 million of which were denominated in Australian dollars. The remaining $728.3 million$1.65 billion of available commitments under the revolving credit facility was available for revolving loans or issuing new letters of credit or bank guarantees. credit.
Borrowings under the credit facility and the applicable interest rates during the years ended December 31, 2017, 2016 and 2015 were as follows (dollars in thousands):
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2019 | | 2018 | | 2017 |
Maximum amount outstanding under the credit facility during the period | $ | 2,051,714 |
| | $ | 1,300,401 |
| | $ | 917,895 |
|
| Average daily amount outstanding under the credit facility | $ | 1,553,499 |
| | $ | 914,012 |
| | $ | 613,130 |
|
| Weighted-average interest rate | 3.8 | % | | 3.6 | % | | 2.7 | % |
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
Maximum amount outstanding under the credit facility during the period | $ | 917,895 |
| | $ | 518,607 |
| | $ | 606,753 |
|
| Average daily amount outstanding under the credit facility | $ | 613,130 |
| | $ | 458,908 |
| | $ | 258,815 |
|
| Weighted-average interest rate | 2.7 | % | | 2.1 | % | | 1.8 | % |
Beginning onSubsequent to November 20,19, 2017, amountsrevolving loans borrowed in U.S. dollars bear interest, at Quanta’s option, at a rate equal to either (i) the Eurocurrency Rate (as defined in the credit agreement) plus 1.125% to 2.000%, as determined based on Quanta’s Consolidated Leverage Ratio, or (ii) the Base Rate (as described below) plus 0.125% to 1.000%, as determined based on Quanta’s Consolidated Leverage Ratio. AmountsRevolving loans borrowed as revolving loans under the credit agreement in any currency other than U.S. dollars bear interest at a rate equal to the Eurocurrency Rate plus 1.125% to 2.000%, as determined based on Quanta’s Consolidated Leverage Ratio. Additionally, standby or commercial letters of credit issued under the credit agreement are subject to a letter of credit fee of 1.125% to 2.000%, based on Quanta’s
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Consolidated Leverage Ratio, and Performance Letters of Credit (as defined in the credit agreement) issued under the credit agreement in support of certain contractual obligations are subject to a letter of credit fee of 0.675% to 1.150%, based on Quanta’s Consolidated Leverage Ratio.
From December 18, 2015 through November 19, 2017, amountsinterest rates for revolving loans and letter of credit fees were generally consistent with those set forth above, other than the maximum additional interest rates and fee percentages were 0.125% higher.
Term loans bear interest at rates generally consistent with the revolving loans borrowed in U.S. dollars, bore interest, at Quanta’s option, at a rate equal to either (i)except that the additional amount over the Eurocurrency Rate (as defined in the credit agreement) plusis 1.125% to 2.125%, as determined based on Quanta’s Consolidated Leverage Ratio (as described below), or (ii) the Base Rate (as described below) plus 0.125% to 1.125%1.875%, as determined based on Quanta’s Consolidated Leverage Ratio. Amounts borrowed as revolvingQuanta made quarterly principal payments of $7.5 million on the term loan through September 2019 and, beginning in December 2019, was required to make quarterly principal payments of $16.1 million on the term loans underon the credit agreementlast business day of each March, June, September and December. The aggregate outstanding principal amount of all outstanding term loans must be paid on the maturity date; however, Quanta may voluntarily prepay that amount from time to time, in any currency other than U.S. dollars bore interest at a rate equal to the Eurocurrency Rate plus 1.125% to 2.125%, as determined based on Quanta’s Consolidated Leverage Ratio. Standby letters of credit issued under the credit agreement were subject to a letter of credit fee of 1.125% to 2.125%, based on Quanta’s Consolidated Leverage Ratio, and Performance Letters of Credit (as definedwhole or in the credit agreement) issued under the credit agreement in support of certain contractual obligations were subject to a letter of credit fee of 0.675% to 1.275%, based on Quanta’s Consolidated Leverage Ratio.part, without
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
premium or penalty.
Quanta is also subject to a commitment fee of 0.20% to 0.40%, based on its Consolidated Leverage Ratio, on any unused availability under the revolving credit agreement.facility.
The Consolidated Leverage Ratio is the ratio of Quanta’s Consolidated Funded Indebtedness to Consolidated EBITDA (as those terms are defined in the credit agreement). For purposes of calculating Quanta’s Consolidated Leverage Ratio, Consolidated Funded Indebtedness is reduced by available cash and cash equivalentsCash Equivalents (as defined in the credit agreement) in excess of $25.0 million. The Base Rate equals the highest of (i) the Federal Funds Rate (as defined in the credit agreement) plus 0.5%, (ii) the prime rate publicly announced by Bank of America, N.A. and (iii) the Eurocurrency Rate plus 1.00%. Consolidated Interest Coverage Ratio is the ratio of (i) Consolidated EBIT (as defined in the credit agreement) for the four fiscal quarters most recently ended to (ii) Consolidated Interest Expense (as defined in the credit agreement) for such period (excluding all interest expense attributable to capitalized loan costs and the amount of fees paid in connection with the issuance of letters of credit on behalf of Quanta during such period).
The credit agreement contains certain covenants, including (i) a maximum Consolidated Leverage Ratio of 3.0 to 1.0 (except that in connection with certain permitted acquisitions in excess of $200.0 million, such ratio is 3.5 to 1.0 for the fiscal quarter in which the acquisition is completed and the two subsequent fiscal quarters) and (ii) a minimum Consolidated Interest Coverage Ratio of 3.0 to 1.0. As of December 31, 2019, Quanta was in compliance with all of the financial covenants under the credit agreement.
Subject to certain exceptions, (i) all borrowings under the credit agreement isare secured by substantially all the assets of Quanta and Quanta’s wholly ownedwholly-owned U.S. subsidiaries and by a pledge of all of the capital stock of Quanta’s wholly ownedwholly-owned U.S. subsidiaries and 65% of the capital stock of direct foreign subsidiaries of Quanta’s wholly owned U.S. subsidiaries. Quanta’s wholly ownedwholly-owned U.S. subsidiaries alsoand (ii) Quanta’s wholly-owned U.S. subsidiaries guarantee the repayment of all amounts due under the credit agreement. Subject to certain conditions, all collateral will automatically be released from the liens securing the obligations under the credit agreement at any time Quanta maintains an Investment Grade Rating (defined in the credit agreement as two of the following three conditions being met: (i) a corporate credit rating that is BBB- or higher by Standard & Poor’s Rating Services, (ii) a corporate family rating that is Baa3 or higher by Moody’s Investors Services, Inc. or (iii) a corporate credit rating that is BBB- or higher by Fitch Ratings, Inc.).
The credit agreement contains certain covenants, including (1) a maximum Consolidated Leverage Ratio of 3.0 to 1.0 (provided that in connection with certain permitted acquisitions in excess of $200.0 million, such ratio is 3.5 to 1.0 for the fiscal quarter in which the acquisition is completed and the two subsequent fiscal quarters) and (2) a minimum Consolidated Interest Coverage Ratio (as defined in the credit agreement) of 3.0 to 1.0. As of December 31, 2017, Quanta was in compliance with all of the covenants in the credit agreement.
The credit agreement also limits certain acquisitions, mergers and consolidations, indebtedness, asset sales and prepayments of indebtedness and, subject to certain exceptions, prohibits liens on Quanta’s assets. The credit agreement allows cash payments for dividends and stock repurchases subject to compliance with the following requirements (after(including after giving effect to the dividend or stock repurchase): (i) no default or event of default under the credit agreement; (ii) continued compliance with the financial covenants in the credit agreement; and (iii) at least $100.0 million of availability under the revolving credit agreementfacility and/or cash and cash equivalents on hand.
The credit agreement provides for customary events of default and contains cross-default provisions with Quanta’s underwriting, continuing indemnity and security agreement with its sureties and all of Quanta’scertain other debt instruments exceeding $100.0$150.0 million in borrowings or availability. If an Event of Default (as defined in the credit agreement) occurs and is continuing, on the terms and subject to the conditions set forth in the credit agreement, the lenders may declare all amounts outstanding and accrued and unpaid interest immediately due and payable, require that Quanta provide cash collateral for all outstanding letter of credit obligations, terminate the commitments under the credit agreement, and foreclose on the collateral.
Effective January 1, 2019, Quanta adopted the new lease accounting standard utilizing the transition method that allows recognition of a cumulative-effect adjustment to the amendment and restatementopening balance of Quanta’s credit agreement on December 18, 2015 and after April 1, 2014, amounts borrowed bore interest at the same rates asretained earnings in the period from December 18, 2015 through November 19, 2017 described above,of adoption, if applicable. Quanta’s financial results for reporting periods beginning on or after January 1, 2019 are presented under the new standard, while financial results for prior periods continue to be reported in accordance with the prior standard and Quanta was subject to the same commitment fees as above.Quanta’s historical accounting policy.
Other Facilities
Quanta has also entered into bilateral credit agreements with various lenders that provide for up to $50.2 million in aggregate availability in both U.S. dollars and certain alternative currencies, primarily Australian dollars. Quanta may utilize these facilities for, among other things, the issuance of letters of credit or bank guarantees and overdraft protection and had $2.8 million of letters of credit and bank guarantees outstanding under these facilities at December 31, 2017.
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Quanta primarily leases land, buildings, vehicles, construction equipment and office equipment. As of December 31, 2019, Quanta’s leases had remaining lease terms of up to ten years. Certain leases include options to extend their terms in increments of up to seven years and/or options to terminate. The components of lease costs in the accompanying consolidated statements of operations are as follows (in thousands):
|
| | | | | |
| | | | Year Ended |
| Lease cost | Classification | | December 31, 2019 |
| Finance lease cost: | | | |
| Amortization of lease assets | Depreciation (1) | | $ | 1,393 |
|
| Interest on lease liabilities | Interest expense | | 64 |
|
| Operating lease cost | Cost of services and Selling, general and administrative expenses | | 121,767 |
|
Short-term and variable lease cost (2) | Cost of services and Selling, general and administrative expenses | | 837,244 |
|
| Total lease cost | | | $ | 960,468 |
|
| |
(1) | Depreciation is included within “Cost of services” and “Selling, general and administrative expenses” in the accompanying consolidated statements of operations. |
| |
(2) | Short-term lease cost includes both leases and rentals with initial terms of one year or less. Variable lease cost is insignificant and primarily relates to real estate leases and consists of common area maintenance charges, real estate taxes, insurance and other variable costs. |
For the years ended December 31, 2018 and 2017, rent expense related to operating leases was $309.7 million and $276.2 million; however, this amount did not include rent expense related to certain equipment under month-to-month rental periods, which is included in short-term and variable lease cost for the year ended December 31, 2019 in the table above.
Additionally, Quanta has entered into lease arrangements for real property and facilities with certain related parties, typically an employee of Quanta who is the former owner of a business acquired by Quanta that continues to utilize the leased premises. Lease amounts are analyzed by a third party at the time of acquisition to ensure they are at market rates. These lease agreements generally have remaining lease terms of up to five years and may include renewal options. Related party lease expense was $16.7 million, $14.0 million and $12.3 million for the years ended December 31, 2019, 2018 and 2017.
The components of leases in the accompanying consolidated balance sheet were as follows (in thousands):
|
| | | | | |
| Lease type | Classification | | December 31, 2019 |
| Assets: | | | |
| Operating lease right-of-use assets | Operating lease right-of-use assets | | $ | 284,369 |
|
| Finance lease assets | Property and equipment, net of accumulated depreciation | | 1,043 |
|
| Total lease assets | | | $ | 285,412 |
|
| Liabilities: | | | |
| Current: | | | |
| Operating | Current portion of operating lease liabilities | | $ | 92,475 |
|
| Finance | Current maturities of long-term debt and short-term debt | | 440 |
|
| | | | |
| Non-current: | | | |
| Operating | Operating lease liabilities, net of current portion | | 196,521 |
|
| Finance | Long-term debt, net of current maturities | | 517 |
|
| Total lease liabilities | | | $ | 289,953 |
|
Certain of Quanta’s equipment rental agreements contain purchase options pursuant to which the purchase price is offset by a portion of the rental payments. When rental purchase options are exercised and a substantive benefit is deemed to be transferred to a third-party lessor, the transaction is deemed to be a financing transaction for accounting purposes. This results in the recognition of an asset equal to the purchase price being recorded in “Property, plant and equipment, net of accumulated depreciation,” and the recognition of a corresponding liability in “Current maturities of long-term debt and short-term debt” and “Long-term debt, net of current maturities.” As of December 31, 2019, the assets recorded, net of accumulated depreciation, totaled $11.8 million.
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Future minimum lease payments for operating and finance leases were as follows (in thousands):
|
| | | | | | | | | | | | |
| | | As of December 31, 2019 |
| | | Operating Leases | | Finance Leases | | Total |
| 2020 | | $ | 102,848 |
| | $ | 469 |
| | $ | 103,317 |
|
| 2021 | | 75,982 |
| | 325 |
| | 76,307 |
|
| 2022 | | 51,295 |
| | 127 |
| | 51,422 |
|
| 2023 | | 34,153 |
| | 60 |
| | 34,213 |
|
| 2024 | | 17,952 |
| | 21 |
| | 17,973 |
|
| Thereafter | | 35,019 |
| | 8 |
| | 35,027 |
|
| Total future minimum operating and finance lease payments | | 317,249 |
| | 1,010 |
| | 318,259 |
|
| Less imputed interest | | (28,253 | ) | | (53 | ) | | (28,306 | ) |
| Total lease liabilities | | $ | 288,996 |
| | $ | 957 |
| | $ | 289,953 |
|
Future minimum lease payments for short-term leases, which are not recorded in the consolidated balance sheets due to our accounting policy election, were $19.9 million as of December 31, 2019. Month-to-month rental expense associated primarily with certain equipment rentals is excluded from these amounts because Quanta is unable to accurately predict future rental amounts.
Future minimum lease payments for operating leases under the prior standard and Quanta’s historical accounting policy were as follows (in thousands):
|
| | | | |
| | | As of December 31, 2018 |
| | | Operating Leases Under Prior Accounting Standard |
| 2019 | | $ | 124,530 |
|
| 2020 | | 81,189 |
|
| 2021 | | 55,827 |
|
| 2022 | | 34,337 |
|
| 2023 | | 21,450 |
|
| Thereafter | | 37,217 |
|
| Total minimum lease payments | | $ | 354,550 |
|
The weighted average remaining lease terms and discount rates were as follows:
|
| | | |
| | As of December 31, 2019 |
| Weighted average remaining lease term (in years): | | |
| Operating leases | | 4.35 |
|
| Finance leases | | 2.66 |
|
| Weighted average discount rate: | | |
| Operating leases | | 4.3 | % |
| Finance leases | | 4.2 | % |
Quanta has also guaranteed the residual value on certain of its equipment operating leases, agreeing to pay any difference between this residual value and the fair market value of the underlying asset at the date of lease termination. At December 31, 2019, the maximum guaranteed residual value of this equipment was $769.8 million. While Quanta believes that no significant payments will be made as a result of these residual value guarantees, there can be no assurance that significant payments will not be required in the future.
As of December 31, 2019, Quanta had additional operating lease obligations that had not yet commenced of $10.3 million. These operating leases will commence in 2020 with lease terms of one year to seven years.
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
U.S. federal and state and foreign income tax laws and regulations are voluminous and 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, statements of operations and statements of comprehensive income. For example, the Tax Act significantly revised the U.S. corporate tax regime, which, among other things, resulted in a reduction of Quanta’s future effective tax rate and a remeasurement of its deferred tax assets and liabilities. Quanta completed its analysis of the Tax Act within the prescribed one-year measurement period, and adjustments during the measurement period were included within “Net income” as an adjustment to “Provision for income taxes” on Quanta’s consolidated statement of operations. The measurement period adjustments are described in further detail below.
The Tax Act among other things, lowerslowered the U.S. federal corporate income tax rate from 35% to 21% effective January 1, 2018, requiresrequired companies to pay a one-time transition tax on earnings of certain foreign subsidiaries, limitslimited and eliminateseliminated certain tax deductions and createscreated new taxes on certain foreign-sourced earnings. Consequently, duringfor the year ended December 31, 2017, Quanta recorded one-time net tax benefits of $70.1 million, were recorded, including $85.3 million of tax benefits associated with the re-measurementremeasurement of U.S. federal deferred tax assets and liabilities based on expected future rates at which they are expected to reverse in future periods, which is generally(generally 21%;), partially offset by an estimated $15.2 million transition tax on post-1986 earnings and profits of certain foreign subsidiaries. AlsoThis net tax benefit was Quanta’s provisional estimate, utilizing the information that was available at the time. As permitted by and in accordance with the guidance issued by the SEC and codified by the FASB, during the year ended December 31, 2018, Quanta recorded $6.3 million of additional benefit related to the remeasurement of U.S. federal deferred tax assets and liabilities, as the estimate of such amount was revised in connection with the preparation and filing of Quanta’s 2017 income tax returns. Additionally, as a result of the tax reform regulations issued during 2018, Quanta recorded a valuation allowance of $43.5 million against foreign tax credits. As of December 31, 2018, Quanta completed its accounting for the tax effects of the enactment of the Tax Act; however, additional regulations could have a material impact on Quanta’s effective tax rate in future periods. Further, to the extent there are settlements of certain foreign unrecognized tax benefits in future periods, changes to the estimates associated with the transition tax may be required.
The Tax Act also imposed a tax on global intangible low-taxed income (GILTI). Quanta analyzed the impacts of GILTI and made an accounting policy election in the fourth quarter of 2018 whereby it determined that such income will be recognized in the period earned and deferred taxes for basis differences that may reverse as GILTI will not be recognized in future years.
For the year ended December 31, 2017, an additional one-time tax benefit of $26.7 million was recorded associatedin connection with entity restructuring and recapitalization efforts,transactions completed by Quanta, which was partially offset by an $8.5 million decrease ofin the production activity relatedactivity-related tax benefit due to thethat resulted from acceleration of certain deductions ininto 2017.
While Quanta has substantially completed its provisional analysis of During the effects ofyear ended December 31, 2018, the Tax Actestimated benefit associated with entity restructuring and recorded a reasonable estimate of such effects, the net one-time benefits related to the Tax Act may differ, possibly materially, due to, among other things, further refinement of Quanta’s calculations, changes in interpretationsrecapitalization transactions was decreased by $1.8 million based on actual 2017 earnings and assumptions made, additional regulatory guidance, and actions and related accounting policy decisions resulting from the Tax Act. Quanta will complete its analysis over a one-year measurement period ending December 22, 2018, and any adjustments during the measurement period will be included within “Net income from continuing operations” as an adjustment to “Provision for income taxes” on Quanta’s consolidated statement of operations in the reporting period when such adjustments are determined.profit balances.
The components of income (loss) from continuing operations before income taxes were as follows (in thousands):
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2019 | | 2018 | | 2017 |
| Income before income taxes: | | | | | |
| Domestic | $ | 550,676 |
| | $ | 318,635 |
| | $ | 291,031 |
|
| Foreign | 21,611 |
| | 139,031 |
| | 62,726 |
|
| Total | $ | 572,287 |
| | $ | 457,666 |
| | $ | 353,757 |
|
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| Income (loss) from continuing operations before income taxes: | | | | | |
| Domestic | $ | 291,031 |
| | $ | 349,959 |
| | $ | 244,955 |
|
| Foreign | 62,726 |
| | (42,273 | ) | | (16,280 | ) |
| Total | $ | 353,757 |
| | $ | 307,686 |
| | $ | 228,675 |
|
The components of the provision for income taxes for continuing operations were as follows (in thousands):
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2019 | | 2018 | | 2017 |
| Current: | |
| | |
| | |
|
| Federal | $ | 121,214 |
| | $ | 50,306 |
| | $ | 44,695 |
|
| State | 35,329 |
| | 26,170 |
| | 301 |
|
| Foreign | 16,848 |
| | 23,209 |
| | 22,666 |
|
| Total current tax provision | 173,391 |
| | 99,685 |
| | 67,662 |
|
| | | | | | |
| Deferred: | | | | | |
| Federal | 7,379 |
| | 62,482 |
| | (36,915 | ) |
| State | (1,776 | ) | | (4,152 | ) | | 14,951 |
|
| Foreign | (13,522 | ) | | 3,644 |
| | (10,166 | ) |
| Total deferred tax provision (benefit) | (7,919 | ) | | 61,974 |
| | (32,130 | ) |
| Total provision for income taxes | $ | 165,472 |
| | $ | 161,659 |
| | $ | 35,532 |
|
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| Current: | |
| | |
| | |
|
| Federal | $ | 44,695 |
| | $ | 106,316 |
| | $ | 85,830 |
|
| State | 301 |
| | 11,549 |
| | 9,783 |
|
| Foreign | 22,666 |
| | 5,076 |
| | 21,262 |
|
| Total current tax provision | 67,662 |
| | 122,941 |
| | 116,875 |
|
| | | | | | |
| Deferred: | | | | | |
| Federal | (36,915 | ) | | (264 | ) | | (5,247 | ) |
| State | 14,951 |
| | (923 | ) | | 917 |
|
| Foreign | (10,166 | ) | | (14,508 | ) | | (15,073 | ) |
| Total deferred tax benefit | (32,130 | ) | | (15,695 | ) | | (19,403 | ) |
| Total provision for income taxes from continuing operations | $ | 35,532 |
| | $ | 107,246 |
| | $ | 97,472 |
|
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The actual income tax provision differed from the income tax provision computed by applying the U.S. federal statutory corporate rate to income from continuing operations before provision for income taxes as follows (in thousands):
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2019 | | 2018 | | 2017 |
| Provision at the statutory rate | $ | 120,180 |
| | $ | 96,110 |
| | $ | 123,815 |
|
| Increases (decreases) resulting from — | | | | | |
| Valuation allowance on deferred tax assets | 35,761 |
| | 48,862 |
| | 1,455 |
|
| State taxes | 23,399 |
| | 18,504 |
| | 17,920 |
|
| Employee per diems, meals and entertainment | 13,817 |
| | 11,949 |
| | 13,605 |
|
| Foreign taxes | (21,565 | ) | | (2,621 | ) | | (18,413 | ) |
| Contingency reserves, net | (3,173 | ) | | (2,619 | ) | | 3,651 |
|
| Stock-based compensation | (1,863 | ) | | (1,449 | ) | | (5,095 | ) |
| Taxes on unincorporated joint ventures | (930 | ) | | (578 | ) | | (1,354 | ) |
| Tax Cuts and Jobs Act | — |
| | (6,295 | ) | | (70,129 | ) |
| Entity restructuring and recapitalization efforts | — |
| | (4,424 | ) | | (26,668 | ) |
| Production activity deduction | — |
| | — |
| | (1,504 | ) |
| Other | (154 | ) | | 4,220 |
| | (1,751 | ) |
| Total provision for income taxes | $ | 165,472 |
| | $ | 161,659 |
| | $ | 35,532 |
|
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| Provision at the statutory rate | $ | 123,815 |
| | $ | 107,690 |
| | $ | 80,036 |
|
| Increases (decreases) resulting from — | | | | | |
| Tax Cuts and Jobs Act | (70,129 | ) | | — |
| | — |
|
| State taxes | 17,920 |
| | 6,479 |
| | 7,241 |
|
| Foreign taxes | (16,958 | ) | | 1,860 |
| | 1,239 |
|
| Contingency reserves, net | 3,651 |
| | (13,540 | ) | | 4,438 |
|
| Production activity deduction | (1,504 | ) | | (8,586 | ) | | (6,871 | ) |
| Employee per diems, meals and entertainment | 13,605 |
| | 8,764 |
| | 8,727 |
|
| Taxes on unincorporated joint ventures | (1,354 | ) | | (656 | ) | | (3,838 | ) |
| Asset impairments | — |
| | 1,909 |
| | 7,047 |
|
| Entity restructuring and recapitalization efforts | (26,668 | ) | | — |
| | — |
|
| Equity compensation | (5,095 | ) | | — |
| | — |
|
| Other | (1,751 | ) | | 3,326 |
| | (547 | ) |
| Total provision for income taxes from continuing operations | $ | 35,532 |
| | $ | 107,246 |
| | $ | 97,472 |
|
Deferred income taxes result from temporary differences in the recognition of income and expenses for financial reporting purposes and tax purposes. The tax effects of these temporary differences, representing deferred tax assets and liabilities, result principally from the following (in thousands):
|
| | | | | | | |
| | December 31, |
| | 2019 | | 2018 |
| Deferred income tax liabilities: | | | |
| Property and equipment | $ | (208,751 | ) | | $ | (178,090 | ) |
| Leased assets | (73,861 | ) | | — |
|
| Goodwill | (72,244 | ) | | (60,305 | ) |
| Customer holdbacks | (11,882 | ) | | (44,173 | ) |
| Other intangibles | (11,384 | ) | | (21,034 | ) |
| Other book/tax accounting method differences | (1,801 | ) | | (7,247 | ) |
| Total deferred income tax liabilities | (379,923 | ) | | (310,849 | ) |
| | | | |
| Deferred income tax assets: | |
| | |
|
| Net operating loss carryforwards | 78,310 |
| | 52,406 |
|
| Lease liabilities | 74,044 |
| | — |
|
| Tax credits | 46,621 |
| | 43,572 |
|
| Accruals and reserves | 36,372 |
| | 28,594 |
|
| Stock and incentive compensation | 26,045 |
| | 20,627 |
|
| Deferred profit on investment in unconsolidated affiliates | — |
| | 16,021 |
|
| Deferred tax benefits on unrecognized tax positions | 16,542 |
| | 13,278 |
|
| Other | 3,933 |
| | 1,776 |
|
| Subtotal | 281,867 |
| | 176,274 |
|
| Valuation allowance | (104,178 | ) | | (67,601 | ) |
| Total deferred income tax assets | 177,689 |
| | 108,673 |
|
| Total net deferred income tax liabilities | $ | (202,234 | ) | | $ | (202,176 | ) |
|
| | | | | | | |
| | December 31, |
| | 2017 | | 2016 |
| Deferred income tax liabilities: | | | |
| Property and equipment | $ | (161,491 | ) | | $ | (214,902 | ) |
| Goodwill | (49,407 | ) | | (83,097 | ) |
| Other intangibles | (26,676 | ) | | (33,566 | ) |
| Customer holdbacks | (36,218 | ) | | (16,424 | ) |
| Other book/tax accounting method differences | (15,154 | ) | | (24,817 | ) |
| Total deferred income tax liabilities | (288,946 | ) | | (372,806 | ) |
| | | | |
| Deferred income tax assets: | |
| | |
|
| Accruals and reserves | 21,419 |
| | 21,681 |
|
| Accrued insurance | — |
| | 79,630 |
|
| Stock and incentive compensation and pension withdrawal liabilities | 17,676 |
| | 58,744 |
|
| Net operating loss carryforwards | 62,925 |
| | 37,362 |
|
| Tax credits | 48,516 |
| | 1,613 |
|
| Other | 4,747 |
| | 5,933 |
|
| Subtotal | 155,283 |
| | 204,963 |
|
| Valuation allowance | (19,328 | ) | | (14,991 | ) |
| Total deferred income tax assets | 135,955 |
| | 189,972 |
|
| Total net deferred income tax liabilities | $ | (152,991 | ) | | $ | (182,834 | ) |
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The net deferred income tax assets and liabilities were comprised of the following in the accompanying consolidated balance sheets (in thousands):
|
| | | | | | | |
| | December 31, |
| | 2019 | | 2018 |
| Deferred income taxes: | |
| | |
|
| Assets | $ | 12,545 |
| | $ | 16,939 |
|
| Liabilities | (214,779 | ) | | (219,115 | ) |
| Total net deferred income tax liabilities | $ | (202,234 | ) | | $ | (202,176 | ) |
|
| | | | | | | |
| | December 31, |
| | 2017 | | 2016 |
| Deferred income taxes: | |
| | |
|
| Assets | $ | 26,390 |
| | $ | 10,000 |
|
| Liabilities | (179,381 | ) | | (192,834 | ) |
| Total net deferred income tax liabilities | $ | (152,991 | ) | | $ | (182,834 | ) |
The valuation allowance for deferred income tax assets at December 31, 2019, 2018 and 2017 2016 and 2015 was $19.3$104.2 million, $15.0$67.6 million and $16.1 million, respectively.$19.3 million. These valuation allowances relate to state and foreign net operating loss carryforwards.carryforwards and foreign tax credits. The net change in the total valuation allowance for each of the years ended December 31, 2017, 20162019, 2018 and 20152017 was an increase of $4.3$36.6 million, a decreasean increase of $1.1$48.3 million and an increase of $3.1 million, respectively.$4.3 million. The valuation allowance was established primarily as a result of uncertainty in Quanta’s outlook as to the amount and character of future taxable income in particular tax jurisdictions. Quanta believes it is more likely than not that it will realize the benefit of its deferred tax assets net of existing valuation allowances.
At December 31, 2017,2019, Quanta had state and foreign net operating loss carryforwards, the tax effect of which was $67.9$83.6 million. These carryforwards will expire as follows: 2018, $0.2 million; 2019, $0.1 million; 2020, $1.9$1.3 million; 2021, $0.1$0.5 million; 2022, $0.2 millionmillion; 2023, $27.0 million; 2024, $0.9 million; and $65.4$53.7 million thereafter. A valuation allowance of $17.8$52.0 million has been recorded against certain foreign and state net operating loss carryforwards.
Quanta generally does not provide for taxes related to undistributed earnings of its foreign subsidiaries because such earnings either would not be taxable when remitted or they are considered to be indefinitely reinvested. Quanta could also be subject to
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
additional foreign withholding taxes if it were to repatriate cash that is indefinitely reinvested outside the United States, but it does not expect such amount to be material.
A reconciliation of unrecognized tax benefit balances is as follows (in thousands):
|
| | | | | | | | | | | |
| | December 31, |
| | 2019 | | 2018 | | 2017 |
| Balance at beginning of year | $ | 41,110 |
| | $ | 36,229 |
| | $ | 35,240 |
|
| Additions based on tax positions related to the current year | 7,708 |
| | 6,231 |
| | 7,040 |
|
| Additions for tax positions of prior years | 1,200 |
| | 9,377 |
| | 3,372 |
|
| Reductions for tax positions of prior years | — |
| | (2,870 | ) | | (1,171 | ) |
| Reductions for audit settlements | (3,205 | ) | | — |
| | — |
|
Reductions resulting from a lapse of the applicable statute of limitations periods | (5,935 | ) | | (7,857 | ) | | (8,252 | ) |
| Balance at end of year | $ | 40,878 |
| | $ | 41,110 |
| | $ | 36,229 |
|
|
| | | | | | | | | | | |
| | December 31, |
| | 2017 | | 2016 | | 2015 |
| Balance at beginning of year | $ | 35,240 |
| | $ | 54,541 |
| | $ | 50,668 |
|
| Additions based on tax positions related to the current year | 7,040 |
| | 4,227 |
| | 5,340 |
|
| Additions for tax positions of prior years | 3,372 |
| | 2,048 |
| | 292 |
|
| Reductions for tax positions of prior years | (1,171 | ) | | (1,948 | ) | | (132 | ) |
| Reductions for audit settlements | — |
| | (180 | ) | | (1,345 | ) |
Reductions resulting from a lapse of the applicable statute of limitations periods | (8,252 | ) | | (23,448 | ) | | (282 | ) |
| Balance at end of year | $ | 36,229 |
| | $ | 35,240 |
| | $ | 54,541 |
|
For the year ended December 31, 2019, the $9.1 million of aggregate reductions were primarily due to the favorable settlement of certain non-U.S. income tax obligations of an acquired business and the expiration of U.S. state income tax statute of limitations. For the year ended December 31, 2018, the $7.9 million reduction was primarily due to the expiration of certain federal and state statute of limitations periods for the 2014 tax year. For the year ended December 31, 2017, the $8.3 million reduction was primarily due to the expiration of certain federal and state statute of limitations periods for the 2013 tax year. For the year ended December 31, 2016, the $23.4 million reduction was primarily due to the expiration of certain federal and state statute of limitations periods for the 2010 through 2012 tax years. For the year ended December 31, 2015, the $0.3 million reduction was primarily due to the expiration of certain federal and state statute of limitations periods for the 2004 tax year.
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The balances of unrecognized tax benefits, the amount of related interest and penalties and what Quanta believes to be the range of reasonably possible changes in the next 12 months are as follows (in thousands):
|
| | | | | | | | | | | |
| | December 31, |
| | 2019 |
| 2018 |
| 2017 |
| Unrecognized tax benefits | $ | 40,878 |
|
| $ | 41,110 |
|
| $ | 36,229 |
|
Portion that, if recognized, would reduce tax expense and effective tax rate | 40,695 |
|
| 40,977 |
|
| 35,561 |
|
| Accrued interest on unrecognized tax benefits | 6,240 |
|
| 5,459 |
|
| 5,368 |
|
| Accrued penalties on unrecognized tax benefits | 14 |
|
| 631 |
|
| 631 |
|
Reasonably possible reduction to the balance of unrecognized tax benefits in succeeding 12 months | $0 to $6,268 |
|
| $0 to $9,541 |
|
| $0 to $13,655 |
|
Portion that, if recognized, would reduce tax expense and effective tax rate | $0 to $5,693 |
|
| $0 to $8,224 |
|
| $0 to $12,483 |
|
|
| | | | | | | | | | | |
| | December 31, |
| | 2017 |
| 2016 |
| 2015 |
| Unrecognized tax benefits | $ | 36,229 |
|
| $ | 35,240 |
|
| $ | 54,541 |
|
Portion that, if recognized, would reduce tax expense and effective tax rate | 35,561 |
|
| 33,128 |
|
| 48,312 |
|
| Accrued interest on unrecognized tax benefits | 5,368 |
|
| 5,539 |
|
| 8,750 |
|
| Accrued penalties on unrecognized tax benefits | 631 |
|
| 650 |
|
| 673 |
|
Reasonably possible reduction to the balance of unrecognized tax benefits in succeeding 12 months | $0 to $13,655 |
|
| $0 to $12,332 |
|
| $0 to $27,485 |
|
Portion that, if recognized, would reduce tax expense and effective tax rate | $0 to $12,483 |
|
| $0 to $10,983 |
|
| $0 to $24,009 |
|
Quanta classifies interest and penalties within the provision for income taxes. Quanta recognized interest incomeexpense of $0.2$0.8 million, interest expense of $0.1 million and interest income of $3.2 million and interest expense of $2.4$0.2 million in the provision for income taxes for the years ended December 31, 2017, 20162019, 2018 and 2015, respectively.2017.
Although the IRS completed its examination related to tax years 2010, 2011Quanta and 2012 during 2016, certain subsidiaries remain under examination by various U.S. state and Canadian and other foreign tax authorities for multiple periods. Quanta’s Canadian subsidiaries remain open to examination by the Canada Revenue Agency for tax years 2010 through 2014 as these statute of limitations periods have not yet expired. Quanta does not consider any state in which it does business to be a major tax jurisdiction.
Exchangeable Shares and Series F and Series G Preferred Stock
In connection with certain prior acquisitions of Canadian acquisitions,businesses, the former owners of the acquired companiesbusinesses received exchangeable shares of certain Canadian subsidiaries of Quanta, which maycould be exchanged at the option of the holders for Quanta common stock on a one-for-one1-for-one basis. TheAll holders of exchangeable shares can make an exchange only once in any calendar quarter and must exchange a minimum of either 50,000 shares or, if less, the total number of remaining exchangeable shares registered in the name of the holder making the request. Additionally, in connection with two of such acquisitions, Quanta issued one share of Quanta Series F preferred stock and one share of Quanta Series G preferred stock to voting trusts on behalf of the respective holders of the exchangeable shares issued in such acquisitions. The one share of Quanta Series F preferred stock was subsequently redeemed and retired effective October 6, 2017.
The share of Quanta Series G preferred stock provides the holder of such exchangeable shares voting rights in Quanta common stock equivalent to the number of exchangeable shares outstanding. The holder of exchangeable shares associated with the Quanta Series G preferred stock has rights equivalent to Quanta common stockholders with respect to voting, dividends and other economic rights. The holders of exchangeable shares not associated with the Quanta Series G preferred stock havehad rights equivalent to Quanta common stockholders with respect to dividends and other economic rights but do not have voting rights.
During 2017, 20162019 and 2015, 6.0 million,2017, 0.4 million and 0.46.0 million exchangeable shares were exchanged for Quanta common stock. As of December 31, 2017, the Quanta Series G preferred stock remained outstanding and 0.5 million2019, a nominal amount of exchangeable shares remained outstanding, of which 0.4 millionand subsequent to December 31, 2019, all remaining exchangeable shares were associated with theexchanged for Quanta Series G preferredcommon stock.
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Treasury Stock
General
Treasury stock is recorded at cost. Under Delaware corporate law, treasury stock is not counted for quorum purposes or entitled to vote.
Shares withheld for tax withholding obligations
Under the stock incentive plans described in Note 12, theThe tax withholding obligations of employees upon vesting of restricted stock, RSUs and performance unitsPSUs settled in common stock are typically satisfied by Quanta making such tax payments and withholding the number of vested shares having a value on the date of vesting equal to the tax withholding obligation. For the settlement of these employee tax liabilities, Quanta withheld 0.5 million shares of Quanta common stock during the year ended December 31, 2017, with2019, which had a total market value of $18.6$17.4 million, 0.4 million shares of Quanta common stock during the year ended
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 2016 with a total market value of $8.3 million, and 0.4 million shares of Quanta common stock during the year ended December 31, 2015 with2018, which had a total market value of $10.4$15.2 million, and 0.5 million shares of Quanta common stock during the year ended December 31, 2017, which had a market value of $18.6 million. These shares and the related costs to acquire them were accounted for as adjustments to the balance of treasury stock.
Notional amounts recorded related to deferred compensation plans
For RSUs and performance unitsPSUs that vest but the settlement of which is deferred under Quanta’sa deferred compensation plans,plan, Quanta records ana notional amount to treasury stock“Treasury stock” and an offsetting amount to APIC. No“Additional paid-in capital” (APIC). At vesting, only shares withheld for tax liabilities other than income taxes are recorded asadded to outstanding treasury stock at vestingshares, as the shares of Quanta common stock associated with deferred equitystock-based awards are not issued.issued until settlement of the award. Upon settlement of the deferred equitystock-based awards and issuance of the associated Quanta common stock, the original accounting entry is reversed. The net amounts recorded to treasury stock related to the deferred compensation plans during the years ended December 31, 2019, 2018 and 2017 2016 and 2015 were $2.6$3.0 million, $6.8$2.5 million and $6.6 million, respectively. An aggregate $16.9 million was included in treasury stock for notional amounts related to deferred compensation plans at December 31, 2017.
Retirement of Treasury Stock
Effective December 1, 2016, Quanta retired 84.8 million shares of treasury stock. These retired shares were restored to the status of authorized and unissued shares as permitted by Delaware law. The retired stock had a carrying amount of $1.95 billion. In accordance with Quanta’s policy, Quanta recorded the formal retirement of treasury stock by deducting the par value from common stock and the excess of cost over par value from APIC.$2.6 million.
Stock repurchases
During the second quarter of 2017, Quanta’s boardBoard of directorsDirectors approved a stock repurchase program that authorizesauthorized Quanta to purchase, from time to time through June 30, 2020, up to $300.0 million of its outstanding common stock (the 2017 Repurchase Program). Repurchases under the 2017 Repurchase Program can be made in open market and privately negotiated transactions. As of December 31, 2017, Quanta had repurchased 1.4 million shares of its common stock at a cost of $50.0 million in the open market under the 2017 Repurchase Program.
During the third quarter of 2015,2018, Quanta’s boardBoard of directorsDirectors approved aan additional stock repurchase program that authorizedauthorizes Quanta to purchase, from time to time through February 28, 2017,June 30, 2021, up to $1.25 billion of its outstanding common stock (the 2015 Repurchase Program). During 2015, Quanta repurchased 19.2 million shares of its common stock at a cost of $449.9 million in the open market under the 2015 Repurchase Program. During the third quarter of 2015, Quanta also entered into an accelerated share repurchase arrangement (the ASR) to repurchase $750.0 million of its common stock under the 2015 Repurchase Program. Pursuant to the terms of the ASR, based on the final volume-weighted average share price during the term of the ASR, minus a discount and subject to other adjustments, Quanta paid $750.0 million to JPMorgan Chase Bank, National Association, London Branch (JPMorgan) and received 25.7 million shares of its common stock in the third quarter of 2015 and 9.4 million shares of its common stock in the second quarter of 2016. As a result, Quanta repurchased a total of 54.3 million shares of its common stock at a cost of $1.20 billion under the 2015 Repurchase Program prior to its termination on February 28, 2017.
During the fourth quarter of 2013, Quanta’s board of directors approved a stock repurchase program authorizing Quanta to purchase, from time to time through December 31, 2016, up to $500$500.0 million of its outstanding common stock (the 20132018 Repurchase Program). During the year ended December 31, 2015,
Quanta repurchased 14.3 millionthe following shares of its common stock at a cost of $406.5 million in the open market under the stock repurchase programs (in thousands):
|
| | | | | | | |
| Year ended: | | Shares | | Amount |
| December 31, 2019 | | 376 |
| | $ | 11,954 |
|
| December 31, 2018 | | 13,917 |
| | $ | 451,290 |
|
| December 31, 2017 | | 1,382 |
| | $ | 50,000 |
|
Quanta’s policy is to record a stock repurchase as of the trade date; however, the payment of cash related to the repurchase is made on the settlement date of the trade. During the years ended December 31, 2019, 2018 and completed2017, cash payments related to stock repurchases were $20.1 million, $443.2 million and $50.0 million.
As of December 31, 2019, $286.8 million remained under the 20132018 Repurchase Program. Repurchases under the 2018 Repurchase Program may be implemented through open market repurchases or privately negotiated transactions, at management’s discretion, based on market and business conditions, applicable contractual and legal requirements, including restrictions under Quanta’s senior secured credit facility, and other factors. Quanta is not obligated to acquire any specific amount of common stock, and the 2018 Repurchase Program may be modified or terminated by Quanta’s Board of Directors at any time at its sole discretion and without notice.
Non-controlling Interests
Quanta holds investmentsinterests in severalvarious entities through both joint venturesventure entities that provide infrastructure services under specific customer contracts.contracts, either directly or through subcontracting relationships, and other equity investments in partially owned entities that own and operate certain infrastructure assets, including investments that may be entered into through the partnership structure Quanta has formed with certain infrastructure investors. Quanta has determined that certain of these joint ventures are VIEs, withwhere Quanta providingprovides the majority of the infrastructure services, to the joint venture, which management believes most significantly influences the economic performance of thesuch joint venture.ventures, are VIEs. Management has concluded that Quanta is the primary beneficiary of each of thethese joint
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
ventures determined to be VIEs and has accounted for each on a consolidated basis. The other parties’ equity interests in these joint ventures have been accounted for as “Non-controlling interests” in Quanta’s consolidated balance sheets. Net income attributable to the other joint venture membersparticipants in the amounts of $3.2$4.8 million, $1.7$2.7 million and $10.9$3.2 million for the years ended December 31, 2019, 2018 and 2017 2016 and 2015, respectively, hashave been accounted for as a reduction of net income in deriving “Net income attributable to common stock” in Quanta’s consolidated statements of operations.
The carrying amount of the investments in VIEs held by Quanta in all of its VIEs was $7.8$12.0 million and $3.3$9.6 million at December 31, 20172019 and 2016.2018. The carrying amount of investments held by the non-controlling interests in these VIEs at December 31, 20172019 and 20162018 was $4.1$3.5 million and $3.3$1.3 million. During the years ended December 31, 2017, 20162019, 2018 and 2015,2017, net distributions to non-controlling interests were $2.0$2.5 million, $0.8$4.0 million and $18.9$2.0 million. ThereDuring the years ended December 31, 2018 and 2017, notes receivable of $1.4 million and $0.5 million were alsodischarged for a discharge of a note receivable from a
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
joint venture partner, of $0.5 million, which waswere accounted for as a “Buyout of a non-controlling interest” in the accompanying consolidated statementstatements of equity for the year ended December 31, 2017.equity. There were no other changes in equity as a result of transfers to/from the non-controlling interests during the years ended December 31, 2017, 2016 and 2015.2019, 2018 or 2017. See Note 1514 for further disclosures related to Quanta’s joint venture arrangements.
Dividends
Quanta declared and paid the following cash dividends and cash dividend equivalents during 2019 and 2018 (in thousands, except per share amounts):
|
| | | | | | | | | | | | |
| Declaration | | Record | | Payment | | Dividend | | Dividends |
| Date | | Date | | Date | | Per Share | | Declared |
| December 11, 2019 | | January 2, 2020 | | January 16, 2020 | | $ | 0.05 |
| | $ | 7,371 |
|
| August 28, 2019 | | October 1, 2019 | | October 15, 2019 | | $ | 0.04 |
| | $ | 5,564 |
|
| May 24, 2019 | | July 1, 2019 | | July 15, 2019 | | $ | 0.04 |
| | $ | 6,233 |
|
| March 21, 2019 | | April 5, 2019 | | April 19, 2019 | | $ | 0.04 |
| | $ | 5,896 |
|
| December 6, 2018 | | January 2, 2019 | | January 16, 2019 | | $ | 0.04 |
| | $ | 5,838 |
|
A significant majority of the dividends declared were paid on the corresponding payment dates. Holders of RSUs awarded under the Quanta Services, Inc. 2011 Omnibus Equity Incentive Plan (the 2011 Plan) generally received cash dividend equivalent payments on the payment dates that are equal to the cash dividend payable on account of the underlying Quanta common stock. Holders of exchangeable shares of certain Canadian subsidiaries of Quanta were paid a cash dividend per exchangeable share equal to the cash dividend per share paid to Quanta common shareholders on the payment dates. Holders of RSUs awarded under the Quanta Services, Inc. 2019 Omnibus Equity Incentive Plan (the 2019 Plan) and holders of unearned and unvested PSUs awarded under the 2011 Plan or the 2019 Plan receive cash dividend equivalent payments only to the extent such RSUs and PSUs become earned and/or vest. Additionally, cash dividend equivalent payments related to certain stock-based awards that have been deferred pursuant to the terms of a deferred compensation plan maintained by Quanta are recorded as liabilities in such plans until the deferred awards are settled.
The declaration, payment and amount of future cash dividends will be at the discretion of Quanta’s Board of Directors after taking into account various factors, including Quanta’s financial condition, results of operations, cash flows from operations, current and anticipated capital requirements and expansion plans, income tax laws then in effect and the requirements of Delaware law. In addition, as discussed in Note 8, Quanta’s credit agreement restricts the payment of cash dividends unless certain conditions are met.
| |
| 12. | EQUITY-BASEDSTOCK-BASED COMPENSATION: |
Stock Incentive Plans
On May 19, 2011,23, 2019, Quanta’s stockholders approved the 2011 Omnibus Equity Incentive Plan (the 2011 Plan).2019 Plan. The 20112019 Plan provides for the award of non-qualified stock options, incentive (qualified) stock options, stock appreciation rights, restricted stock awards, RSUs, stock bonus awards, performance compensation awards (including performance units and cash bonus awards) or any combination of the foregoing. The purpose of the 2011 Plan is to attractCurrent and retain key personnel and provide participants with additional performance incentives by increasing their proprietary interest in Quanta. Employees,prospective employees, directors, officers, consultantsadvisors or advisorsconsultants of Quanta or its affiliates are eligible to participate in the 2019 Plan. Subject to certain adjustments, the maximum number of shares available for issuance under the 2019 Plan is 7,466,592 shares, plus any shares underlying share-settling awards previously awarded pursuant to the 2011 Plan asthat are prospective employees, directors, officers, consultantsultimately forfeited, canceled, expired or advisorssettled in cash after May 23, 2019. All awards subsequent to stockholder approval of Quanta whothe 2019 Plan have agreed to serve Quanta in those capacities. An aggregate of 11,750,000 shares of Quanta common stock maybeen and will be issuedmade pursuant to awards grantedthe 2019 Plan and applicable award agreements. Awards made under the 2011 Plan.
Quanta also has a Restricted Stock Unit Plan (the RSU Plan), pursuantprior to which RSUs may be awardedapproval of the 2019 Plan remain subject to certain employees and consultantsthe terms of Quanta’s Canadian operations. Thethe 2011 Plan and the RSU Plan are referred to as the Plans.applicable award agreements.
The Plans are administered by the Compensation Committee of the Board of Directors of Quanta. The Compensation Committee has, subject to applicable regulation and the terms of the Plans, the authority to grant awards under the Plans, to construe and interpret the Plans and to make all other determinations and take any and all actions necessary or advisable for the administration of the Plans. The Board also delegated to the Equity Grant Committee, a committee of the Board consisting of one or more directors, the authority to grant limited awards to eligible persons who are not executive officers or non-employee directors.QUANTA SERVICES, INC. AND SUBSIDIARIES
Restricted Stock and NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
RSUs to be Settled in Common Stock
During the years ended December 31, 2017, 20162019, 2018 and 2015,2017, Quanta granted 1.52.1 million, 1.81.6 million and 1.31.5 million shares of RSUs to be settled in common stock under the 2011 Plan and the 2019 Plan, with weighted average grant date fair values of $37.06, $22.22$35.62, $34.37 and $27.64$37.06 per share, respectively. The grant date fair value for RSUs to be settled in common stock is based on the market value of Quanta common stock on the date of grant. RSU awards to be settled in common stock are subject to forfeiture, restrictions on transfer and certain other conditions until vesting, which generally occurs in three equal annual installments over a two-year, three-year or five-year period following the date of grant. Holders of RSUs to be settled in common stock awarded under the 2011 Plan generally are entitled to receive a cash dividend equivalent payment equal to any cash dividend payable on account of the underlying Quanta common shares.stock on the payment date of any such dividend. Holders of RSUs to be settled in common stock awarded under the 2019 Plan are also entitled to cash dividend equivalent payments in an amount equal to any cash dividend payable on account of the underlying Quanta common stock; however, payment of such amounts is not made until the RSUs vest, such that the dividend equivalent payments are subject to forfeiture.
During the years ended December 31, 2017, 20162019, 2018 and 2015,2017, vesting activity consisted of 1.51.3 million, 1.4 million and 1.31.5 million shares of restricted stock and RSUs settled in common stock with an approximate fair value at the time of vesting of $48.7 million, $48.6 million and $55.6 million, $28.9 million and $35.9 million, respectively. As of December 31, 2017, there was no restricted stock outstanding.
A summary of the activity for RSUs to be settled in common stock for the year ended December 31, 20172019 is as follows (shares in thousands):
|
| | | | |
| | Shares | | Weighted Average Grant Date Fair Value (Per share) |
| Unvested at December 31, 2018 | 2,634 |
| | $33.50 |
| Granted | 2,142 |
| | $35.62 |
| Vested | (1,349 | ) | | $32.22 |
| Forfeited | (162 | ) | | $35.20 |
| Unvested at December 31, 2019 | 3,265 |
| | $35.34 |
|
| | | | |
| | Shares | | Weighted Average Grant Date Fair Value (Per share) |
| Unvested at December 31, 2016 | 2,711 |
| | $25.45 |
| Granted | 1,459 |
| | $37.06 |
| Vested | (1,489 | ) | | $28.03 |
| Forfeited | (81 | ) | | $27.58 |
| Unvested at December 31, 2017 | 2,600 |
| | $30.42 |
During the years ended December 31, 2017, 20162019, 2018 and 2015,2017, Quanta recognized $41.0$45.5 million, $39.6$43.9 million and $33.3$41.0 million of non-cash stock compensation expense related to restricted stock and RSUs to be settled in common stock. Such expense is recorded in “Selling, general and administrative expenses.” As of December 31, 2017,2019, there was $38.2$63.7 million of total unrecognized compensation costexpense related to unvested RSUs to be settled in common stock granted to both employees and non-employees. This cost is expected to be recognized over a weighted average period of 1.612.61 years.
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Performance UnitsPSUs to be Settled in Common Stock
Performance units awarded pursuant to the 2011 PlanPSUs provide for the issuance of shares of common stock upon vesting. These performance units cliff-vestvesting, which occurs at the end of a three-year performance period based on achievement of certain performance metrics established by the Compensation Committee of Quanta’s compensation committee,Board of Directors, including company performance goals and, with respect to certain awards, Quanta’s total shareholder return as compared to a predetermined group of peer companies. The final number of earned and vested performance unitsshares of common stock issuable upon vesting of PSUs can range from 0% to 200% of the initial award basednumber of PSUs initially granted, depending on the level of achievement, as determined by the Compensation Committee of Quanta’s compensation committee.Board of Directors. Holders of PSUs are entitled to cash dividend equivalent payments in an amount equal to any cash dividend payable on account of the underlying Quanta common stock; however, payment of such amounts is not made until the PSUs vest, such that the dividend equivalent payments are subject to forfeiture.
During the years ended December 31, 2017, 20162019, 2018 and 2015,2017, Quanta granted 0.30.4 million, 0.3 million and 0.20.3 million of performance unitsPSUs to be settled in common stock under the 2011 Plan and the 2019 Plan, with a weighted average grant date fair value of $17.63, $22.86$15.49, $12.24 and $28.16$17.63 per unit. The grant date fair valuevalues for awards of performance units without market-based metrics was based on the market value of Quanta common stock on the date of grant applied to the total number of performance units that Quanta anticipates will vest. The grant date fair value for awards of performance units with market-based metrics, which werePSUs granted in the yearyears ended December 31, 2019, 2018 and 2017, was based on a fair value aswhich included market-based metrics, were determined using a Monte Carlo simulation valuation methodology using the following key inputs:
|
| | | | | | | | | |
| | | 2019 | | 2018 | | 2017 |
| Valuation date price based on March 8, 2019, February 28, 2018 and March 22, 2017 closing stock prices of Quanta common stock | | $35.19 | | $34.44 | | $36.31 |
| Expected volatility | | 25 | % | | 34 | % | | 36 | % |
| Risk-free interest rate | | 2.43 | % | | 2.39 | % | | 1.46 | % |
| Term in years | | 2.81 |
| | 2.84 |
| | 2.78 |
|
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
|
| | |
Valuation date stock price
Quanta recognizes expense, net of estimated forfeitures, related to PSUs with market-based metrics based on the March 22, 2017 closing stock price | $36.31 |
Expected volatility | 36.00 | % |
Risk-free interest rate | 1.46 | % |
Term in years | 2.78 |
|
This fair value is expensed ratably over the three-year performance period and is adjusted for changes in the expected probability of achievement of the underlying goals andperformance metrics, multiplied by the resulting number of performance units anticipated to vest, so that the expense recognized is equivalent to the proportioncompleted portion of the three-year period and the fair value of the total number of shares of common stock that has expired,Quanta anticipates will be issued based on such achievement. Quanta recognizes expense, net of estimated forfeitures, related to PSUs without market-based metrics based on the completed portion of the three-year period multiplied by the fair value of the total number of performance units anticipated to vest.shares of common stock that Quanta anticipates will be issued. During the years ended December 31, 2017, 20162019, 2018 and 2015,2017, Quanta recognized $5.4$6.5 million, $3.2$8.6 million and $3.6$5.4 million in compensation expense associated with performance units.PSUs. Such expense is recorded in “Selling, general and administrative expenses.” During the year ended December 31, 2019, 0.2 million PSUs vested, and 0.4 million shares of common stock were earned and either issued or deferred for future issuance in connection with PSUs. During each of the years ended December 31, 2018 and 2017, 0.1 million performance unitsPSUs vested, and 0.1 million shares of common stock were earned and either issued or deferred for future issuance in connection with performance units. During the years ended December 31, 2016 and 2015, no performance units vested, and no shares of common stock were issued in connection with performance units.PSUs.
RSUs to be Settled in Cash
Certain RSUs granted by Quanta under the Plans are settled solely in cash. These cash-settled RSUs are intended to provide plan participants with cash performance incentives that are substantially equivalent to the risks and rewards of equitystock ownership in Quanta, typically vest in three equal annual installments over a two-year or three-year period following the date of grant, and are subject to forfeiture under certain conditions, primarily termination of service. Additionally, subject to certain restrictions, Quanta’s non-employee directors may elect to cash settle a portion of their RSU awards which generally vest upon conclusion of the director service year.in cash. For RSUs settled in cash, the holders receive for each vested RSU an amount in cash equal to the fair market value of one1 share of Quanta common stock on the settlement date, as specified in the applicable award agreement.
Compensation expense related to RSUs to be settled in cash was $8.1$5.9 million, $7.0$5.0 million and $4.0$8.1 million for the years ended December 31, 2017, 20162019, 2018 and 2015.2017. Such expense is recorded in selling,“Selling, general and administrative expenses.” RSUs that are anticipated to be settled in cash are not included in the calculation of weighted average shares outstanding for earnings per share, and the estimated earned value of such RSUs is classified as a liability. Quanta paid $8.6$5.4 million, $4.6$5.9 million and $4.2$8.6 million to settle liabilities related to cash-settled RSUs in the years ended December 31, 2017, 20162019, 2018 and 2015, respectively.2017. Accrued liabilities for the estimated earned value of outstanding RSUs to be settled in cash were $4.6$4.3 million and $5.1$3.4 million at December 31, 20172019 and 2016.
2018.
| |
| 13. | EMPLOYEE BENEFIT PLANS: |
Unions’ Multiemployer Pension Plans
Quanta contributes to a number of multiemployer defined benefit pension plans under the terms of collective bargaining agreements with various unions that represent certain of Quanta’s employees. Approximately 35% of our employees at December 31, 2019 were covered by collective bargaining agreements. Quanta’s multiemployer pension plan contribution rates generally are specified in the collective bargaining agreements (usually on an annual basis), and contributions are made to the plans on a “pay-as-you-go” basis based on its union employee payrolls. Quanta may also have additional liabilities imposed by law as a result of its participation in multiemployer defined benefit pension plans. The Employee Retirement Income Security Act of 1974, as amended by the Multiemployer Pension Plan Amendments Act of 1980, imposes certain liabilities upon an employer who is a contributor to a multiemployer pension plan if the employer withdraws or is deemed to have withdrawn from the plan or the plan is terminated or experiences a mass withdrawal. In the fourth quarter of 2011, Quanta recorded a partial withdrawal liability related to the withdrawal by certain
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Quanta subsidiaries from the Central States, Southeast and Southwest Areas Pension Plan (Central States Plan) following an amendment to the applicable collective bargaining agreement which eliminated their obligations to contribute to the Central States Plan. During the first quarter of 2014, Quanta recorded an adjustment to cost of services to increase the recognized withdrawal liability. Additional information regarding this withdrawal, as well as the withdrawal from the Central States Plan of a company acquired by Quanta in the fourth quarter of 2013, is provided in Collective Bargaining Agreements in Note 15.
The Pension Protection Act of 2006 (PPA) also added special funding and operational rules generally applicable to plan years beginning after 2007 for multiemployer plans in the United States that are classified as “endangered,” “seriously endangered” or “critical” status based on multiple factors (including, for example, the plan’s funded percentage, cash flow position and whether it is projected to experience a minimum funding deficiency). Plans in these classifications must adopt measures to improve their funded status through a funding improvement or rehabilitation plan, as applicable, which may require additional contributions from employers (which may take the form of a surcharge on benefit contributions) and/or modifications to retiree benefits. Certain plans to which Quanta contributes or may contribute in the future are in “endangered,” “seriously endangered” or “critical” status. The amount of additional funds, if any, that Quanta may be obligated to contribute to these plans in the future cannot be reasonably estimated due to uncertainty regarding the amount of the future levels of work that require the specific use ofinvolving covered union employees, covered by these plans, as well as the future contribution levels and possible surcharges on contributions applicable to these plans.plan contributions.
The following table summarizes plan information relating to Quanta’s participation in multiemployer defined benefit pension plans, including company contributions for the last three years, the status under the PPA of the plans and whether the plans are subject to a funding improvement or rehabilitation plan or contribution surcharges. The most recent PPA zone status available in 20172019 and 20162018 relates to the plan’splans’ fiscal year-endyear-ends in 20162018 and 2015.2017. Forms 5500 were not yet available for the plan years ending in 2017.2019. The PPA zone status is based on information that Quanta received from the respective plans, as well as publicly available information on the U.S. Department of Labor website, and is certified by the plan’s actuary. Although multiple factors or tests may result in red zone or yellow zone status, plans in the red zone generally are less than 65 percent funded, plans in the yellow zone
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
generally are less than 80 percent funded, and plans in the green zone generally are at least 80 percent funded. Under the PPA, red zone plans are classified as “critical” status, yellow zone plans are classified as “endangered” status and green zone plans are classified as neither “endangered” nor “critical” status. The “Subject to Financial Improvement/ Rehabilitation Plan” column indicates plans for which a financial improvement plan or a rehabilitation plan is either pending or has been implemented. The last column lists the expiration dates of Quanta’s collective-bargaining agreements to which the plans are subject. Total contributions to these plans correspond to the number of union employees employed at any given time and the plans in which they participate and vary depending upon the location and number of ongoing projects at a given time and the need for union resources in connection with such projects. Information has been presented separately for individually significant plans, based on PPA funding status classification, and in the aggregate for all other plans.
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
| | | | | Employee Identification Number/ Pension Plan Number | | PPA Zone Status | | Subject to Financial Improve- ment/ Reha- bilitation Plan | | Contributions (in thousands) | Sur-charge Imposed | | Expiration Date of Collective Bargaining Agreement | | Employee Identification Number/ Pension Plan Number | | PPA Zone Status | | Subject to Financial Improve- ment/ Reha- bilitation Plan | | Contributions (in thousands) | Sur-charge Imposed | | Expiration Date of Collective Bargaining Agreement |
| Fund | | 2017 | | 2016 | | 2017 | | 2016 | | 2015 | | | 2019 | | 2018 | | 2019 | | 2018 | | 2017 | |
| National Electrical Benefit Fund | | 53-0181657-001 | | Green | | Green | | No | | $ | 29,161 |
| | $ | 22,912 |
| | $ | 21,200 |
| | No | | Varies through May 2022 | | 53-0181657-001 | | Green | | Green | | No | | $ | 44,414 |
| | $ | 35,399 |
| | $ | 29,161 |
| | No | | Varies through May 2022 |
| Central Pension Fund of the IUOE & Participating Employers | | | 36-6052390-001 | | Green | | Green | | No | | 11,638 |
| | 9,246 |
| | 12,176 |
| | No | | Varies through December 2020 |
| Pipeline Industry Pension Fund | | 73-6146433-001 | | Green | | Green | | No | | 13,585 |
| | 6,954 |
| | 6,087 |
| | No | | Varies through May 2020 | | 73-6146433-001 | | Green | | Green | | No | | 9,376 |
| | 10,132 |
| | 13,585 |
| | No | | Varies through May 2020 |
| Central Pension Fund of the IUOE & Participating Employers | | 36-6052390-001 | | Green | | Green | | No | | 12,176 |
| | 5,668 |
| | 5,677 |
| | No | | Varies through December 2020 | |
| Excavators Union Local 731 Pension Fund | | | 13-1809825-001 | | Green | | N/A | | No | | 6,697 |
| | — |
| | — |
| | No | | April 2022 |
| Eighth District Electrical Pension Fund | | | 84-6100393-001 | | Green | | Green | | No | | 5,939 |
| | 3,332 |
| | 3,208 |
| | No | | Varies through December 2020 |
| Operating Engineers Local 324 Pension Fund | | | 38-1900637-001 | | Red | | Red | | Yes | | 4,315 |
| | 2,310 |
| | 1,969 |
| | Yes | | Varies through December 2020 |
| Local 697 IBEW and Electrical Industry Pension Fund | | | 51-6133048-001 | | Green | | Green | | No | | 3,717 |
| | 2,656 |
| | 1,127 |
| | No | | May 2020 |
| Teamsters National Pipe Line Pension Plan | | 46-1102851-001 | | Green | | Green | | No | | 3,602 |
| | 1,661 |
| | 1,343 |
| | No | | Varies through December 2020 | | 46-1102851-001 | | Green | | Green | | No | | 3,039 |
| | 3,318 |
| | 3,602 |
| | No | | Varies through December 2020 |
| Laborers Pension Trust Fund for Northern California | | 94-6277608-001 | | Yellow | | Yellow | | Yes | | 3,387 |
| | 3,805 |
| | 2,603 |
| | Yes | | Varies through May 2020 | | 94-6277608-001 | | Green | | Yellow | | Yes | | 2,823 |
| | 3,652 |
| | 3,387 |
| | Yes | | Varies through May 2020 |
| Eighth District Electrical Pension Fund | | 84-6100393-001 | | Green | | Green | | No | | 3,208 |
| | 3,089 |
| | 2,544 |
| | No | | Varies through December 2020 | |
| Locals 302 & 612 of the IUOE-Employers Construction Industry Retirement Plan | | | 91-6028571-001 | | Green | | Green | | No | | 2,392 |
| | 2,620 |
| | 2,194 |
| | No | | May 2021 |
| Laborers National Pension Fund | | 75-1280827-001 | | Green | | Green | | No | | 3,049 |
| | 1,358 |
| | 7,671 |
| | No | | Varies through December 2020 | | 75-1280827-001 | | Red | | Red | | Yes | | 1,910 |
| | 2,051 |
| | 3,049 |
| | Yes | | Varies through December 2020 |
| West Virginia Laborers Pension Trust Fund | | | 55-6026775-001 | | Green | | Green | | No | | 1,693 |
| | 3,321 |
| | 509 |
| | No | | May 2020 |
| Michigan Laborers’ Pension Plan | | | 38-6233976-001 | | Yellow | | Yellow | | No | | 1,491 |
| | 1,061 |
| | — |
| | No | | May 2020 |
| International Union of Operating Engineers Local 132 Pension Fund | | | 55-6015364-001 | | Green | | Green | | No | | 1,289 |
| | 3,367 |
| | 222 |
| | No | | May 2020 |
| Laborers District Council of W PA Pension Fund | | | 25-6135576-001 | | Yellow | | Red | | Yes | | 1,194 |
| | 1,029 |
| | 418 |
| | Yes | | May 2020 |
| Plumbers and Pipefitters National Pension Fund | | | 52-6152779-001 | | Yellow | | Yellow | | No | | 1,162 |
| | 2,734 |
| | 1,273 |
| | No | | Varies through March 2021 |
| OE Pension Trust Fund | | | 94-6090764-001 | | Yellow | | Red | | Yes | | 956 |
| | 1,922 |
| | 1,703 |
| | Yes | | Varies through June 2020 |
| Employer-Teamsters Local Nos 175 & 505 Pension Trust Fund | | | 55-6021850-001 | | Red | | Red | | Yes | | 530 |
| | 1,209 |
| | 50 |
| | Yes | | May 2020 |
| Alaska Electrical Pension Plan | | 92-6005171-001 | | Green | | Green | | No | | 2,143 |
| | 2,701 |
| | 639 |
| | No | | Varies through December 2019 | | 92-6005171-001 | | Green | | Green | | No | | 66 |
| | 2,287 |
| | 2,143 |
| | No | | December 2019 |
| Operating Engineers Local 324 Pension Fund | | 38-1900637-001 | | Red | | Red | | Yes | | 1,969 |
| | 1,291 |
| | 1,231 |
| | Yes | | Varies through December 2020 | |
| OE Pension Trust Fund | | 94-6090764-001 | | Red | | Red | | Yes | | 1,703 |
| | 1,508 |
| | 1,264 |
| | Yes | | Varies through June 2020 | |
| Plumbers and Pipefitters National Pension Fund | | 52-6152779-001 | | Yellow | | Yellow | | Yes | | 1,273 |
| | 1,666 |
| | 850 |
| | No | | Varies through March 2021 | |
| Alaska Laborers - Employers Retirement Fund | | 91-6028298-001 | | Yellow | | Yellow | | Yes | | 536 |
| | 1,216 |
| | 181 |
| | No | | December 2018 | |
| Laborers District Council of W PA Pension Fund | | 25-6135576-001 | | Red | | Red | | Yes | | 418 |
| | 876 |
| | 21 |
| | Yes | | May 2018 | |
| Alaska Teamster Employer Pension Plan | | 92-6003463-024 | | Red | | Red | | Yes | | 255 |
| | 659 |
| | 513 |
| | Yes | | December 2018 | |
| Midwest Operating Engineers Pension Trust Fund | | 36-6140097-001 | | Yellow | | Yellow | | Yes | | 106 |
| | 793 |
| | 3,294 |
| | Yes | | June 2019 | |
| All other plans - U.S. | | 24,234 |
| | 28,516 |
| | 20,594 |
| | | 23,105 |
| | 26,027 |
| | 21,029 |
| |
All other plans - Canada (1) | | 9,277 |
| | 562 |
| | 1,303 |
| | | 6,451 |
| | 8,518 |
| | 9,277 |
| |
| Total | | $ | 110,082 |
| | $ | 85,235 |
| | $ | 77,015 |
| | |
| Total contributions | | | $ | 134,197 |
| | $ | 126,191 |
| | $ | 110,082 |
| |
| |
(1) | Multiemployer defined benefit pension plans in Canada are not subject to the reporting requirements under the PPA. Accordingly, certain information was not publicly available. |
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Quanta’s contributions to the following individually significant plans were five percent or more of the total contributions to these plans for the periods indicated based on the Forms 5500 for these plans for the years ended December 31, 20162018 and 2015.2017. Forms 5500 were not yet available for these plans for the year ended December 31, 20172019.
|
| | |
| Pension Fund | | Plan Years in which Quanta Contributions Were Five Percent or More of Total Plan Contributions |
| Pipeline Industry Pension Fund | | 20162018 and 20152017 |
| Eighth District Electrical Pension Fund | | 20162018 and 2015 |
Local 697 IBEW and Electrical Industry Pension Fund | | 2016 and 2015 |
Local Union No. 9 IBEW and Outside Contractors Pension Fund | | 2016 and 2015 |
Alaska Plumbing and Pipefitting Industry Pension Fund | | 2016 and 20152017 |
| Teamsters National Pipe Line Pension Plan | | 20162018 and 20152017 |
AlaskaLocal 697 I.B.E.W. and Electrical Industry Pension PlanFund | | 20162018 and 2017 |
IBEWNational Electrical Benefit Fund | | 2018 and 2017 |
| West Virginia Laborers Pension Trust Fund | | 2018 |
| I.B.E.W. Local 456 Pension Plan | | 20162018 |
Michigan Electrical Employees’Local Union No. 9 I.B.E.W. and Outside Contractors Pension Fund | | 2018 |
| International Union of Operating Engineers Local 132 Pension Fund | | 2018 |
| Employer-Teamsters Local Nos 175 & 505 Pension Trust Fund | | 2018 |
| Local Union 400 I.B.E.W. Pension Plan | | 20162017 |
Laborers National Pension Fund | | 2015 |
Michigan Upper Peninsula Intrl Brotherhood of Elec WorkersIBEW 648 Pension Plan | | 20152017 |
| Laborers Local 57 Industrial Pension Plan | | 2017 |
In addition to the contributions made to multiemployer defined benefit pension plans noted above, Quanta also contributed to multiemployer defined contribution or other benefit plans on behalf of certain union employees. Contributions to union multiemployer defined contribution or other benefit plans by Quanta were $171.4$201.3 million, $139.3$174.7 million and $147.1$171.4 million for the years ended December 31, 2017, 20162019, 2018 and 2015.2017. Total contributions made to all of these multiemployer plans for the years ended December 31, 2017, 20162019, 2018 and 20152017 correspond to the number of union employees employed at any given time and the plans in which they participate and vary depending upon the location and number of ongoing projects at a given time and the need for union resources in connection with such projects.
Quanta 401(k) Plan
Quanta maintains a 401(k) plan pursuant to which employees who are not provided retirement benefits through a collective bargaining agreement may make contributions through a payroll deduction. Quanta makes matching cash contributions of 100% of each employee’s contribution up to 3% of that employee’s salary and 50% of each employee’s contribution between 3% and 6% of such employee’s salary, up to the maximum amount permitted by law. Contributions to the 401(k) plan by Quanta were $26.3$41.4 million, $21.9$33.4 million and $17.7$26.3 million for the years ended December 31, 2017, 20162019, 2018 and 2015, respectively.2017.
Deferred Compensation Plans
Quanta maintains nonqualified deferred compensation plans pursuant to which non-employee directors and certain key employees, independent contractors and consultants may defer receipt of some or all of their cash compensation and/or settlement of their equity-basedstock-based awards, subject to certain limitations. These plans are unfunded and unsecured compensation arrangements. Individuals participating in these plans may allocate deferred cash amounts among a group of notional accounts that mirror the gains and losses of various investment alternatives. Generally, participants receive distributions of deferred balances based on predetermined payout schedules or other events.
The plan covering key employees provides for employer matching contributions for certain officers and employees whose benefits under the 401(k) plan are limited by federal tax law. Quanta may also make discretionary employer contributions to that plan. Matching contributions vest immediately, and discretionary employer contributions are subject to a vesting schedule determined at the time of the contribution, provided that vesting accelerates upon a change in control andor the participant’s death or retirement. All matching and discretionary employer contributions, whether vested or not, are forfeited upon a participant’s termination of employment for cause or upon the participant engaging in competition with Quanta or any of its affiliates.
Quanta made contributions to the eligible participants’ accounts under the deferred compensation plans of $1.1 million $1.0 million and $1.0 million during each of the years ended December 31, 2017, 20162019, 2018 and 2015, respectively.2017. At December 31, 20172019 and 2016,2018, obligations under these plans, were$30.1including amounts contributed by Quanta, were $47.3 million and $19.1$33.4 million and were included in “Insurance and other non-current liabilities” in the accompanying consolidated balance sheets,sheets. Quanta maintains investments to provide for future obligations
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
related to these deferred compensation plans. At December 31, 2019 and 2018, these investments inwere primarily comprised of company-owned life insurance policies, had fair market values of $28.7$45.8 million and $17.9$33.5 million and were included in “Other assets, net” in the accompanying consolidated balance sheets. Individuals participating in these plans receive distributions of their respective balances based on predetermined payout schedules or other events and are also able to direct investments made on their behalf among investment alternatives permitted from time to time under the plan.
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
| |
14. | RELATED PARTY TRANSACTIONS: |
Certain of Quanta’s operating units have entered into related party lease arrangements for operational facilities, typically with prior owners of certain acquired businesses. These lease agreements generally have terms of up to approximately 5 years and include renewal options. Related party lease expense for the years ended December 31, 2017, 2016 and 2015 was $12.3 million, $8.7 million and $10.6 million, respectively.
| |
15.14. | COMMITMENTS AND CONTINGENCIES: |
Investments in Affiliates and Other Entities
As described in NoteNotes 2 and 11, Quanta holds investments in certainvarious entities, including joint ventures with third parties for the purpose of providingventure entities that provide infrastructure services under specific customer contracts and partially owned entities that own and operate certain customer contracts.infrastructure assets constructed by Quanta. Losses incurred by these joint venturesentities are generally shared ratably based on the percentage ownership of the participants in these structures. However, in Quanta’s joint venture members. However,structures that provide infrastructure services, each member of the joint ventureparticipant is typically is jointly and severally liable for all of the obligations of the joint venture underentity pursuant to the contract with the customer, as a general partner or through a parent guarantee, and therefore can be liable for full performance of the contract with the customer. In circumstances where Quanta’s participation in a joint venture qualifies as a general partnership, the joint venture partners are jointly and severally liable for all of the obligations of the joint venture, including obligations owed to the customer or any other person or entity. Quanta is not aware of circumstances that would lead to future claims against it for material amounts in connection with these joint and several liabilities.
In the joint venture arrangements entered into by Quanta,Additionally, typically each joint venture party indemnifiesparticipant agrees to indemnify the other partyparticipant for any liabilities incurred in excess of what the liabilities such other partyparticipant is obligated to bear under the respective joint venture agreement.agreement or in accordance with the scope of work subcontracted to each participant. It is possible, however, that Quanta could be required to pay or perform obligations in excess of its share if the other party to the joint venture failedanother participant is unable or refusedrefuses to pay or perform its share of the obligations. Quanta is not aware of circumstances that would lead to future claims against it for material amounts that would not be indemnified. However, to the extent any such claims arise, they could be material and could adversely affect Quanta’s consolidated business, financial condition, results of operations or cash flows.
During 2014, a limited partnership in which Quanta is a partner was selected for an engineering, procurement and construction (EPC) electric transmission project to construct approximately 500 kilometers of transmission line and two 500 kV substations. Quanta will provide turnkey EPC services for the entire project. As of December 31, 2017, Quanta made aggregate contributions to this unconsolidated affiliate of $66.7 million, received $64.4 million as a return of capital and had outstanding additional capital commitments associated with this project of $25.2 million, which are anticipated to be paid in 2019.
Additionally, as of December 31, 2017, Quanta had outstanding capital commitments associated with investments in unconsolidated affiliates related to planned oil and gas infrastructure projects of $16.9 million, of which $14.8 million is expected to be paid in 2018. The remaining $2.1 million of these capital commitments is anticipated to be paid by May 31, 2022. As described in Note 2, Quanta has also formed a partnership with select infrastructure investors that provides up to $1.0 billion of capital, including approximately $80.0 million from Quanta, available to invest in certain specified infrastructure projects through August 2024.
Leases
Quanta leases certain land, buildings and equipment under non-cancelable lease agreements, including related party leases as discussed in Note 14. The terms As of these agreements vary from lease to lease, including some with renewal options and escalation clauses. The following schedule shows the future minimum lease payments under these leases as of December 31, 2017 (in thousands):
|
| | | |
| | Operating Leases |
| Year Ending December 31: | |
|
| 2018 | $ | 115,985 |
|
| 2019 | 75,556 |
|
| 2020 | 49,287 |
|
| 2021 | 28,422 |
|
| 2022 | 15,883 |
|
| Thereafter | 30,871 |
|
| Total minimum lease payments | $ | 316,004 |
|
Rent expense related2019, Quanta had contributed $20.0 million to operating leases was $276.2 million, $242.3 millionthis partnership in connection with certain investments. However, in October 2019, due to certain management changes at the registered investment adviser, the partnership entered into a 180-day period during which the investors and $208.5 million forQuanta will evaluate the years ended December 31, 2017, 2016 and 2015, respectively.
Quanta has guaranteedpartnership. During this period, the residual value on certain of its equipment operating leases. Quanta has agreed to pay any difference between this residual value andpartnership may make additional investments with the fair market valueconsent of the underlying assetinvestors, and, at the date of terminationend of the leases. At December 31,
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
2017,period, the maximum guaranteed residual value was $626.8 million.investors or Quanta believes that no significant paymentsmay elect to end the investment period for any future investments or dissolve the partnership. Quanta will be made as a resultcontinue to collect management fees during this period, and this event is not expected to materially affect Quanta’s consolidated business, financial position, results of the difference between the fair market value of the leased equipment and the guaranteed residual value. However, there can be no assurance that significant payments will not be required in the future.operations or cash flows.
Contingent Consideration Liabilities
As discussed in further detail in Note 2, Quanta is obligated to pay contingent consideration amounts to the former owners of certain acquired businesses in the event that such acquired businesses achieve specified financial performance metrics.objectives. As of December 31, 20172019 and 2016,2018, the estimated fair value of Quanta’s contingent consideration liabilities totaled $65.7$84.2 million and $19.5$70.8 million.
Committed Expenditures
Quanta has capital commitments for the expansion of its vehicleequipment fleet in order to accommodate manufacturer lead times on certain types of vehicles. As of December 31, 2017,2019, Quanta issued $14.6had $30.5 million of production orders with expected delivery dates in 2018.2020. Although Quanta has committed to purchase these vehicles at the time of their delivery, Quanta anticipates that the majority of these orders will be assigned to third partythird-party leasing companies and made available to Quanta under certain of its master equipment lease agreements, thereby releasing Quanta from its capital commitments.
Legal Proceedings
Quanta is from time to time party to various lawsuits, claims and other legal proceedings that arise in the ordinary course of business. These actions typically seek, among other things, compensation for alleged personal injury, breach of contract, negligence or gross negligence and/or property damages, wage and hour and other employment-related damages, punitive damages, civil penalties or other losses, or injunctive or declaratory relief. With respect to all such lawsuits, claims and proceedings, Quanta records a reserve when it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. In addition, Quanta discloses matters for which management believes a material loss is at least reasonably possible. Except as otherwise stated below, none of these proceedings separately or in the aggregate, are expected to have a material adverse effect on Quanta’s consolidated financial position, results of operations or cash flows. In all instances, management has assessed the matter based on current information and made
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
a judgment concerning its potential outcome, giving due consideration to the nature of the claim, the amount and nature of damages sought and the probability of success. Management’s judgment may prove materially inaccurate, and such judgment is made subject to the known uncertainties of litigation.
Peru Project Dispute. In 2015, Redes Andinas de Comunicaciones S.R.L. (Redes), a majority-owned subsidiary of Quanta, entered into two separate contracts with an agency of the Peruvian Ministry of Transportation and Communications (MTC), currently Programa Nacional de Telecomunicaciones (PRONATEL), as successor to Fondo de Inversion en Telecomunicaciones (FITEL), pursuant to which Redes would design, construct and operate certain telecommunication networks in rural regions of Peru. The aggregate consideration provided for in the contracts was approximately $248 million, consisting of approximately $151 million to be paid during the construction period and approximately $97 million to be paid during a 10-year post-construction operation and maintenance period. At the beginning of the project, FITEL made advance payments totaling approximately $87 million to Redes, which were secured by two on-demand advance payment bonds posted by Redes to guarantee proper use of the payments in the execution of the project. Redes also provided two on-demand performance bonds in the aggregate amount of $25 million to secure performance of its obligations under the contracts.
During the construction phase, the project experienced numerous challenges and delays, primarily related to issues which Quanta believes were outside of the control of and not attributable to Redes, including, among others, weather-related issues, local opposition to the project, permitting delays, the inability to acquire clear title to certain required parcels of land and other delays which Quanta believes were attributable to FITEL/PRONATEL. In response to various of these challenges and delays, Redes had requested and received multiple extensions to certain contractual deadlines and relief from related liquidated damages. However, in April 2019, PRONATEL provided notice to Redes claiming that Redes was in default under the contracts due to the delays and that PRONATEL would terminate the contracts if the alleged defaults were not cured. Redes responded by claiming that it was not in default, as the delays were due to events not attributable to Redes, and therefore PRONATEL was not entitled to terminate the contracts. PRONATEL subsequently terminated the contracts for alleged cause prior to completion of Redes’ scope of work, exercised the on-demand performance bonds and advance payment bonds against Redes, and indicated its intention to claim damages, including a verbal allegation of approximately $45 million of liquidated damages under the contracts, although it has not formally submitted the amount of its claim to Redes.
In May 2019, Redes filed for arbitration before the Court of International Arbitration of the International Chamber of Commerce against PRONATEL and the MTC. In the arbitration, Redes claims that PRONATEL: wrongfully terminated the contracts, wrongfully executed the advance payment bonds and the performance bonds, and is not entitled to the alleged amount of liquidated damages. In addition, Redes is seeking compensation for all damages arising from PRONATEL’s actions, including but not limited to (i) repayment of the amounts collected by PRONATEL under the advance payment bonds and the performance bonds; (ii) payment of amounts owed for work completed by Redes under the contracts; (iii) lost income in connection with Redes’ future operation and maintenance of the networks; and (iv) other related costs and damages to Redes as a result of the improper termination of the contracts.
As of the date of the contract terminations, Redes had incurred costs of approximately $157 million in construction of the project and had received approximately $100 million of payments (inclusive of the approximately $87 million advance payments). Furthermore, upon completion of the physical transfer of the networks (as completed at the time of the contract terminations) to PRONATEL, which is required upon termination of the contracts and commenced in October 2019, PRONATEL and the MTC will possess the networks, for which PRONATEL has paid approximately $100 million while collecting approximately $112 million of bond proceeds. Quanta believes that PRONATEL’s actions represent an abuse of power and unfair and inequitable treatment and that PRONATEL and the MTC have been unjustly enriched. Specifically, under the terms of the contracts, the advance payment bonds were to be exercised only if it is determined that Redes did not use the advance payments for their intended purpose, in which case Redes would be obligated to return the portion of the advance payments not properly used. Redes was not afforded the opportunity to provide evidence of its proper use of the advance payments for project expenditures prior to PRONATEL exercising the bonds in their full amount. As stated above, Redes has incurred substantially more than the advance payment amounts in the execution of the project, and Quanta believes Redes has used the advance payment amounts for their intended purpose.
Quanta also reserves the right to seek full compensation for the loss of its investment under other applicable legal regimes, including investment treaties and customary international law, as well as to seek resolution through direct discussions with PRONATEL or the MTC.
Quanta believes Redes is entitled to all amounts described in the claims above and intends to vigorously pursue those claims in the pending arbitration proceeding and/or additional arbitration proceedings. However, as a result of the contract terminations and the inherent uncertainty involved in arbitration proceedings and recovery of amounts owed, there can be no assurance that Redes will prevail on those claims or in defense of liquidated damages claims or any other claims that may be asserted by PRONATEL. As a result, during the three months ended June 30, 2019, Quanta recorded a charge to earnings of $79.2 million,
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which included a reduction of previously recognized earnings on the project, a reserve against a portion of the project costs incurred through the project termination date, an accrual for a portion of the alleged liquidated damages, and the estimated costs to complete the project turnover and close out the project.
As of December 31, 2019, after taking into account the above charge, Quanta had a net receivable position related to the project of approximately $120 million, which includes the approximately $87 million PRONATEL collected through exercise of the advance payment bonds. The net receivable from PRONATEL is included in “Other assets, net” in the accompanying consolidated balance sheet as of December 31, 2019.
If Quanta is not successful in the pending or future arbitration proceedings, this matter could result in an additional significant loss that could have a material adverse effect on Quanta’s consolidated results of operations and cash flows. However, based on the information currently available and the preliminary status of the pending arbitration proceeding, Quanta is not able to determine a range of reasonably possible additional loss, if any, with respect to this matter.
Maurepas Project Dispute. During the third quarter of 2017, Maurepas Pipeline, LLC (Maurepas) notified QPS Engineering, LLC (QPS), a subsidiary of Quanta, of Maurepas’ assertion of aits claim for liquidated damages allegedly arising from delay in mechanical completion of a project in Louisiana. Quanta disputes the claim and believes that QPS is not responsible for liquidated damages under the contract terms, and in June 2019 QPS filed suit against SemGroup Corporation (now Energy Transfer LP), the parent company of Maurepas, under the parent guarantee issued to secure payment from Maurepas on the project. QPS is seeking to recover $22.0 million that it believes has been wrongfully withheld, which represents the maximum liability for liquidated damages pursuant to the contract terms. TheIn July and August 2018, QPS also received notice from Maurepas claiming certain warranty defects on the project. In July 2019, Maurepas filed suit against QPS and Quanta, pursuant to a parent guarantee, for damages related to the warranty defects and for a declaratory judgment related to the liquidated damages claim, subsequently claiming approximately $59 million in damages related to a portion of the alleged warranty defects. Quanta is continuing to evaluate the claimed warranty defects and, if they exist, the appropriate remedy. At this time, Quanta disputes the extent of the alleged defects or has not been able to substantiate them.
As of December 31, 2019, Quanta had recorded an accrual with respect to this matter remains subject to contractual dispute resolution measures; however, either party may choose to institute a formal legal proceeding upon completionbased on the current estimated amount of such measures.probable loss. However, based on the information currently available, Quanta cannot estimate the range of additional reasonably possible loss in connection with this matter. If, upon final resolution of this matter, Quanta is unsuccessful, any such liquidated damages or warranty defect damages in excess of Quanta’s current loss accrual would be recorded by QPS as additional costs on the project, and Quanta believes the range of reasonably possible loss could be up to $22.0 million, which is the maximum liability for liquidated damages pursuant to the contract terms. project.
Lorenzo Benton v. Telecom Network Specialists, Inc., et al. In June 2006, plaintiff Lorenzo Benton filed a class action complaint in the Superior Court of California, County of Los Angeles, alleging various wage and hour violations against Telecom Network Specialists (TNS), a former subsidiary of Quanta. Quanta retained liability associated with this matter pursuant to the terms of Quanta’s sale of TNS in December 2012. Benton represents a class of workers that includes all persons who worked on certain TNS projects, including individuals that TNS retained through numerous staffing agencies. The plaintiff class in this matter is seeking damages for unpaid wages, penalties associated with the failure to provide meal and rest periods and overtime wages, interest and attorneys’ fees. In January 2017, the trial court granted a summary judgment motion filed by the plaintiff class and found that TNS was a joint employer of the class members and that it failed to provide adequate meal and rest breaks and failed to pay overtime wages. In February 2018, a hearing was held on a2019, the court granted, in part, the plaintiff class’s final motion for summary judgment on damages, filed byawarding the plaintiff class seeking approximately $11.1$7.5 million for its claims; however, a final determination regardingmeal/rest break and overtime claims, and denied the amount of damages was not made.motion as to penalties. Quanta believes the court’s decisiondecisions on liability isand damages are not supported by controlling law and continues to contest its liability and the damage calculation asserted by the plaintiff class in this matter. In July 2019, TNS prevailed, in part, on its own motion for summary judgment on the remaining wage statement and penalty claims, with the court dismissing the claims for penalties based on alleged meal and rest break violations.
Additionally, in November 2007, TNS filed cross complaints for indemnity and breach of contract against the staffing agencies, which employed many of the individuals in question. In December 2012, the trial court heard cross-motions for summary judgment filed by TNS and the staffing agencies pertaining to TNS’s demand for indemnity. The court denied TNS’s motion and
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granted the motions filed by the staffing agencies; however, the California Appellate Court reversed the trial court’s decision in part and instructed the trial court to reconsider its ruling. In February 2017, the court denied a new motion for summary judgment filed by the staffing companies and has since stated that the staffing companies would be liable to TNS for any damages owed to the class members that the staffing companies employed.
The final amount of liability, if any, payable in connection with this matter remains the subject of pending litigation and will ultimately depend on various factors, including the outcome of Quanta’s appeal of the trial court’s rulingrulings on liability and damages, the final determination with respect to any additional damages owed by Quanta, and the solvency of the staffing agencies. Based on review and analysis of the trial court’s rulings on liability, Quanta does not believe, at this time, that it is probable this matter will result in a material loss. However, if Quanta is unsuccessful in this litigation and the staffing agencies are unable to fund
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damages owed to class members, Quanta believes the range of reasonably possible loss to Quanta upon final resolution of this matter could be up to approximately $11.1$9.1 million, plus attorneys’ fees and expenses of the plaintiff class.
For additional information regardingHallen Acquisition Assumed Liability. In August 2019, in connection with the acquisition of Hallen, Quanta assumed certain contingent liabilities associated with a March 2014 natural gas-fed explosion and fire in the Manhattan borough of New York City, New York. The incident resulted in, among other legal proceedings, see Collective Bargaining Agreementsthings, loss of life, personal injury and the destruction of two buildings and other property damage. After investigation, the National Transportation Safety Board determined that the probable cause of the incident was the failure of certain natural gas infrastructure installed by Consolidated Edison, Inc. (Con Ed) and the failure of certain sewer infrastructure maintained by the City of New York. Pursuant to a contract with Con Ed, Hallen had performed certain work related to such natural gas infrastructure and agreed to indemnify Con Ed for certain claims, liabilities and costs associated with its work. Numerous lawsuits are pending in New York state courts related to the incident, which generally name Con Ed, the City of New York and Hallen as defendants. These lawsuits are at various preliminary stages and generally seek unspecified damages and, in some cases, punitive damages, for wrongful death, personal injury, property damage and business interruption.
Hallen’s liabilities associated with this Note 15.matter are expected to be covered under applicable insurance policies or contractual remedies negotiated by Quanta with the former owners of Hallen. As of December 31, 2019, Quanta had not recorded an accrual for any probable and estimable loss related to this matter. However, the ultimate amount of liability in connection with this matter remains subject to uncertainties associated with pending litigation, including, among other things, the apportionment of liability among the defendants and the likelihood and amount of potential damages claims. As a result, this matter could result in a loss that is in excess of, or not covered by, such insurance or contractual remedies, which could have a material adverse effect on Quanta’s consolidated results of operations and cash flows.
Concentrations of Credit Risk
Quanta is subject to concentrations of credit risk related primarily to its cash and cash equivalents and its net receivable position with customers, which includes amounts related to billed and unbilled accounts receivable and costs and estimated earnings in excess of billings on uncompleted contractscontract assets net of advanced billings with the same customer. Substantially all of Quanta’s cash and cash equivalents are managed by what it believes to be high credit quality financial institutions. In accordance with Quanta’s investment policies, these institutions are authorized to invest cash and cash equivalents in a diversified portfolio of what Quanta believes to be high quality cash and cash equivalent investments, which consist primarily of interest-bearing demand deposits, money market investments and money market mutual funds and investment grade commercial paper with original maturities of three months or less.funds. Although Quanta does not currently believe the principal amount of these cash and cash equivalents is subject to any material risk of loss, changes in economic conditions could impact the interest income Quanta receives from these investments. In addition, Quanta grants credit under normal payment terms, generally without collateral, to its customers, which include electric power and oil and gasenergy companies, governmental entities, general contractors, and builders, owners and managers of commercial and industrial properties located primarily in the United States, Canada, Australia and Latin America. Consequently, Quanta is subject to potential credit risk related to changes in business and economic factors throughout these locations, which may be heightened as a result of uncertain economic and financial market conditions that have existed in recent years.conditions. However, Quanta generally has certain statutory lien rights with respect to services provided. Historically, some
Some of Quanta’s customers have experienced significant financial difficulties (including bankruptcy), and otherscustomers may experience financial difficulties in the future. These difficulties expose Quanta to increased risk related to collectability of billed and unbilled receivables and costs and estimated earnings in excess of billings on uncompleted contractscontract assets for services Quanta has performed.
At December 31, 2016, For example, on January 29, 2019, PG&E, one customer within Quanta’s Electric Power Infrastructure Services segment accounted for 16% of Quanta’s consolidated net receivable position. Portionslargest customers, filed for bankruptcy protection under Chapter 11 of this net receivable balance werethe U.S. Bankruptcy Code, as amended. Quanta is monitoring the bankruptcy proceeding and evaluating the treatment of, and potential claims related to, invoicing challengesits pre-petition receivables. As of the bankruptcy filing date, Quanta had $165 million of billed and billing delays on two electric transmission projects located in remote regionsunbilled receivables. Subsequent to the bankruptcy filing, the bankruptcy court approved the assumption by PG&E of northeastern Canada,certain contracts with subsidiaries of Quanta, pursuant to which resulted from changed site conditions requiring extensive quality assurance documentation and administrative requirements. During the second quarter of 2017, Quanta and the customer reached a settlement and entered into a renegotiated contract, which eliminated the previous scheduling and billing issues and settled outstanding change orders. No other customers represented 10% or morePG&E had paid $122 million of Quanta’s consolidated net receivable positionpre-petition receivables as of December 31, 20172019. Quanta also sold $36 million of its pre-petition receivables to a third party during the three months ended December 31, 2019 in exchange for cash consideration of $34 million, subject to certain claim disallowance provisions, the occurrence of which could result in Quanta’s obligation to repurchase some or 2016,all of the pre-petition receivables sold. Quanta expects the remaining $7 million of pre-petition receivables to be sold or ultimately collected in the bankruptcy proceeding. However, the ultimate outcome of the bankruptcy proceeding is uncertain, and no customersour belief regarding any future sale or collection of the remaining receivables is based on a number of assumptions that are potentially subject to change as the proceeding progresses. Should any of these assumptions change, the amount collected could be less than the amount of the remaining receivables. Additionally, Quanta is continuing to perform services for PG&E while the bankruptcy case is ongoing and believes that amounts billed for post-petition services will continue to be collected in the ordinary course of business.
NaN customer represented 10% or more of Quanta’s consolidated revenues for the years ended December 31, 2019, 2018 or 2017, 2016and 0 customer represented 10% or 2015.more of Quanta’s consolidated net receivable position at December 31, 2019 or 2018.
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Insurance
As discussed in Note 2, Quanta is insured for employer’s liability, workers’ compensation, auto liability, general liability and group health claims. As of December 31, 20172019 and 2016,2018, the gross amount accrued for insurance claims totaled $254.7$287.6 million and $218.2$272.9 million, with $200.0$212.9 million and $162.0$210.1 million considered to be long term and included in “Insurance and other non-current liabilities.” Related insurance recoveries/receivables as of December 31, 20172019 and 20162018 were $50.4$35.1 million and $8.7$56.5 million, of which $0.4$0.3 million and $0.4$0.3 million wereare included in “Prepaid expenses and other current assets” and $50.0$34.8 million and $8.3$56.2 million wereare included in “Other assets, net.”
Project Insurance Claim. In June 2018, while performing a horizontal directional drill and installing an underground gas pipeline, one of Quanta’s subsidiaries experienced a partial collapse of a borehole. Subsequent to the incident, Quanta worked with its customer to mitigate the impact of the incident and to complete the project. As required by the contract, the customer procured certain insurance coverage for the project, with Quanta’s subsidiaries as additional insureds, and Quanta worked collaboratively with the customer to pursue insurance claims with the customer’s insurance carriers. In December 2019 and January 2020, Quanta reached settlement and release agreements with the insurers and the customer, respectively, resulting in total insurance recoveries related to this matter of $95.5 million. Quanta expects to receive the remaining insurance proceeds in the first quarter of 2020.
Letters of Credit
Certain of Quanta’s vendors require letters of credit to ensure reimbursement for amounts they are disbursing on Quanta’s behalf, such as to beneficiaries under its insurance programs. In addition, from time to time, certain customers require Quanta to post letters of credit to ensure payment of subcontractors and vendors and guarantee performance under contracts. Such letters of
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credit are generally issued by a bank or similar financial institution, typically pursuant to Quanta’s senior secured revolving credit facility. Each letter of credit commits the issuer to pay specified amounts to the holder of the letter of credit if the holder demonstratesclaims that Quanta has failed to perform specified actions. If this were to occur, Quanta would be required to reimburse the issuer of the letter of credit. Depending on the circumstances of such a reimbursement, Quanta may also be required to record a charge to earnings for the reimbursement. Quanta does not believe that it is likely that any material claims will be made under a letter of credit in the foreseeable future.
As of December 31, 2017,2019, Quanta had $413.3$383.8 million in outstanding letters of credit and bank guarantees under its senior secured revolving credit facility securing its casualty insurance program and various contractual commitments. These are irrevocable stand-by letters of credit with maturities generally expiring at various times throughout 2018. Upon maturity, it is expected that2020. Quanta expects to renew the majority of the letters of credit related to the casualty insurance program will be renewed for subsequent one-year periods.periods upon maturity. Quanta is not aware of any claims currently asserted or threatened under any of these letters of credit that are material, individually or in the aggregate. However, to the extent payment is required for any such claims, the amount paid could be material and could adversely affect Quanta’s consolidated business, financial condition, results of operations or cash flows.
Performance Bonds and Parent Guarantees
InMany customers, particularly in connection with new construction, require Quanta to post performance and payment bonds. These bonds provide a guarantee that Quanta will perform under the terms of a contract and pay its subcontractors and vendors. If Quanta fails to perform, the customer may demand that the surety make payments or provide services under the bond, and Quanta must reimburse the surety for any expenses or outlays it incurs. Under Quanta’s underwriting, continuing indemnity and security agreement with its sureties, Quanta has granted security interests in certain circumstances,of its assets as collateral for its obligations to the sureties. Subject to certain conditions and consistent with terms of the credit agreement for Quanta’s senior secured credit facility, these security interests will be automatically released if Quanta maintains a credit rating that meets two of the following three conditions: (i) a corporate credit rating that is BBB- or higher by Standard & Poor’s Rating Services, (ii) a corporate family rating that is Baa3 or higher by Moody’s Investors Services, Inc. or (iii) a corporate credit rating that is BBB- or higher by Fitch Ratings, Inc. Quanta may be required to providepost letters of credit or other collateral in favor of the sureties or Quanta’s customers in the future, which would reduce the borrowing availability under its senior secured credit facility. Quanta has not been required to make any material reimbursements to its sureties for bond-related costs except related to the exercise of certain advance payment and performance bonds in connection with its contractual commitments. Quanta has indemnified its sureties for any expenses paid out under these performance bonds. These performancea project located in Peru, as set forth in Legal Proceedings above. However, to the extent further reimbursements are required, the amounts could be material and could adversely affect Quanta’s consolidated business, financial condition, results of operations or cash flows.
Performance bonds expire at various times ranging from mechanical completion of the related projectsa project to a period extending beyond contract completion in certain circumstances, and as such a determination of maximum potential amounts outstanding requires the use of certain estimates and assumptions. Such amounts can also fluctuate from period to period based upon the mix and level of Quanta’s bonded operating activity. As of December 31, 2017,2019, the total amount of the outstanding performance bonds was estimated to be approximately $3.0$2.9 billion. Quanta’s estimated maximum exposure as it relates to the value of the performance bonds outstanding is lowered on each bonded project as the cost to complete is reduced, and each of its commitmentscommitment under thea performance bonds
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bond generally extinguishes concurrently with the expiration of its related contractual obligation. The estimated cost to complete these bonded projects was approximately $869 million$1.1 billion as of December 31, 2017.2019.
Additionally, from time to time, Quanta guarantees thecertain obligations and liabilities of its wholly owned subsidiaries including obligationsthat may arise in connection with, certainamong other things, contracts with customers, equipment lease obligations, joint venture arrangements and contractor licenses. These guarantees may cover all of the subsidiary’s unperformed, undischarged and unreleased obligations and liabilities under or in some states, contractors’ licenses.connection with the relevant agreement. For example, with respect to customer contracts, a guarantee may cover a variety of obligations and liabilities arising during the ordinary course of the subsidiary’s business or operations, including, among other things, warranty and breach of contract claims, third-party and environmental liabilities arising from the subsidiary’s work and for which it is responsible, liquidated damages, or indemnity claims. Quanta is not aware of any material obligations for performance or payment asserted against itclaims under any of these guarantees.guarantees that are material, except as set forth in Legal Proceedings above. To the extent a subsidiary incurs a material obligation or liability and Quanta has guaranteed the performance or payment of such liability, the recovery by a customer or other counterparty or a third party will not be limited to the assets of the subsidiary. As a result, responsibility under the guarantee could exceed the amount recoverable from the subsidiary alone and could materially and adversely affect Quanta’s consolidated business, financial condition, results of operations and cash flows.
Employment Agreements
Quanta has various employment agreements with certain executives and other employees, which provide for compensation, and certain other benefits and, forunder certain circumstances, severance payments under certain circumstances.and post-termination stock-based benefits. Certain employment agreements also contain clauses that become effective upon a change in controlrequire the payment of Quanta, and Quanta may be obligated to pay certain amounts to such employees upon the occurrence of any of thea defined change in control events.event.
Collective Bargaining Agreements
SomeCertain of Quanta’s operating units are parties to various collective bargaining agreements with unions that represent certain of their employees. The collective bargaining agreements expire at various times and have typically been renegotiated and renewed on terms similar to those in the expiring agreements. From time to time, Quanta is a party to grievance and arbitration actions based on claims arising out of the collective bargaining agreements. The agreements require the operating units to pay specified wages, provide certain benefits to their union employees and contribute certain amounts to multiemployer pension plans and employee benefit trusts. Quanta’s multiemployer pension plan contribution rates generally are specified in the collective bargaining agreements (usually on an annual basis), and contributions are made to the plans on a “pay-as-you-go” basis based on its union employee payrolls. The location and number of union employees that Quanta employs at any given time and the plans in which they may participate vary depending on the projects Quanta has ongoing at any time and theQuanta’s need for union resources in connection with thoseits ongoing projects. Therefore, Quanta is unable to accurately predict its union employee payroll and the amount of the resulting multiemployer pension plan contribution obligationobligations for future periods.
The PPA also added special funding and operational rules generally applicable to plan years beginning after 2007 for multiemployer plans that are classified as “endangered,” “seriously endangered” or “critical” status based on multiple factors (including, for example, the plan’s funded percentage, the plan’s cash flow position and whether itthe plan is projected to experience a minimum funding deficiency). Plans in these classifications must adopt measures to improve their funded status through a funding improvement or rehabilitation plan, as applicable, which may require additional contributions from employers (which may take the form of(e.g., a surcharge on benefit contributions) and/or modifications to retiree benefits. Certain plans to which Quanta contributes or may contribute in the future are in “endangered,” “seriously endangered” or “critical” status. The amount, of additional funds, if any, that Quanta may be obligated to contribute to these plans in the future cannot be reasonably estimated due to uncertainty regarding the amount of the future
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levels of work that require the specific use ofinvolving covered union employees, covered by these plans, as well as the future contribution levels and possible surcharges on contributions applicable to these plans.plan contributions.
Quanta may be subject to additional liabilities imposed by law as a result of its participation in multiemployer defined benefit pension plans. For example, the Employee Retirement Income Security Act of 1974, as amended by the Multiemployer Pension Plan Amendments Act of 1980, imposes certain liabilities upon an employer who is a contributor to a multiemployer pension plan if the employer withdraws or is deemed to have withdrawn from the plan or the plan is terminated or experiences a mass withdrawal. These liabilities include an allocable share of the unfunded vested benefits in the plan for all plan participants, not merely the benefits payable to a contributing employer’s own retirees. As a result, participating employers may bear a higher proportion of liability for unfunded vested benefits if other participating employers cease to contribute or withdraw, with the reallocation of liability being more acute in cases when a withdrawn employer is insolvent or otherwise fails to pay its withdrawal liability. Other than as described below, Quanta is not aware of any material amounts of withdrawal liabilityliabilities that have been incurred or asserted and that remain outstanding as a result of a withdrawal by any of Quanta’s operating unitsQuanta from anya multiemployer defined benefit pension plans.
2011 Central States Plan Withdrawal Liability. In the fourth quarter of 2011, certainplan. However, Quanta subsidiaries withdrew from the Central States Plan. Thishas been subject to significant withdrawal event was the result of an amendment to a collective bargaining agreement with the International Brotherhood of Teamsters (Teamsters) that eliminated certain employers’ obligations to contribute to the Central States Plan, which was then in critical status and significantly underfunded as to its vested benefit obligations. The amendment was negotiated by the Pipe Line Contractors Association (PLCA) on behalf of its members, which include certain Quanta subsidiaries. Because certain other Quanta subsidiaries continued participationliabilities in the Central States Plan into 2012, the Quanta subsidiaries’ withdrawals in 2011 effected only a partial withdrawal on behalf of Quanta for 2011. Quanta believed that the partial withdrawal was advantageous because it limited exposure to increased liability resulting from a future withdrawal event, at which point the Central States Plan could have been further underfunded. Quanta and other PLCA members now contribute to a different multiemployer pension plan on behalf of the affected Teamsters employees.
The Central States Plan subsequently asserted that the withdrawal of the PLCA members, and thus Quanta’s partial withdrawal, was not effective in 2011. The PLCA and Quanta believed at that time that a legally effective withdrawal had occurred during the fourth quarter of 2011, and this issue was litigated in the federal district court for the Northern District of Illinois, Eastern Division. In September 2013, the district court ruled in favor of the Central States Plan, and that decision was appealed by the PLCA. In July 2014, the Central States Plan provided Quanta with a Notice and Demand claiming partial withdrawal liability in the amount of $39.6 million and requiring Quanta to make payments on this assessment while the dispute was ongoing. In September 2015, the United States Court of Appeals for the Seventh Circuit ruled in favor of the PLCA and reversed the district court’s previous ruling. Based on the outcome of the appeal, in January 2016, the Central States Plan issued a revised Notice and Demand claiming a partial withdrawal liability in the amount of $32.9 million.
Separately, in December 2013, the Central States Plan filed lawsuits against two of Quanta’s other subsidiariespast, including in connection with their withdrawal in 2012. In the first lawsuit, the Central States Plan alleged that the subsidiary elected to participate in the Central States Plan pursuant to the collective bargaining agreement under which it participated. Quanta argued that no such election was made and that any payments made to the Central States Plan were made in error. In July 2014, the parties reached an agreement to settle the lawsuit, and the court dismissed the case with prejudice. In the second lawsuit, the Central States Plan alleged that contributions made by the Quanta subsidiary to a new industry fund created after Quanta withdrew from the Central States Plan should have been made to the Central States Plan. This arguably would have extended the withdrawal date for this subsidiary to at least the end of 2013. Quanta disputed these allegations on the basis that it properly paid contributions to the new industry fund based on the terms of the collective bargaining agreement under which it participated and asserted that it terminated its obligation to contribute to the Central States Plan by the end of 2012. The parties both moved for summary judgment, and in March 2015, the court entered judgment in favor of Quanta. The Central States Plan filed a notice of appeal in April 2015, and in December 2015, the Central States Plan agreed to dismiss the appeal with prejudice.
In December 2017, Quanta and the Central States Plan entered into a settlement agreement and release, whereby the parties agreed on a final settlement amount of $48.9 million, which included a final withdrawal liability of $44.1 million and retention of interest paid on the assessed amount of $4.8 million. This settlement addressed (i) the partial withdrawal liability assessed in the January 2016 Notice and Demand; (ii) an unassessed withdrawal liability in connection with a partial withdrawal in 2012; and (iii) an unassessed withdrawal liability in connection with a complete withdrawal in 2013 or 2014. Prior to settlement of the matter, Quanta made monthly payments on the assessed partial withdrawal liability according to the terms of the January 2016 Notice and Demand, and the portion of those payments that was attributable to the principal amount of the assessed liability was offset against its final withdrawal liability. Accordingly, a final payment of $25.5 million was made in December 2017 as full satisfaction of this matter.
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2013 Central States Plan Withdrawal Liability. On October 9, 2013, Quanta acquired a company that experienced a complete withdrawal from the Central States, Southeast and Southwest Areas Pension Plan, priorand may be subject to the acquisition date. Prior to the acquisition, the Central States Plan issued a Notice and Demand to the acquired company claiming amaterial withdrawal liabilityliabilities in the total amount of $6.9 million and requiring payments to be made on this assessment while the dispute is ongoing. In connection with the acquisition, Quanta recorded an initial liability of $4.8 million related to this withdrawal liability, and a portion of the purchase price for the acquired company was deposited into an escrow account to fund any withdrawal obligation in excess of the initial liability recorded. In January 2016, the Central States Plan issued a revised Notice and Demand claiming a withdrawal liability in the amount of $4.8 million. Although Quanta continues to dispute the total liability owed to the Central States Plan, it continues to make monthly payments according to the terms of this revised Notice and Demand while the parties determine the final withdrawal liability. As of December 31, 2017, payments totaling $4.2 million had been made toward the withdrawal liability assessment. The final amount of withdrawal liability payable in connection with this matter remains the subject of a pending arbitration proceeding and will ultimately depend on various factors, including the outcome of the arbitration. However, the acquired company’s withdrawal from the Central States Plan is not expected to have a material impact on Quanta’sfuture, which could adversely affect its business, financial condition, results of operations or cash flows.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Indemnities
Quanta generally indemnifies its customers for the services it provides under its contracts as well asand other specified liabilities, which may subject Quanta to indemnity claims and liabilities and related litigation. Additionally, in connection with certain acquisitions and dispositions, Quanta has indemnified various parties against specified liabilities that those parties might incur in the future. The indemnities under acquisition or disposition agreements are usually contingent upon the other party incurring liabilities that reach specified thresholds. AsQuanta is not aware of December 31, 2017, except as otherwise set forth above in Legal Proceedings, Quanta does not believe any material liabilities forindemnity claims exist against it in connection with anyits indemnity obligations that are material. However, to the extent indemnification is required, the amount could adversely affect Quanta’s consolidated business, financial condition, results of these indemnity obligations.operations or cash flows.
In the normal course of Quanta’s acquisition transactions, Quanta obtains rights to indemnification from the sellers or former owners of acquired companiesbusinesses for certain risks, liabilities and obligations arising from their prior operations, such as performance, operational, safety, workforce or tax issues, some of which Quanta may not have discovered during due diligence. However, the indemnities may not cover all of Quanta’s exposure for such pre-acquisition matters, andor the indemnitors may be unwilling or unable to pay the amounts owed to Quanta. Accordingly, Quanta may incur expenses for which it is not reimbursed.reimbursed, and such amounts could be material and could have a material adverse effect on Quanta’s business or consolidated financial condition, results of operations and cash flows. Quanta is currently in the process of negotiatingpursuing indemnity for certain pre-acquisition obligations associated with non-U.S. payroll taxes that may be due fromof a business acquired by Quanta in 2013. As of December 31, 2017,2019, Quanta had recorded $11.4a $4.7 million as its estimate of the pre-acquisitionpayroll tax obligationsliability and a correspondingrelated indemnification asset, as management expects to recoverasset.
Additionally, Quanta has obtained certain indemnification rights from the indemnity counterparties any amountsformer owners of Hallen with respect to contingent liabilities that Quanta may be required to paywere assumed in connection with any such obligations.
the acquisition, as set forth in Legal Proceedings — Hallen Acquisition Assumed Liability above.
| |
16.15. | SEGMENT INFORMATION: |
Quanta presents its operations under two2 reportable segments: (1) Electric Power Infrastructure Services and (2) OilPipeline and GasIndustrial Infrastructure Services. This structure is generally based on the broad end-user markets for Quanta’s services. See Note 1 for additional information regarding Quanta’s reportable segments.
Quanta’s segment results are derived from the types of services provided across its operating units in each of theits end user markets described above.markets. Quanta’s entrepreneurial business model allows each of itsmultiple operating units to serve the same or similar customers and to provide a range of services across end user markets. Quanta’s operating units are organized into one of two2 internal divisions, namely,divisions: the Electric Power Infrastructure Services Division and the OilPipeline and GasIndustrial Infrastructure Services Division. These internal divisions are closely aligned with the reportable segments, and operating units are assigned to divisions based on their operating units’the predominant type of work.work performed.
Reportable segment information, including revenues and operating income by type of work, is gathered from each operating unit for the purpose of evaluating segment performance in support of Quanta’s market strategies. These classificationsClassification of Quanta’s operating unit revenues by type of work for segment reporting purposes can at times require judgment on the part of management. Quanta’s operating units may perform joint projects for customers in multiple industries, deliver multiple types of services under a single customer contract or provide service acrossofferings to various industries. For example, Quanta performs joint trenching projects to install distribution lines for electric power and natural gas customers.
In addition, Quanta’s integrated operations and common administrative support at each offor its operating units require that certain allocations be made to determine segment profitability, including allocations of shared and indirect costs such as(e.g., facility costs,costs), indirect operating expenses including depreciation,(e.g., depreciation), and general and administrative costs. CorporateCertain corporate costs such asare not allocated and include payroll and benefits, employee travel expenses, facility costs, professional fees, acquisition costs and amortization related to intangible assets are not allocated.assets.
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Summarized financial information for Quanta’s reportable segments is presented in the following table (in thousands):
|
| | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2019 | | 2018 | | 2017 |
| Revenues: | | |
| | |
| | |
|
| Electric Power Infrastructure Services | | $ | 7,121,837 |
| | $ | 6,415,562 |
| | $ | 5,599,836 |
|
| Pipeline and Industrial Infrastructure Services | | 4,990,316 |
| | 4,755,861 |
| | 3,866,642 |
|
| Consolidated revenues | | $ | 12,112,153 |
| | $ | 11,171,423 |
| | $ | 9,466,478 |
|
Operating income (loss): | | |
| | |
| | |
|
| Electric Power Infrastructure Services | | $ | 591,177 |
| | $ | 628,286 |
| | $ | 518,130 |
|
| Pipeline and Industrial Infrastructure Services | | 332,011 |
| | 204,178 |
| | 184,083 |
|
| Corporate and non-allocated costs | | (368,314 | ) | | (292,195 | ) | | (323,364 | ) |
| Consolidated operating income | | $ | 554,874 |
| | $ | 540,269 |
| | $ | 378,849 |
|
| Depreciation: | | |
| | |
| | |
|
| Electric Power Infrastructure Services | | $ | 108,295 |
| | $ | 96,300 |
| | $ | 91,708 |
|
| Pipeline and Industrial Infrastructure Services | | 90,953 |
| | 89,046 |
| | 76,355 |
|
| Corporate and non-allocated costs | | 18,859 |
| | 17,173 |
| | 15,745 |
|
| Consolidated depreciation | | $ | 218,107 |
| | $ | 202,519 |
| | $ | 183,808 |
|
|
| | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2017 | | 2016 | | 2015 |
| Revenues: | | |
| | |
| | |
|
| Electric Power Infrastructure Services | | $ | 5,599,836 |
| | $ | 4,850,495 |
| | $ | 4,937,289 |
|
| Oil and Gas Infrastructure Services | | 3,866,642 |
| | 2,800,824 |
| | 2,635,147 |
|
| Consolidated | | $ | 9,466,478 |
| | $ | 7,651,319 |
| | $ | 7,572,436 |
|
Operating income (loss): | | |
| | |
| | |
|
| Electric Power Infrastructure Services | | $ | 518,130 |
| | $ | 395,745 |
| | $ | 362,328 |
|
| Oil and Gas Infrastructure Services | | 184,083 |
| | 149,502 |
| | 142,929 |
|
| Corporate and non-allocated costs | | (323,364 | ) | | (224,434 | ) | | (267,754 | ) |
| Consolidated | | $ | 378,849 |
| | $ | 320,813 |
| | $ | 237,503 |
|
| Depreciation: | | |
| | |
| | |
|
| Electric Power Infrastructure Services | | $ | 91,708 |
| | $ | 91,269 |
| | $ | 89,150 |
|
| Oil and Gas Infrastructure Services | | 76,355 |
| | 67,374 |
| | 65,315 |
|
| Corporate and non-allocated costs | | 15,745 |
| | 11,597 |
| | 8,380 |
|
| Consolidated | | $ | 183,808 |
| | $ | 170,240 |
| | $ | 162,845 |
|
Separate measures of Quanta’s assets and cash flows by reportable segment, including capital expenditures, are not produced or utilized by management to evaluate segment performance. Quanta’s fixed assets, which are held at the operating unit level, include operating machinery, equipment and vehicles, as well as office equipment, buildings and leasehold improvements, and are used on an interchangeable basis across its reportable segments. As such, for reporting purposes, total depreciation expense is allocated each quarter among Quanta’s reportable segments based on the ratio of each reportable segment’s revenue contribution to consolidated revenues.
Foreign Operations
During 20172019, 20162018, and 20152017, Quanta derived $2.48$1.92 billion,, $1.59 $2.60 billion and $1.54$2.48 billion, respectively, of its revenues from foreign operations. Of Quanta’s foreign revenues, 79%75%, 75%76% and 85%79% were earned in Canada during the years ended December 31, 20172019, 20162018 and 2015, respectively.2017. In addition, Quanta held property and equipment of $330.4314.1 million and $320.7304.0 million in foreign countries, primarily Canada, as of December 31, 20172019 and 20162018.
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
| |
17.16. | SUPPLEMENTAL CASH FLOW INFORMATION: |
The net effecteffects of changes in operating assets and liabilities, net of non-cash transactions, on cash flows from operating activities are as follows (in thousands):
|
| | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2019 | | 2018 | | 2017 |
| Accounts and notes receivable | | $ | (214,580 | ) | | $ | (475,919 | ) | | $ | (425,313 | ) |
| Contract assets | | (12,317 | ) | | (92,838 | ) | | 15,999 |
|
| Inventories | | 52,168 |
| | (28,131 | ) | | 14,110 |
|
| Prepaid expenses and other current assets | | (60,475 | ) | | (40,187 | ) | | (32,079 | ) |
| Accounts payable and accrued expenses and other non-current liabilities | | 39,419 |
| | 247,897 |
| | 28,547 |
|
| Contract liabilities | | 174,230 |
| | (23 | ) | | 139,114 |
|
Other, net (1) | | (135,250 | ) | | (11,332 | ) | | 17,858 |
|
| Net change in operating assets and liabilities, net of non-cash transactions | | $ | (156,805 | ) | | $ | (400,533 | ) | | $ | (241,764 | ) |
(1) The amount for the year ended December 31, 2019 includes the payment of continuing operations$87 million of on-demand advance payment bonds and $25 million of on-demand performance bonds exercised in connection with the termination of a large telecommunications project in Peru. See Legal Proceedings — Peru Project Dispute in Note 14 for additional information on this matter.
A reconciliation of cash, cash equivalents, and restricted cash reported within the consolidated balance sheets that sum to the total of such amounts shown in the statements of cash flows is as follows (in thousands):
|
| | | | | | | | | | | | | | | | |
| | | December 31, |
| | | 2019 | | 2018 | | 2017 | | 2016 |
| Cash and cash equivalents | | $ | 164,798 |
| | $ | 78,687 |
| | $ | 138,285 |
| | $ | 112,183 |
|
| Restricted cash included in “Prepaid expenses and other current assets” | | 4,026 |
| | 3,286 |
| | 5,106 |
| | 1,709 |
|
| Restricted cash included in “Other assets, net” | | 921 |
| | 1,283 |
| | 384 |
| | 518 |
|
| Total cash, cash equivalents, and restricted cash reported in the statements of cash flows | | $ | 169,745 |
| | $ | 83,256 |
| | $ | 143,775 |
| | $ | 114,410 |
|
|
| | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2017 | | 2016 | | 2015 |
| Accounts and notes receivable | | $ | (425,313 | ) | | $ | 144,877 |
| | $ | 150,470 |
|
Costs and estimated earnings in excess of billings on uncompleted contracts | | 15,999 |
| | (152,702 | ) | | (49,358 | ) |
| Inventories | | 14,110 |
| | (9,905 | ) | | (33,524 | ) |
| Prepaid expenses and other current assets | | (32,079 | ) | | 25,133 |
| | 5,899 |
|
| Accounts payable and accrued expenses and other non-current liabilities | | 29,722 |
| | 81,792 |
| | 7,311 |
|
Billings in excess of costs and estimated earnings on uncompleted contracts | | 139,114 |
| | (124,680 | ) | | 153,017 |
|
| Other, net | | 17,267 |
| | (13,743 | ) | | (11,707 | ) |
| Net change in operating assets and liabilities, net of non-cash transactions | | $ | (241,180 | ) | | $ | (49,228 | ) | | $ | 222,108 |
|
Supplemental cash flow information related to leases is as follows (in thousands):
QUANTA SERVICES, INC. AND SUBSIDIARIES |
| | | | |
| | | Year Ended |
| | | December 31, 2019 |
| Cash paid for amounts included in the measurement of lease liabilities: | | |
| Operating cash flows from operating leases | | $ | (119,357 | ) |
| Operating cash flows from finance leases | | $ | (64 | ) |
| Financing cash flows from finance leases | | $ | (1,835 | ) |
| Lease assets obtained in exchange for lease liabilities: | | |
| Operating leases | | $ | 96,550 |
|
| Finance leases | | $ | 691 |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Additional supplemental cash flow information is as follows (in thousands):
|
| | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2019 | | 2018 | | 2017 |
| Cash (paid) received during the period for - | | | | | | |
| Interest paid | | $ | (64,805 | ) | | $ | (34,935 | ) | | $ | (19,373 | ) |
| Income taxes paid | | $ | (116,467 | ) | | $ | (112,895 | ) | | $ | (112,335 | ) |
| Income tax refunds | | $ | 7,174 |
| | $ | 5,209 |
| | $ | 9,845 |
|
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
|
| | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2017 | | 2016 | | 2015 |
| Cash (paid) received during the period for - | | | | | | |
| Interest paid related to continuing operations | | $ | (19,373 | ) | | $ | (12,828 | ) | | $ | (7,087 | ) |
| Income taxes paid related to continuing operations | | $ | (112,335 | ) | | $ | (121,662 | ) | | $ | (130,921 | ) |
| Income taxes paid related to discontinued operations | | $ | — |
| | $ | (7,260 | ) | | $ | (144,076 | ) |
| Income tax refunds related to continuing operations | | $ | 9,845 |
| | $ | 7,548 |
| | $ | 23,788 |
|
During the year ended December 31, 2018, Quanta entered into a non-cash transaction whereby Quanta accepted title to a marine industrial property appraised at $6.4 million in exchange for a construction barge. During the year ended December 31, 2017, Quanta entered into a non-cash transaction whereby Quanta accepted title to a marine vesselconstruction barge in satisfaction and discharge of a $7.1 million note receivable.
| |
18.17. | QUARTERLY FINANCIAL DATA (UNAUDITED): |
The table below sets forth the unaudited consolidated operating results by quarter for the years ended December 31, 20172019 and 20162018 (in thousands, except per share information).
|
| | | | | | | | | | | | | | | | |
| | | For the Three Months Ended |
| | | March 31, | | June 30, | | September 30, | | December 31, |
| 2019: | | |
| | |
| | |
| | |
|
| Revenues | | $ | 2,807,259 |
| | $ | 2,839,199 |
| | $ | 3,352,895 |
| | $ | 3,112,800 |
|
| Gross profit | | $ | 363,981 |
| | $ | 319,505 |
| | $ | 473,445 |
| | $ | 443,321 |
|
| Net income | | $ | 121,035 |
| | $ | 28,459 |
| | $ | 137,022 |
| | $ | 120,299 |
|
| Net income attributable to common stock | | $ | 120,488 |
| | $ | 27,344 |
| | $ | 136,068 |
| | $ | 118,144 |
|
| Basic earnings per share attributable to common stock | | $ | 0.83 |
| | $ | 0.19 |
| | $ | 0.93 |
| | $ | 0.81 |
|
| Diluted earnings per share attributable to common stock | | $ | 0.82 |
| | $ | 0.19 |
| | $ | 0.92 |
| | $ | 0.80 |
|
| 2018: | | |
| | |
| | |
| | |
| Revenues | | $ | 2,417,576 |
| | $ | 2,656,348 |
| | $ | 2,985,281 |
| | $ | 3,112,218 |
|
| Gross profit | | $ | 301,048 |
| | $ | 333,371 |
| | $ | 425,830 |
| | $ | 419,715 |
|
| Net income | | $ | 38,611 |
| | $ | 74,706 |
| | $ | 124,899 |
| | $ | 57,791 |
|
| Net income attributable to common stock | | $ | 37,614 |
| | $ | 74,365 |
| | $ | 124,551 |
| | $ | 56,816 |
|
| Basic earnings per share attributable to common stock | | $ | 0.24 |
| | $ | 0.49 |
| | $ | 0.82 |
| | $ | 0.38 |
|
| Diluted earnings per share attributable to common stock | | $ | 0.24 |
| | $ | 0.48 |
| | $ | 0.81 |
| | $ | 0.38 |
|
|
| | | | | | | | | | | | | | | | |
| | | For the Three Months Ended |
| | | March 31, | | June 30, | | September 30, | | December 31, |
| 2017: | | |
| | |
| | |
| | |
|
| Revenues | | $ | 2,178,170 |
| | $ | 2,200,374 |
| | $ | 2,609,307 |
| | $ | 2,478,627 |
|
| Gross profit | | 266,188 |
| | 302,165 |
| | 350,631 |
| | 322,876 |
|
| Net income | | 48,440 |
| | 64,360 |
| | 89,849 |
| | 115,576 |
|
| Net income attributable to common stock | | 48,267 |
| | 63,837 |
| | 89,313 |
| | 113,561 |
|
| Net income from continuing operations attributable to common stock | | 48,267 |
| | 63,837 |
| | 89,313 |
| | 113,561 |
|
| Basic earnings per share from continuing operations attributable to common stock | | $ | 0.31 |
| | $ | 0.41 |
| | $ | 0.57 |
| | $ | 0.72 |
|
| Diluted earnings per share from continuing operations attributable to common stock | | $ | 0.31 |
| | $ | 0.41 |
| | $ | 0.56 |
| | $ | 0.72 |
|
| 2016: | | |
| | |
| | |
| | |
| Revenues | | $ | 1,713,737 |
| | $ | 1,792,430 |
| | $ | 2,042,186 |
| | $ | 2,102,966 |
|
| Gross profit | | 203,313 |
| | 200,217 |
| | 302,582 |
| | 307,688 |
|
| Net income | | 20,859 |
| | 16,729 |
| | 74,152 |
| | 88,358 |
|
| Net income attributable to common stock | | 20,496 |
| | 16,562 |
| | 73,742 |
| | 87,583 |
|
| Net income from continuing operations attributable to common stock | | 20,496 |
| | 16,562 |
| | 73,137 |
| | 88,530 |
|
| Basic earnings per share from continuing operations attributable to common stock | | $ | 0.13 |
| | $ | 0.11 |
| | $ | 0.47 |
| | $ | 0.57 |
|
| Diluted earnings per share from continuing operations attributable to common stock | | $ | 0.13 |
| | $ | 0.11 |
| | $ | 0.47 |
| | $ | 0.57 |
|
During the fourth quarters of 2019 and 2018, Quanta recorded asset impairment charges of $13.9 million ($10.5 million net of tax) and $49.4 million ($36.5 million net of tax) primarily related to the winding down and exit of certain oil-influenced operations and assets. During the fourth quarter of 2017,2018, Quanta also recorded one-timenet tax benefitscharges of $36.0 million, as further described in Note 10 and asset impairment charges of $58.1 million ($36.6 million net of tax), which were primarily associated with two reporting units within its Oil and Gas Infrastructure Services Division. Specifically, a reporting unit that provides material handling services experienced lower operating margins and is expected to continue to face a highly competitive environment in its select markets, and a reporting unit that provides marine and offshore services experienced prolonged periods of reduced revenues and operating margins and is expected to continue to experience lower levels of activity in the U.S. Gulf of Mexico and other offshore markets. During the fourth quarter of 2016, Quanta recorded total asset impairment charges of $8.0 million ($7.1 million net of tax) primarily related to a pending dispositionQuanta’s final assessment of certain international renewable energy services operations,the Tax Act enacted on December 22, 2017 and for which was completed in 2017.regulations were issued during 2018.
The sum of the individual quarterly earnings per share amounts may not equal year-to-date earnings per share as each period’s computation is based on the weighted average number of shares outstanding during the period.
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
19. SUBSEQUENT EVENTS:
Acquisitions
In January 2018, Quanta acquired an electrical infrastructure services business specializing in substation construction and relay services and a postsecondary educational institution that provides pre-apprenticeship training and programs for experienced lineman, both of which are located in the United States. The aggregate consideration for these acquisitions was $47.9 million in cash, subject to certain adjustments, and 379,817 shares of Quanta common stock, which had a fair value of approximately $13.6 million at the acquisition dates. Additionally, the acquisition of the postsecondary educational institution includes the potential payment of up to approximately $15.0 million, payable if the acquired business achieves certain financial and operational objectives over a five-year period. The results of the acquired businesses will generally be included in Quanta’s Electric Power Infrastructure Services segment and consolidated financial statements beginning on the acquisition dates. Due to the recent closing of these acquisitions, certain financial information related to these acquisitions, including the fair value of total consideration transferred or estimated to be transferred, is not yet finalized.
| |
| ITEM 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
There have been no changes in or disagreements with accountants on accounting and financial disclosure within the parameters of Item 304(b) of Regulation S-K.
| |
| ITEM 9A. | Controls and Procedures |
Attached as exhibits to this Annual Report on Form 10-K are certifications of Quanta’s Chief Executive Officer and Chief Financial Officer that are required in accordance with Rule 13a-14 of the Securities Exchange Act of 1934, as amended (the Exchange Act). This Item 9A. section includes information concerning the controls and controls evaluation referred to in the certifications, and it should be read in conjunction with the certifications for a more complete understanding of the topics presented.
Evaluation of Disclosure Controls and Procedures
Our management has established and maintains a system of disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act, such as this Annual Report on Form 10-K, is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms. The disclosure controls and procedures are also designed to provide reasonable assurance that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
As of the end of the period covered by this Annual Report, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15(b) of the Exchange Act. This evaluation was carried out under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer. Based on this evaluation, these officers have concluded that, as of December 31, 20172019, our disclosure controls and procedures were effective to provide reasonable assurance of achieving their objectives.
Evaluation of Internal Control over Financial Reporting
Management’s report on internal control over financial reporting can be found in Item 8. Financial Statements and Supplementary Data under the heading Report of Management and is incorporated herein by reference. The report of PricewaterhouseCoopers LLP, an independent registered public accounting firm, on the financial statements, and its opinion on the effectiveness of internal control over financial reporting, can also be found in Item 8. Financial Statements and Supplementary Data under the heading Report of Independent Registered Public Accounting Firm and is incorporated herein by reference.
There has been no change in our internal control over financial reporting that occurred during the quarter ended December 31, 20172019 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Design and Operation of Control Systems
Our management, including the Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures 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 system’s 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 breakdowns can occur because of simple errors or mistakes. Controls can 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.
| |
| ITEM 9B. | Other Information |
None.
PART III
| |
| ITEM 10. | Directors, Executive Officers and Corporate Governance |
The information required by this Item 10 is incorporated by reference to our definitive proxy statement, which is to be filed with the SEC pursuant to the Exchange Act within 120 days following the end of our 20172019 fiscal year.
| |
| ITEM 11. | Executive Compensation |
The information required by this Item 11 is incorporated by reference to our definitive proxy statement, which is to be filed with the SEC pursuant to the Exchange Act within 120 days following the end of our 20172019 fiscal year.
| |
| ITEM 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
The information required by this Item 12 is incorporated by reference to our definitive proxy statement, which is to be filed with the SEC pursuant to the Exchange Act within 120 days following the end of our 20172019 fiscal year.
| |
| ITEM 13. | Certain Relationships and Related Transactions, and Director Independence |
The information required by this Item 13 is incorporated by reference to our definitive proxy statement, which is to be filed with the SEC pursuant to the Exchange Act within 120 days following the end of our 20172019 fiscal year.
| |
| ITEM 14. | Principal Accounting Fees and Services |
The information required by this Item 14 is incorporated by reference to our definitive proxy statement, which is to be filed with the SEC pursuant to the Exchange Act within 120 days following the end of our 20172019 fiscal year.
PART IV
| |
| ITEM 15. | Exhibits and Financial Statement Schedules |
The following financial statements, schedules and exhibits are filed as part of this Annual Report on Form 10-K:
(1) Consolidated financial statements. The consolidated financial statements are included in Item 8. Financial Statements and Supplementary Data of this Annual Report on Form 10-K.
(2) Financial statement schedules. All financial statement schedules are omitted because they are not applicable or the required information is shown in the consolidated financial statements or the notes to the consolidated financial statements in Item 8. Financial Statements and Supplementary Data of this Annual Report on Form 10-K.
(3) Exhibits.
EXHIBIT INDEX
|
| | | | |
| Exhibit | | |
| No. | | Description |
| 2.1 |
| — |
| |
2.2 |
| | Securities Purchase Agreement, dated as of July 20, 2017, by and among Quanta Services, Inc., certain subsidiaries of Quanta Services, Inc., as purchasers, and the General Partners and Limited Partners of Stronghold, Ltd. and Stronghold Specialty, Ltd. (previously filed as Exhibit 2.1 to the Company’s Form 10-Q for the quarter ended September 30, 2017 (No. 001-13831) filed November 9, 2017 and incorporated herein by reference) |
| 3.1 |
| — |
| |
| 3.2 |
| — |
| |
3.3 |
| — |
| |
4.14.1^ |
| — |
| |
| 4.2 |
| — |
| |
| 10.1* |
| — |
| |
10.2* |
| — |
| |
| 10.2* |
| — |
| |
| 10.3* |
| — |
| |
| 10.4* |
| — |
| |
| 10.5* |
| — |
| |
10.4*10.6* |
| — |
| |
10.5*10.7* |
| — |
| |
10.6*10.8* |
| — |
| |
10.7*10.9* |
| — |
| |
10.8*10.10* |
| — |
| |
10.9*10.11* |
| — |
| |
10.10* |
| — |
| |
10.11*10.12* |
| — |
| |
|
| | | | |
Exhibit | | |
No. | | Description |
10.12* |
| — |
| |
10.13 *10.13* |
| — |
| |
10.14 *10.14* |
| — |
| |
10.15 * |
| — |
|
|
10.16* |
| | | |
| Exhibit | | |
| No. | | Description |
| 10.15* |
| | |
10.17*10.16* |
| | |
10.18*10.17* |
| — |
| |
| 10.18* |
| | |
| 10.19* |
| — |
| |
| 10.20* |
| — |
| |
10.20*10.21*^ |
| — |
| |
| 10.22* |
| — |
| |
10.21*10.23* |
| — |
| |
10.22* |
| — |
| |
10.23*10.24* |
| — |
| |
10.2410.25 |
| — |
| Fourth Amended and Restated Credit Agreement, dated as of December 18, 2015, among Quanta Services, Inc. and certain subsidiaries of Quanta Services, Inc., as Borrowers, certain subsidiaries of Quanta Services, Inc. identified therein as Guarantors, Bank of America, N.A., as Administrative Agent, Domestic Swing Line Lender and an L/C Issuer, and the other Lenders party thereto (previously filed as Exhibit 99.1 to the Company’s Form 8-K (No. 001-13831) filed December 23, 2015 and incorporated herein by reference) |
10.2510.26 |
| — |
| First Amendment to Fourth Amended and Restated Credit Agreement dated as of June 27, 2016, among Quanta Services, Inc. and certain subsidiaries of Quanta Services, Inc., as Borrowers, certain subsidiaries of Quanta Services, Inc. identified therein as Guarantors, Bank of America, N.A., as Administrative Agent, Domestic Swing Line Lender and an L/C Issuer, and the other Lenders party thereto (previously filed as Exhibit 10.2 to the Company’s Form 10-Q (No. 001-13831) filed August 8, 2016 and incorporated herein by reference) |
|
| 10.27 |
| — | | |
Exhibit | | |
No. | | Description |
10.26 |
|
| Second Amendment to Fourth Amended and Restated Credit Agreement, dated as of October 31, 2017, among Quanta Services, Inc. and certain subsidiaries of Quanta Services, Inc., as Borrowers, certain subsidiaries of Quanta Services, Inc. identified therein as Guarantors, the lenders party thereto, Bank of America, N.A., as Administrative Agent, and the Swing Line Lenders and L/C Issuers party thereto (previously filed as Exhibit 10.1 to the Company’s Form 8-K filed November 6, 2017 and incorporated herein by reference)
|
10.2710.28 |
| — |
| Third Amendment to Fourth Amended and Restated Credit Agreement, dated as of August 24, 2018, among Quanta Services, Inc. and certain subsidiaries of Quanta Services, Inc., as Borrowers, certain subsidiaries of Quanta Services, Inc. identified therein as Guarantors, the lenders party thereto, Bank of America, N.A., as Administrative Agent, and the Swing Line Lenders and L/C Issuers party thereto (previously filed as Exhibit 10.1 to the Company’s Form 8-K filed October 15, 2018 and incorporated herein by reference) |
| 10.29 |
| — |
| Fourth Amendment to Fourth Amended and Restated Credit Agreement, dated as of October 10, 2018, among Quanta Services, Inc. and certain subsidiaries of Quanta Services, Inc., as Borrowers, certain subsidiaries of Quanta Services, Inc. identified therein as Guarantors, the lenders party thereto, Bank of America, N.A., as Administrative Agent, and the Swing Line Lenders and L/C Issuers party thereto (previously filed as Exhibit 10.2 to the Company’s Form 8-K filed October 15, 2018 and incorporated herein by reference) |
|
| | | | |
| Exhibit | | |
| No. | | Description |
| 10.30 |
| — |
| Incremental Term Loan Amendment and Fifth Amendment to Fourth Amended and Restated Credit Agreement and Omnibus Amendment to Loan Documents, dated as of September 6, 2019, among Quanta Services, Inc. and certain subsidiaries of Quanta Services, Inc., as Borrowers, certain subsidiaries of Quanta Services, Inc. identified therein as Guarantors, the lenders party thereto, Bank of America, N.A., as Administrative Agent, and the L/C Issuers party thereto (previously filed as Exhibit 10.6 to the Company’s Form 8-K filed September 9, 2019 and incorporated herein by reference) |
| 10.31 |
| — |
| Incremental Revolving Credit Increase Agreement and Lender Joinder Agreement, dated as of September 12, 2019, among Quanta Services, Inc. and certain subsidiaries of Quanta Services, Inc., as Borrowers, certain subsidiaries of Quanta Services, Inc. identified therein as Guarantors, BNP Paribas, the Swing Line Lenders and L/C Issuers party thereto and Bank of America, N.A., as Administrative Agent (previously filed as Exhibit 10.4 to the Company’s Form 10-Q filed November 1, 2019 and incorporated herein by reference) |
| 10.32 |
| — |
| |
10.2810.33 |
| — |
| |
10.2910.34 |
| — |
| |
10.30 |
| — |
| |
10.3110.35 |
| — |
| |
10.3210.36 |
| — |
| |
10.3310.37 |
| — |
| Second Amendment to Intercreditor Agreement dated August 4, 2015 by and between Federal Insurance Company; American Home Assurance Company, National Union Fire Insurance Company of Pittsburgh, PA and The Insurance Company of the State of Pennsylvania; Liberty Mutual Insurance Company, Liberty Mutual Fire Insurance Company and Safeco Insurance Company of America, and Bank of America, N.A., as Lender Agent on behalf of the other Lender Parties (under the Company’s Credit Agreement, as amended), and agreed to by Quanta Services, Inc. and the subsidiaries and affiliates of Quanta Services, Inc. identified therein (previously filed as Exhibit 10.1 to the Company’s Form 10-Q for the quarter ended June 30, 2018 filed August 7, 2018 and incorporated herein by reference) |
| 10.38 |
| — |
| Joinder Agreement and Amendment to Underwriting, Continuing Indemnity and Security Agreement dated as of November 28, 2006, among American Home Assurance Company, National Union Fire Insurance Company of Pittsburgh, Pa., The Insurance Company of the State of Pennsylvania, Federal Insurance Company, Quanta Services, Inc., and the other Indemnitors identified therein (previously filed as Exhibit 99.1 to the Company’s Form 8-K (No. 001-13831) filed December 4, 2006 and incorporated herein by reference) |
10.3410.39 |
| — |
| Second Amendment to Underwriting, Continuing Indemnity and Security Agreement dated as of January 9, 2008, among American Home Assurance Company, National Union Fire Insurance Company of Pittsburgh, Pa., The Insurance Company of the State of Pennsylvania, Federal Insurance Company, Quanta Services, Inc., and the other Indemnitors identified therein (previously filed as Exhibit 10.34 to the Company’s Form 10-K for the year ended December 31, 2007 (No. 001-13831) filed February 29, 2008 and incorporated herein by reference) |
10.35
|
|
| | | |
| Exhibit | | |
| No. | | Description |
| 10.40 |
| — |
| Joinder Agreement and Third Amendment to Underwriting, Continuing Indemnity and Security Agreement dated as of December 19, 2008, among American Home Assurance Company, National Union Fire Insurance Company of Pittsburgh, Pa., The Insurance Company of the State of Pennsylvania, Federal Insurance Company, Quanta Services, Inc., and the other Indemnitors identified therein (previously filed as Exhibit 10.30 to the Company’s Form 10-K for the year ended December 31, 2011 (No. 001-13831) filed February 29, 2012 and incorporated herein by reference) |
10.3610.41 |
| — |
| Joinder Agreement and Fourth Amendment to Underwriting, Continuing Indemnity and Security Agreement dated as of March 31, 2009, among American Home Assurance Company, National Union Fire Insurance Company of Pittsburgh, Pa., The Insurance Company of the State of Pennsylvania, Liberty Mutual Insurance Company, Liberty Mutual Fire Insurance Company, Safeco Insurance Company of America, Federal Insurance Company, Quanta Services, Inc., and the other Indemnitors identified therein (previously filed as Exhibit 99.1 to the Company’s Form 8-K (No. 001-13831) filed April 1, 2009 and incorporated herein by reference) |
|
| 10.42 | | | | |
Exhibit | | |
No. | | Description |
10.37 |
| — |
| Joinder Agreement and Fifth Amendment to Underwriting, Continuing Indemnity and Security Agreement dated as of May 17, 2012, among Federal Insurance Company, Liberty Mutual Insurance Company, Liberty Mutual Fire Insurance Company, Safeco Insurance Company of America, American Home Assurance Company, National Union Fire Insurance Company of Pittsburgh, PA, The Insurance Company of the State of Pennsylvania, Quanta Services, Inc., and the other Indemnitors identified therein (previously filed as Exhibit 10.2 to the Company’s Form 10-Q for the quarter ended June 30, 2012 (No. 001-13831) filed August 8, 2012 and incorporated herein by reference) |
10.3810.43 |
| — |
| Sixth Amendment to Underwriting, Continuing Indemnity and Security Agreement dated as of December 3, 2012, among Federal Insurance Company, American Home Assurance Company, National Union Fire Insurance Company of Pittsburgh, PA, The Insurance Company of the State of Pennsylvania, Liberty Mutual Insurance Company, Liberty Mutual Fire Insurance Company, Safeco Insurance Company of America, Quanta Services, Inc., and the other Indemnitors identified therein (previously filed as Exhibit 10.32 to the Company’s Form 10-K for the year ended December 31, 2012 (No. 001-13831) filed March 1, 2013 and incorporated herein by reference) |
| 10.44 |
| — |
| Seventh Amendment to Underwriting, Continuing Indemnity and Security Agreement dated as of August 4, 2015, among Federal Insurance Company; American Home Assurance Company, National Union Fire Insurance Company of Pittsburgh, PA and The Insurance Company of the State of Pennsylvania; Liberty Mutual Insurance Company, Liberty Mutual Fire Insurance Company and Safeco Insurance Company of America; Quanta Services, Inc., the other Indemnitors identified therein; and the Stallone Companies (previously filed as Exhibit 10.2 to the Company’s Form 10-Q for the quarter ended June 30, 2018 filed August 7, 2018 and incorporated herein by reference) |
21.1ˆ |
| — |
| |
23.1ˆ |
| — |
| |
31.1ˆ |
| — |
| |
31.2ˆ |
| — |
| |
| 32.1† |
| — |
| |
| 101.INSˆ |
| — |
| XBRL Instance DocumentThe following financial statements from the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, formatted in Inline XBRL: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statements of Cash Flows, (v) Consolidated Statements of Equity and (vi) Notes to Consolidated Financial Statements, tagged as blocks of text and with detailed tags |
101.SCHˆ104* |
| — |
| The cover page from the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, formatted in Inline XBRL Taxonomy Extension Schema Document |
101.CALˆ |
| — |
| XBRL Taxonomy Extension Calculation Linkbase Document |
101.LABˆ |
| — |
| XBRL Taxonomy Extension Label Linkbase Document |
101.PREˆ |
| — |
| XBRL Taxonomy Extension Presentation Linkbase Document |
101.DEFˆ |
| — |
| XBRL Taxonomy Extension Definition Linkbase Document(included as Exhibit 101) |
______________________
|
| |
| * | Management contracts or compensatory plans or arrangements |
| ˆ | Filed with this Annual Report on Form 10-K |
| † | Furnished with this Annual Report on Form 10-K |
ITEM 16. Form 10-K Summary.
Not applicable.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Quanta Services, Inc. has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Houston, State of Texas, on February 28, 20182020.
|
| | |
| | By: | /s/ EARL C. AUSTIN, JR. |
| | | Earl C. Austin, Jr. President, Chief Executive Officer and Chief Operating Officer |
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Earl C. Austin, Jr. and Derrick A. Jensen, each of whom may act without joinder of the other, as their true and lawful attorneys-in-fact and agents, each with full power of substitution and resubstitution, for such person and in his or her name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or their substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed by the following persons in the capacities indicated on February 28, 20182020.
|
| | |
| Signature | | Title |
| | | |
| /s/ EARL C. AUSTIN, JR. | | President, Chief Executive Officer, Chief Operating Officer and Director |
| Earl C. Austin, Jr. | | (Principal Executive Officer) |
| | | |
| /s/ DERRICK A. JENSEN | | Chief Financial Officer |
| Derrick A. Jensen | | (Principal Financial Officer) |
| | | |
| /s/ JERRY K. LEMON | | Chief Accounting Officer |
| Jerry K. Lemon | | (Principal Accounting Officer) |
| | | |
| /s/ DOYLE N. BENEBY | | Director |
| Doyle N. Beneby | | |
| | | |
| /s/ J. MICHAL CONAWAY | | Director |
| J. Michal Conaway | | |
| | | |
| /s/ VINCENT D. FOSTER | | Director |
| Vincent D. Foster | | |
| | | |
| /s/ BERNARD FRIED | | Director |
| Bernard Fried | | |
| | | |
| /s/ WORTHING F. JACKMAN | | Director |
| Worthing F. Jackman | | |
| | | |
| /s/ DAVID M. McCLANAHAN | | Chairman of the Board of Directors |
| David M. McClanahan | | |
| | | |
| /s/ MARGARET B. SHANNON | | Director |
| Margaret B. Shannon | | |
| | | |
| /s/ PAT WOOD, III | | Director |
| Pat Wood, III | | |
| | |
| /s/ MARTHA B. WYRSCH | | Director |
| Martha B. Wyrsch | | |
