UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10-Q
----------------
(Mark One)
[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarterly Period Ended March 31, 1999
OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to .
Commission File No. 001-13831
QUANTA SERVICES, INC.
(Exact name of registrant as specified in its charter)
----------------
Delaware 74-2851603
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1360 Post Oak Blvd.
Suite 2100
Houston, Texas 77056
(Address of principal executive offices)
Registrant's telephone number, including area code: (713) 629-7600
----------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes [X] No [_]
26,182,357 shares of Common Stock were outstanding as of May 13, 1999. As of
the same date, 3,341,451 shares of Limited Vote Common Stock were outstanding.
QUANTA SERVICES, INC. AND SUBSIDIARIES
INDEX
Page
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
QUANTA SERVICES, INC. AND SUBSIDIARIES SUPPLEMENTAL COMBINED FINANCIAL
INFORMATION
Supplemental Combined Financial Information........................... 1
Supplemental Combined Statements of Operations for the three months
ended March 31, 1998 and 1999........................................ 2
QUANTA SERVICES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets........................................... 4
Consolidated Statements of Operations................................. 5
Consolidated Statements of Cash Flows................................. 6
Notes to Condensed Consolidated Financial Statements.................. 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................. 12
PART II. OTHER INFORMATION
Item 2. Changes in Securities........................................... 17
Item 6. Exhibits and Reports on Form 8-K................................ 17
Signature............................................................... 18
QUANTA SERVICES, INC. AND SUBSIDIARIES
PART I, ITEM 1--FINANCIAL INFORMATION
SUPPLEMENTAL COMBINED FINANCIAL INFORMATION
OVERVIEW AND BASIS OF PRESENTATION
Quanta Services, Inc., a Delaware corporation ("Quanta" or the "Company"),
was founded in August 1997 to create a leading provider of specialty
contracting and maintenance services primarily related to electric, utility
and telecommunications infrastructure in North America. In February 1998,
Quanta completed its initial public offering (the "Offering"), concurrent with
which Quanta acquired, in separate transactions, four entities (the "Founding
Companies"). Quanta acquired twelve additional businesses in 1998 and nine
additional businesses through March 31, 1999. Of these additional acquired
businesses, two were accounted for as poolings-of-interests and are referred
to herein as the "Pooled Companies". The remaining acquired businesses were
accounted for as purchases and are referred to herein as the "Purchased
Companies". Quanta intends to continue to acquire through merger or purchase
similar companies to expand its national and regional operations.
The financial statements of Quanta for periods prior to February 18, 1998
(the effective closing date of the acquisitions of the Founding Companies) are
the financial statements of PAR Electrical Contractors, Inc. ("PAR" or the
"Accounting Acquiror") as restated for the acquisitions of the Pooled
Companies. The operations of the other Founding Companies and Quanta, acquired
by the Accounting Acquiror, have been included in the Company's historical
financial statements beginning February 19, 1998, and the Purchased Companies
from their respective dates of acquisition.
The accompanying pro forma combined statement of operations of the Company
for the three months ended March 31, 1998, include the combined operations of
the Pooled Companies and the Founding Companies from January 1, 1998, and the
Purchased Companies from the date of their respective acquisition.
The unaudited pro forma combined statement of operations for the three
months ended March 31, 1998 assumes that the Offering and related transactions
were closed on January 1, 1998 and presents certain data for the Company as
adjusted for: 1) the acquisition of the Founding Companies; 2) the IPO
completed on February 18, 1998; 3) certain reductions in salaries, bonuses and
benefits to former owners of the Founding Companies; 4) amortization of
goodwill resulting from the acquisition of the Founding Companies; 5)
reduction in interest expense, net of interest expense on borrowings to fund S
corporation distributions by certain of the Founding Companies, and 6)
adjustments to the federal and state income tax provision for the Founding
Companies based on pro forma operating results.
The unaudited pro forma combined statement of operations for the three
months ended March 31, 1998 is presented herein as the Company believes
certain investors find the information useful. This statement should be read
in conjunction with the Company's historical unaudited financial statements
and notes thereto included in this Form 10-Q. The pro forma adjustments are
based on estimates, available information and certain assumptions which may be
revised as additional information becomes available. The pro forma financial
data does not purport to represent what the Company's combined financial
position or results of operations would actually have been if such
transactions had in fact occurred on those dates and are not necessarily
representative of the Company's financial position or results of operations
for any future period. Since Quanta, the Founding Companies and the Pooled
Companies were not under common control or management for a portion of the
period presented, historical pro forma combined results may not be comparable
to, or indicative of, future performance.
Operating results for the interim periods are not necessarily indicative of
the results for full years. The results of the Company have historically been
subject to significant seasonal fluctuations. It is suggested that these pro
forma combined financial statements be read in conjunction with the pro forma
combined financial statements and the notes thereto included in the Company's
Annual Report on Form 10-K which was filed with the Securities and Exchange
Commission on March 31, 1999.
1
QUANTA SERVICES, INC. AND SUBSIDIARIES
SUPPLEMENTAL COMBINED STATEMENTS OF OPERATIONS
(In thousands, except per share information)
(Unaudited)
Three Months Ended
March 31 ,
--------------------
1998 1999
----------- --------
(Pro Forma)
Revenues.............................................. $ 46,766 $127,779
Cost of services (including depreciation)............. 39,169 104,871
-------- --------
Gross profit........................................ 7,597 22,908
Selling, general and administrative expenses.......... 4,478 11,982
Merger expenses--pooling.............................. -- 137
Goodwill amortization................................. 414 1,498
-------- --------
Income from operations.............................. 2,705 9,291
Other income (expense):
Interest expense.................................... (379) (2,224)
Other income (expense), net......................... 119 320
-------- --------
Income before income tax provision.................... 2,445 7,387
Provision for income taxes............................ 933 3,964 (a)
-------- --------
Net income............................................ $ 1,512 $ 3,423
======== ========
Basic earnings per share.............................. $ 0.09 $ 0.13
======== ========
Diluted earnings per share............................ $ 0.09 $ 0.13
======== ========
Diluted earnings per share before merger expenses..... $ 0.09 $ 0.16 (b)
======== ========
Shares used in computing earnings per share--
Basic............................................... 17,428 26,024
======== ========
Diluted............................................. 17,490 30,139
======== ========
- --------
(a) Includes a non-cash, non-recurring deferred tax charge of $677,000 as a
result of a change in the tax status from an S corporation to a C
corporation of a company acquired in a pooling transaction during the
first quarter of 1999.
(b) Excludes a non-cash, non-recurring deferred tax charge of $677,000 as a
result of a change in the tax status from an S corporation to a C
corporation of a company acquired in a pooling transaction during the
first quarter of 1999. In addition, it excludes non-recurring merger
expenses of $137,000 related to this transaction.
The accompanying notes are an integral part of these combined financial
statements.
2
(1) Shares Used in Computing Earnings Per Share
The pro forma basic earnings per share calculation for the three months
ended March 31, 1998 include the pro forma effect of the shares issued to the
Founding Companies, the Pooled Companies, the Limited Vote Common Stock and
the Offering as though they were outstanding the entire period. Pro forma
diluted earnings per share include the shares described previously and the
dilution of 61,817 shares attributable to outstanding options to purchase
common stock, using the treasury stock method.
Basic earnings per share for the three months ended March 31, 1999 are based
on the weighted average shares of common stock and Limited Vote Common Stock
outstanding. Diluted earnings per share is based on the weighted average
shares of common stock and Limited Vote Common Stock outstanding and the
dilution of 525,992 attributable to outstanding options to purchase common
stock, using the treasury stock method. In addition, it includes the dilution
attributable to the assumed conversion of the Convertible Subordinated Notes.
Included in net income used in computing diluted earnings per share is
approximately $542,000 in reduced interest expense, net of tax, attributable
to the assumed conversion of the Convertible Subordinated Notes.
3
QUANTA SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
DECEMBER 31, MARCH 31,
1998 1999
------------ -----------
CURRENT ASSETS: (UNAUDITED)
Cash ............................................... $ 3,246 $ 5,257
Accounts receivable, net of allowance of $1,405 and
$1,889............................................. 76,040 114,085
Costs and estimated earnings in excess of billings
on uncompleted contracts........................... 22,620 41,662
Inventories......................................... 2,534 6,141
Prepaid expenses and other current assets........... 4,352 5,214
-------- --------
Total current assets.............................. 108,792 172,359
PROPERTY AND EQUIPMENT, net........................... 74,212 93,219
OTHER ASSETS, net..................................... 5,190 5,543
GOODWILL, net......................................... 150,887 283,083
-------- --------
Total assets...................................... $339,081 $554,204
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt................ $ 4,357 $ 3,392
Accounts payable and accrued expenses............... 40,298 68,778
Billings in excess of costs and estimated earnings
on uncompleted contracts........................... 7,031 9,980
-------- --------
Total current liabilities......................... 51,686 82,150
LONG-TERM DEBT, net of current maturities............. 60,281 85,434
CONVERTIBLE SUBORDINATED NOTES........................ 49,350 49,350
DEFERRED INCOME TAXES AND OTHER NON-CURRENT
LIABILITIES.......................................... 6,261 7,500
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred Stock, $.00001 par value, 10,000,000
shares authorized, none issued and outstanding..... -- --
Common Stock, $.00001 par value, 36,654,667 shares
authorized, 18,557,949 and 25,677,410 shares issued
and outstanding, respectively...................... -- --
Limited Vote Common Stock, $.00001 par value,
3,345,333 shares authorized, 3,345,333 and
3,341,451 shares issued and outstanding,
respectively....................................... -- --
Unearned ESOP shares................................ (1,831) (1,831)
Additional paid-in capital.......................... 145,194 300,038
Retained earnings................................... 28,140 31,563
-------- --------
Total stockholders' equity........................ 171,503 329,770
-------- --------
Total liabilities and stockholders' equity........ $339,081 $554,204
======== ========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
QUANTA SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share information)
(Unaudited)
THREE MONTHS
ENDED MARCH 31,
------------------
1998 1999
-------- --------
Revenues................................................ $ 32,230 $127,779
Cost of services (including depreciation)............... 26,996 104,871
-------- --------
Gross profit.......................................... 5,234 22,908
Selling, general and administrative expenses............ 3,522 11,982
Merger expenses--pooling................................ -- 137
Goodwill amortization................................... 196 1,498
-------- --------
Income from operations................................ 1,516 9,291
Other income (expense):
Interest expense...................................... (416) (2,224)
Other income (expense), net........................... 73 320
-------- --------
Income before income tax provision...................... 1,173 7,387
Provision for income taxes.............................. 356 3,964 (a)
-------- --------
Net income.............................................. $ 817 $ 3,423
======== ========
Basic earnings per share................................ $ 0.08 $ 0.13
======== ========
Diluted earnings per share.............................. $ 0.08 $ 0.13
======== ========
Diluted earnings per share before merger expenses....... $ 0.08 $ 0.16 (b)
======== ========
Shares used in computing earnings per share--
Basic................................................. 10,518 26,024
======== ========
Diluted............................................... 10,580 30,139
======== ========
- --------
(a) Includes a non-cash, non-recurring deferred tax charge of $677,000 as a
result of a change in the tax status from an S corporation to a C
corporation of a company acquired in a pooling transaction during the
first quarter of 1999.
(b) Excludes a non-cash, non-recurring deferred tax charge of $677,000 as a
result of a change in the tax status from an S corporation to a C
corporation of a company acquired in a pooling transaction during the
first quarter of 1999. In addition, it excludes non-recurring merger
expenses of $137,000 related to this transaction.
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
QUANTA SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
--------------------
1998 1999
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.............................................. $ 817 $ 3,423
Adjustments to reconcile net income to net cash provided
by (used in) operating activities--
Depreciation and amortization.......................... 1,159 5,350
Gain on sale of property and equipment................. (49) (34)
Deferred income taxes.................................. 105 690
Changes in operating assets and liabilities, net of
non-cash transactions--
(Increase) decrease in--
Accounts receivable.................................. (3,910) (11,998)
Inventories.......................................... (606) (822)
Costs and estimated earnings in excess of billings on
uncompleted contracts............................... (949) (10,875)
Prepaid expenses and other current assets............ 6 (676)
Increase (decrease) in--
Accounts payable and accrued expenses................ 5,117 7,905
Billings in excess of costs and estimated earnings on
uncompleted contracts............................... (1,585) 2,476
Other, net........................................... 32 154
--------- ---------
Net cash provided by (used in) operating activities.... 137 (4,407)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and equipment............ 816 287
Additions of property and equipment..................... (2,951) (8,580)
Cash paid for acquisitions, net of cash acquired........ (12,057) (97,584)
--------- ---------
Net cash used in investing activities.................. (14,192) (105,877)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt............................ 2,579 2,428
Payments on long-term debt.............................. (18,157) (15,657)
Issuances of common stock, net of offering costs........ 45,109 101,119
Net borrowings under bank lines of credit............... -- 24,405
Distributions to accounting acquiror.................... (8,370) --
Other, net.............................................. (2,526) --
--------- ---------
Net cash provided by financing activities.............. 18,635 112,295
--------- ---------
NET INCREASE IN CASH..................................... 4,580 2,011
CASH, beginning of period................................ 489 3,246
--------- ---------
CASH, end of period...................................... $ 5,069 $ 5,257
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for--
Interest............................................... $ 380 $ 1,940
Income taxes........................................... 263 5,438
The accompanying notes are an integral part of these condensed consolidated
financial statements.
6
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BUSINESS AND ORGANIZATION:
Quanta Services, Inc., a Delaware corporation ("Quanta" or the "Company"),
was founded in August 1997 to create a leading provider of specialty
contracting and maintenance services primarily related to electric, utility
and telecommunications infrastructure in North America.
In February 1998, Quanta completed its initial public offering (the
"Offering"), concurrent with which Quanta acquired, in separate transactions,
four entities (the "Founding Companies"). Quanta acquired twelve additional
businesses in 1998 and nine additional businesses through March 31, 1999. Of
the additional acquired businesses, two were accounted for as poolings-of-
interests and are referred to herein as the "Pooled Companies". The remaining
acquired businesses were accounted for as purchases and are referred to herein
as the "Purchased Companies" (together with the Founding Companies and the
Pooled Companies, the "Acquired Businesses"). Quanta intends to continue to
acquire through merger or purchase similar companies to expand its national
and regional operations.
The financial statements of Quanta for periods prior to February 18, 1998
(the effective closing date of the acquisitions of the Founding Companies),
are the financial statements of PAR Electrical Contractors, Inc. ("PAR" or the
"Accounting Acquiror") as restated for the acquisitions of the Pooled
Companies. The operations of the other Founding Companies and Quanta, acquired
by the Accounting Acquiror, have been included in the Company's historical
financial statements beginning February 19, 1998, and the Purchased Companies
beginning on their respective dates of acquisition. References herein to the
"Company" include Quanta and its subsidiaries.
Interim Condensed Consolidated Financial Information
The unaudited condensed consolidated financial statements have been prepared
pursuant to the rules of the Securities and Exchange Commission ("SEC").
Certain information and footnote disclosures, normally included in annual
financial statements prepared in accordance with generally accepted accounting
principles, have been condensed or omitted pursuant to those rules and
regulations, although the Company believes that the disclosures made are
adequate to make the information presented not misleading. In the opinion of
management, all adjustments, consisting only of normal recurring adjustments,
necessary to fairly present the financial position, results of operations and
cash flows with respect to the interim consolidated financial statements, have
been included. The results of operations for the interim periods are not
necessarily indicative of the results for the entire fiscal year.
It is suggested that these condensed consolidated financial statements be
read in conjunction with the audited financial statements and notes thereto of
Quanta Services, Inc. and subsidiaries included in the Company's Annual Report
on Form 10-K, which was filed with the SEC on March 31, 1999.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions
by management in determining the reported amounts of assets and liabilities,
disclosures of contingent liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
7
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
2. PER SHARE INFORMATION:
Basic earnings per share calculations are based on the weighted average
shares of common stock and Limited Vote Common Stock outstanding. Diluted
earnings per share calculations are based on the weighted average shares of
common stock and Limited Vote Common Stock outstanding and the dilution of
61,817 and 525,992 shares in 1998 and 1999, respectively, attributable to
outstanding options to purchase common stock, using the treasury stock method.
In addition, for the three months ended March 31, 1999, diluted earnings per
share includes the dilution attributable to the assumed conversion of the
Convertible Subordinated Notes. Included in net income used in computing
diluted earnings per share for the three months ended March 31, 1999 is
approximately $542,000 in reduced interest expense, net of tax, attributable
to the assumed conversion of the Convertible Subordinated Notes.
3. BUSINESS COMBINATIONS:
Poolings
During 1998 and the quarter ended March 31, 1999, the Company acquired all
of the outstanding stock of two companies in exchange for 1,162,572 shares of
common stock. These companies provide specialty contracting services to the
cable television and telecommunications industries. These acquisitions have
been accounted for as poolings-of-interests and the results of their
operations are included for all periods presented herein.
Purchases
During the first quarter of 1999, the Company has completed eight
acquisitions accounted for as purchases. The aggregate consideration paid in
these transactions consisted of approximately $100.0 million in cash and notes
and 2.5 million shares of common stock. The accompanying balance sheet as of
March 31, 1999 includes preliminary allocations of the respective purchase
prices and is subject to final adjustment. Set forth below are unaudited pro
forma combined revenue and income data reflecting the pro forma effect of
these acquisitions on the Company's results of operations for the year ended
December 31, 1998 and the three months ended March 31, 1999. The unaudited
data presented below consists of statements of operations data as presented in
these condensed consolidated financial statements plus (i) statements of
operations data of the Founding Companies for the periods prior to February
19, 1998, (ii) the effects of the Pooled Companies and (iii) all Purchased
Companies as if the acquisitions were effective on the first day of the period
being reported. The unaudited revenue and net income data are in thousands.
Three
Months
Year Ended Ended
December 31, March
1998 31, 1999
------------ --------
Revenues................................................. $627,469 $147,705
Net income............................................... $ 37,853 $ 4,006
Basic earnings per share................................. $ 1.30 $ 0.14
Diluted earnings per share............................... $ 1.23 $ 0.14
Pro forma adjustments included in the amounts above primarily relate to: (a)
contractually agreed reductions in salaries and benefits for former owners,
and certain key employees; (b) adjustment to depreciation and amortization
expense due to the purchase price allocations; (c) the assumed reductions in
interest expense due to
8
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
unassumed debt and the refinancing of the outstanding indebtedness in
conjunction with the acquisition of the Founding Companies and Purchased
Companies, offset by an assumed increase in interest expense incurred in
connection with financing the acquisitions; (d) elimination of non-recurring
acquisition costs associated with the Pooled Companies; (e) the incremental
interest expense and amortization of deferred financing costs incurred as a
result of the issuance of the Convertible Subordinated Notes (as defined in
Note 7), net of the repayment of outstanding indebtedness of the Company; (f)
the reduction in interest expense related to the repayment of debt from
proceeds of the secondary offering of common stock completed in January 1999,
as if the offering had been completed at the beginning of all periods
presented and (g) adjustment to the federal and state income tax provisions
based on the combined operations. The pro forma financial data does not
purport to represent what the Company's combined financial position or results
of operations would actually have been if such transactions had in fact
occurred on those dates and are not necessarily representative of the
Company's financial position or results of operations for any future period.
4. INCOME TAXES:
Certain of the acquisitions were S corporations for income tax purposes and,
accordingly, any income tax liabilities for the periods prior to the
acquisitions are the responsibility of the respective stockholders. Effective
with the acquisitions, the S corporations converted to C corporations.
Accordingly, an estimated deferred tax liability has been recorded to provide
for the estimated future income tax liability as a result of the difference
between the book and tax bases of the net assets of these former S
corporations. For purposes of these consolidated financial statements, federal
and state income taxes have been provided for the post-acquisition periods. In
addition, during the first quarter of 1999, a non-cash, non-recurring tax
charge of $677,000 was recorded as a result of a change in the tax status from
an S Corporation to a C Corporation of a company acquired in a pooling
transaction.
5. COMMITMENTS AND CONTINGENCIES:
The Company issued shares of common stock to an Employee Stock Ownership
Plan (the "ESOP") in connection with the acquisition of one of the Pooled
Companies. The ESOP was terminated on July 31, 1998, and pending a favorable
determination letter from the Internal Revenue Service, a portion of the
shares of the Company's common stock held by the ESOP will be sold to repay
debt owed by the ESOP to the Company and the remaining portion of the
unallocated shares will be distributed to its participants. The cost of the
unallocated ESOP shares is reflected as a reduction in the Company's
stockholders' equity. Upon distribution from the ESOP, the Company will owe an
excise tax equal to 10 percent of the value of the Company's common stock
distributed. In addition, the Company will eliminate the remaining balance
reflected as Unearned ESOP Shares on the Company's balance sheet and will have
to recognize a non-cash, non-recurring compensation charge equal to the value
of the unallocated shares held by the ESOP at the time it allocates and
distributes such shares. The Company currently cannot determine the amount of
the excise tax that will be owed or the non-cash, non-recurring compensation
charge that will be recognized. However, based on the closing price of the
Company's common stock on March 31, 1999, the amount of such charges would be
approximately $772,000 and $3,209,000, respectively.
6. NEW PRONOUNCEMENT:
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", which becomes effective for financial
statements beginning January 1, 2000. SFAS No. 133 requires a company to
recognize all derivative instruments (including certain derivative instruments
embedded in other
9
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
contracts) as assets or liabilities in its balance sheet and measure them at
fair value. The statement requires that changes in the derivatives fair value
be recognized currently in earnings unless specific hedge accounting criteria
are met. The Company is evaluating SFAS No. 133 and the impact on existing
accounting policies and financial reporting disclosures. However, the Company
has not to date engaged in activities or entered into arrangements normally
associated with derivative instruments.
7. DEBT:
Credit Facility
The Company has a $175.0 million revolving credit facility (the "Credit
Facility") with a group of nine banks. The Credit Facility is secured by a
pledge of all of the capital stock of the Company's material operating
subsidiaries and the majority of the Company's assets and is to provide funds
to be used for working capital, to finance acquisitions and for other general
corporate purposes. Amounts borrowed under the Credit Facility bear interest
at a rate equal to either (a) the London Interbank Offered Rate ("LIBOR" which
was 4.94% at March 31, 1999) plus 1.00% to 2.00%, as determined by the ratio
of the Company's total funded debt to EBITDA (as defined in the Credit
Facility) or (b) the bank's prime rate (which was 7.75% at March 31, 1999)
plus up to 0.25%, as determined by the ratio of the Company's total funded
debt to EBITDA. Commitment fees of 0.175% to 0.30% (based on certain financial
ratios) are due on any unused borrowing capacity under the Credit Facility.
The Credit Facility matures August 2, 2003. The Company's existing and future
subsidiaries will guarantee the repayment of all amounts due under the
facility and the facility restricts pledges on all material assets. The Credit
Facility contains usual and customary covenants for a credit facility of this
nature including the prohibition of the payment of dividends, certain
financial ratio covenants and the consent of the lenders for acquisitions
exceeding a certain level of cash consideration. As of March 31, 1999, $81.0
million was borrowed under the Credit Facility, and the Company had $3.5
million of letters of credit outstanding, resulting in a borrowing
availability of $90.5 million under the Credit Facility.
Strategic Investment
In October 1998, the Company entered into a strategic investment agreement
with Enron Capital & Trade Resources Corp. ("Enron Capital"), a subsidiary of
Enron Corp., pursuant to which Enron Capital and an affiliate made an
investment of $49.4 million in Quanta. The investment is in the form of
Convertible Subordinated Notes bearing interest at 6 7/8 percent and
convertible into Quanta common stock at a price of $13.75 per share.
Additionally, Quanta and Enron Capital entered into a strategic alliance under
which Enron Capital and Quanta will exchange information regarding the design,
construction and maintenance of electric power transmission and distribution
systems and fiber optic communications systems. The Convertible Subordinated
Notes require quarterly interest payments and equal semi-annual principal
payments beginning in 2006 until the notes are paid in full in 2010. The
Company has the option to redeem the notes at a premium beginning in 2002.
8. SEGMENT INFORMATION:
The Company operates in one reportable segment as a specialty contractor.
The Company provides contracting and maintenance services including services
for electric utility infrastructure, telecommunications, transportation
control and lighting systems and commercial and industrial services. Each of
these services is provided by various of the Company's subsidiaries and
discrete financial information is not provided to management at the service
level. The following table presents information regarding revenues derived
from the services noted above.
10
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
Three Months
Ended March 31,
-----------------
1998 1999
-------- --------
(In thousands)
Electric utility infrastructure.............................. $ 18,430 $ 68,502
Telecommunications........................................... 9,639 39,615
Transportation control and lighting systems.................. 2,156 4,690
Commercial and industrial.................................... 2,005 14,972
-------- --------
$ 32,230 $127,779
======== ========
The Company does not have significant operations or long-lived assets in
countries outside of the United States.
9. SUBSEQUENT EVENTS:
Business Combinations
Subsequent to March 31, 1999 and through May 13, 1999, the Company acquired
two additional companies for an aggregate consideration of approximately $13.8
million in cash and 485,029 shares of common stock. The cash portion of such
consideration was provided by borrowings under the Company's credit facility.
11
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Introduction
The following discussion should be read in conjunction with the Consolidated
Financial Statements and related notes thereto included elsewhere in this
Quarterly Report on Form 10-Q. Except for the historical financial information
contained herein, the matters discussed in this Quarterly Report on Form 10-Q
may be considered "forward-looking" statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Such statements include
declarations regarding the intent, belief or current expectations of the
Company and its management, statements regarding the future results of
acquired companies, the Company's gross margins and the Company's expectations
regarding Year 2000 issues. Prospective investors are cautioned that any such
forward-looking statements are not guarantees of future performance and
involve a number of risks and uncertainties. Actual results could differ
materially from those indicated by such forward-looking statements. Among the
important factors that could cause actual results to differ materially from
those indicated by such forward-looking statements are the risk factors
identified in the Company's Annual Report on Form 10-K, which was filed with
the Securities and Exchange Commission on March 31, 1999, and which is
available at the SEC's Web site at www.sec.gov.
Quanta derives its revenues from one reportable segment by providing
specialty contracting and maintenance services related to electric and
telecommunications infrastructure, installing transportation control and
lighting systems, and providing specialty contracting services to the
commercial and industrial markets. Costs of services consist primarily of
salaries and benefits to employees, depreciation, fuel and other vehicle
expenses, equipment rentals, subcontracted services, materials, parts and
supplies. Quanta's gross margin, which is gross profit expressed as a
percentage of revenues, is typically higher on projects where labor, rather
than materials, constitutes a greater portion of the cost of services. Labor
costs can be predicted with relatively less accuracy than materials costs.
Therefore, to compensate for the potential variability of labor costs, we seek
to maintain higher margins on our labor-intensive projects. Certain of our
subsidiaries were previously subject to deductibles ranging from $100,000 to
$1,000,000 for workers' compensation insurance. Fluctuations in insurance
accruals related to this deductible could have an impact on gross margins in
the period in which such adjustments are made. Selling, general and
administrative expenses consist primarily of compensation and related benefits
to management, administrative salaries and benefits, marketing, office rent
and utilities, communications and professional fees.
12
Results of Operations--Historical
The unaudited historical combined statements of operations for the three
months ended March 31, 1998 and 1999 reflect the historical operations of PAR
and the Pooled Companies. The operations of the Founding Companies have been
included in the Company's historical financial statements beginning February
19, 1998 and the operations of the Purchased Companies have been included from
their respective acquisition dates.
Three Months Ended March 31,
-----------------------------
1998 1999
------------- --------------
(In thousands)
Revenues........................................ $32,230 100.0% $127,779 100.0%
Cost of services................................ 26,996 83.8 104,871 82.1
------- ----- -------- -----
Gross profit.................................... 5,234 16.2 22,908 17.9
Selling, general and administrative expenses.... 3,522 10.9 11,982 9.4
Merger expenses--pooling........................ -- -- 137 0.1
Goodwill amortization........................... 196 0.6 1,498 1.2
------- ----- -------- -----
Income from operations.......................... 1,516 4.7 9,291 7.2
Interest expense................................ 416 1.3 2,224 1.7
Other income (expense), net..................... 73 0.2 320 0.3
------- ----- -------- -----
Income before income tax provision.............. 1,173 3.6 7,387 5.8
Provision for income taxes...................... 356 1.1 3,964 3.1
------- ----- -------- -----
Net income...................................... $ 817 2.5% $ 3,423 2.7%
======= ===== ======== =====
Combined Results For The Three Months Ended March 31, 1998 Compared To The
Three Months Ended March 31, 1999
Revenues. Revenues increased $95.5 million, or 296.5 percent, to $127.8
million for the three months ended March 31, 1999. This increase in revenues
was primarily attributable to the contribution of $72.1 million of revenues in
1999 from companies purchased subsequent to March 31, 1998, inclusion of
revenues of the Founding Companies for the full quarter and increased demand
for the Company's services in 1999.
Gross profit. Gross profit increased $17.7 million, or 337.7 percent, to
$22.9 million for the three months ended March 31, 1999. Gross margin
increased from 16.2 percent for the three months ended March 31, 1998 to 17.9
percent for the three months ended March 31, 1999. This increase was due to a
higher mix of higher margin telecommunications contracts in 1999 compared to
1998 and slightly improved margins from electric utility infrastructure
services.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $8.5 million, or 240.2 percent, to $12.0
million for the three months ended March 31, 1999. This increase was due to
the acquisition of the Purchased Companies, increases in selling and
administrative salaries required to support the higher level of revenues
generated from an increased volume of projects, and the increased costs
related to the Company's corporate infrastructure.
Interest expense. Interest expense increased $1.8 million, or 434.6%, to
$2.2 million for the three months ended March 31, 1999. This increase in
interest expense is attributable to higher levels of debt resulting from cash
paid and debt assumed with the acquisition of certain Purchased Companies. In
addition, the Company borrowed funds under the Credit Facility for equipment
purchases and other operating activities in connection with the addition of
the Purchased Companies through the first quarter of 1999. Also, interest
expense increased due to the issuance of the Convertible Subordinated Notes,
partially offset by lower overall effective borrowing rates in 1999 versus
1998.
13
Liquidity and Capital Resources
In February 1999, the Company completed a follow-on public offering of
common stock, which included the issuance of 4,600,000 shares of common stock
(including 600,000 shares pursuant to the underwriters' over-allotment option)
at a price of $23.25 per share (before deducting underwriting discounts and
commissions). The Company realized proceeds from this transaction, net of the
discounts and after deducting the expenses of the offering, of approximately
$101.1 million. Of this amount, the Company used $57.8 million to repay
outstanding indebtedness under the Credit Facility and the remainder to
acquire additional businesses.
As of March 31, 1999, Quanta had cash of $5.3 million, working capital of
$90.2 million and long-term debt of $85.4 million, net of current maturities,
including borrowings of $81.0 million under the Credit Facility. The Company
also had $3.5 million of letters of credit outstanding under the Credit
Facility. In addition, the Company had $49.4 million of Convertible
Subordinated Notes.
During the three months ended March 31, 1999, operating activities utilized
net cash flow of $4.4 million. Changes in working capital accounts are driven
predominantly by the acquisitions throughout the quarter and as such are not
comparable to prior periods. We used net cash in investing activities of
$105.9 million, including $97.6 million used for the purchase of businesses,
net of cash acquired. Financing activities provided a net cash flow of $112.3
million, resulting primarily from $101.1 million of net proceeds from the
follow-on offering, and $24.4 million from net borrowings under our Credit
Facility, partially offset by $15.7 million in repayments of debt assumed in
connection with acquisitions.
The Company has a $175.0 million revolving Credit Facility (the "Credit
Facility") with a group of nine banks. The Credit Facility is secured by a
pledge of all of the capital stock of the Company's material operating
subsidiaries and the majority of the Company's assets and is to provide funds
to be used for working capital, to finance acquisitions and for other general
corporate purposes. Amounts borrowed under the Credit Facility bear interest
at a rate equal to either (a) the London Interbank Offered Rate ("LIBOR") plus
1.00 percent to 2.00 percent, as determined by the ratio of the Company's
total funded debt to EBITDA (as defined in the Credit Facility) or (b) the
bank's prime rate plus up to 0.25 percent, as determined by the ratio of the
Company's total funded debt to EBITDA. Commitment fees of 0.175 percent to
0.30 percent (based on certain financial ratios) are due on any unused
borrowing capacity under the Credit Facility. The Company's existing and
future subsidiaries will guarantee the repayment of all amounts due under the
Credit Facility, and the Credit Facility restricts pledges on all material
assets. The Credit Facility contains usual and customary covenants for a
credit facility of this nature including the prohibition of the payment of
dividends, certain financial ratios and indebtedness covenants and a
requirement to obtain the consent of the lenders for acquisitions exceeding a
certain level of cash consideration. As of May 13, 1999 the Company had
approximately $105.6 million in outstanding borrowings under the Credit
Facility and $4.1 million of letters of credit outstanding, resulting in a
borrowing availability of $65.3 million under the revolving Credit Facility.
Additionally, on October 5, 1998, we issued and sold $49.4 million of
Convertible Subordinated Notes bearing interest at 6 7/8% to Enron Capital and
one of its affiliates. We used the proceeds of the Convertible Subordinated
Notes to reduce outstanding borrowings under the Credit Facility. The
Convertible Subordinated Notes include restrictive covenants substantially
similar to those included in the Credit Facility. The Convertible Subordinated
Notes are convertible into common stock at any time at the option of the
holder at a conversion price of $13.75 per share, subject to adjustment. The
Convertible Subordinated Notes are nonredeemable for four years and are
redeemable thereafter at our option at a redemption price which is initially
$103.50 per $100.00 principal amount, with such premium declining ratably over
the succeeding four years. The Convertible Subordinated Notes are mandatorily
redeemable in nine semi-annual installments beginning in June 2006. Upon a
change in control, the Convertible Subordinated Notes are mandatorily
redeemable at a redemption price which is initially $107.00 per $100.00
principal amount, with such premium declining ratably over eight years
following the date of issuance.
14
The Company issued shares of common stock to an Employee Stock Ownership
Plan (the "ESOP") in connection with the acquisition of one of the Pooled
Companies. The ESOP was terminated on July 31, 1998, and pending a favorable
determination letter from the Internal Revenue Service, a portion of the
shares of the Company's common stock held by the ESOP will be sold to repay
debt owed by the ESOP to the Company and the remaining portion of the
unallocated shares will be distributed to its participants. The cost of the
unallocated ESOP shares is reflected as a reduction in the Company's
stockholders' equity. Upon distribution from the ESOP, the Company will owe an
excise tax equal to 10 percent of the value of the Company's common stock
distributed. In addition, the Company will eliminate the remaining balance
reflected as Unearned ESOP Shares on the Company's balance sheet and will have
to recognize a non-cash, non-recurring compensation charge equal to the value
of the unallocated shares held by the ESOP at the time it allocates and
distributes such shares. The Company currently cannot determine the amount of
the excise tax that will be owed or the non-cash, non-recurring compensation
charge that will be recognized. However, based on the closing price of the
Company's common stock on March 31, 1999, the amount of such charges would be
approximately $772,000 and $3,209,000, respectively.
Through May 12, 1999 the Company has acquired 23 companies in addition to
the Founding Companies for an aggregate consideration of 8.2 million shares of
Common Stock and $198.4 million in cash and notes. The cash portion of such
consideration was provided by borrowings under the Company's Credit Facility
and proceeds from the Offering and our second public offering of common stock.
The timing size or success of any acquisition effort and the associated
potential capital commitments cannot be predicted.
The Company expects to continue its aggressive acquisition program. The
Company intends to continue to use a combination of cash, notes and common
stock to finance the principal part of the consideration payable in
acquisitions. If the common stock does not maintain a sufficient value, or
potential acquisition candidates are unwilling to accept common stock as part
of the consideration for the sale of their businesses, the Company could be
required to utilize more cash to complete acquisitions. If sufficient funds
were not available from operating cash flow or through borrowings under the
Company's Credit Facility, the Company may seek additional financing through
the public or private sale of equity or debt securities. There can be no
assurance that the Company could secure such financing if and when it is
needed or on terms the Company deems acceptable. If the Company is unable to
secure acceptable financing, its acquisition program could be negatively
affected. The Company anticipates that its cash flow from operations and the
Credit Facility will provide sufficient cash to enable the Company to meet its
working capital needs, debt service requirements and planned capital
expenditures for property and equipment for at least the next 12 months.
Seasonality; Fluctuations of Quarterly Results
The Company's results of operations can be subject to seasonal variations.
Generally, during the winter months, demand for new projects and maintenance
services may be lower due to reduced construction activity during such
weather, while demand for electrical service and repairs may be higher due to
damage caused by inclement weather. Additionally, the industry can be highly
cyclical. As a result, the Company's volume of business may be adversely
affected by declines in new projects in various geographic regions in the U.S.
Typically, the Company experiences lower gross margins and operating margins
during the winter months. Quarterly results may also be materially affected by
the timing of acquisitions, variations in the margins of projects performed
during any particular quarter, the timing and magnitude of acquisition
assimilation costs and regional economic conditions. Accordingly, the
Company's operating results in any particular quarter may not be indicative of
the results that can be expected for any other quarter or for the entire year.
Year 2000
Impact of Year 2000. Many currently installed computer systems and software
products are coded to accept only two-digit entries in the date code field.
Beginning in the year 2000, these date code fields will need to accept four-
digit entries to distinguish 21st century dates from 20th century dates. As a
result, computer systems and
15
software used by many companies may need to be upgraded to comply with such
"Year 2000" requirements. Significant uncertainty exists concerning the
potential effects associated with such compliance, but systems that do not
properly recognize such information could generate erroneous data or cause a
system to fail.
State of Readiness. We have assessed our Year 2000 issues and have developed
a plan to address both the information technology ("IT") and non-IT systems
issues. We have not developed any of the systems we use in our business;
consequently, we believe our Year 2000 issues relate to systems that different
vendors have developed and sold to us. We assess Year 2000 issues relating to
the operating and other systems of all business we may acquire. Since our
acquisition program is ongoing, our assessment of potential Year 2000 issues
is not complete.
We have circulated a formal questionnaire to all of our significant
suppliers, customers and service providers to determine the extent to which
Quanta is vulnerable to those third parties' failure to remediate the Year
2000 problem. We have received assurances of Year 2000 compliance from many of
our suppliers, customers and service providers, including the providers of
most of our computer systems and the providers of financial services to us. In
addition, we have hired a consultant to assist us in evaluating the responses
we receive from our suppliers, customers and service providers. Because of the
nature of our business and the number of vendors available to us, we believe
that our operations will not be significantly disrupted even if third parties
with whom we have relationships are not Year 2000 compliant.
Costs to Address the Year 2000 Issue. We have not identified any material
systems which are not Year 2000 compliant, although seven of our Acquired
Businesses have systems which are not Year 2000 compliant. Three of the
systems require only minor software upgrades to a current version. For the
remaining four companies, we plan to have replacements for these systems
operational by December 31, 1999, at an estimated cost of $350,000, as part of
our previously planned systems integration program which will be funded from
cash flows from operations. To date, costs incurred to address Year 2000
compliance have been internal in nature and have been charged to income as
incurred. We have not delayed any IT projects due to our Year 2000 compliance
program.
Risks to the Company and Contingency Plan. In the worst case scenario, if
the replacements and modifications are not completed, our operating
subsidiaries may experience temporary problems with certain computer systems
that contain date critical functions. We believe that any temporary
disruptions from the failures of our own systems would not be material to our
overall business or results of operations. However, should our customers
experience a sustained period of unanticipated disruption because of Year 2000
problems, our customers may delay the award of new contracts or payment for
work already completed, and our business, results of operations and financial
condition may be materially and adversely affected. As a contingency plan,
immediately prior to January 1, 2000, we intend to maintain an adequate supply
of fuel and spare parts so that we can continue to operate normally until such
time as any temporary Year 2000 problems related to our operations are
remedied. The Company will continue throughout 1999 to consider the likelihood
of a material business interruption due to the Year 2000 issue.
While we have made a careful assessment of both our own internal operating
systems and the Year 2000 compliance of our suppliers, customer and service
providers, because of the complexity of the problem, we cannot be certain that
all of our own systems and those of third parties with whom we operate will be
made Year 2000 compliant in a timely manner or that any such failure to be
Year 2000 compliant will not materially and adversely affect our business,
results of operations or financial condition.
16
QUANTA SERVICES, INC. AND SUBSIDIARIES
PART II--OTHER INFORMATION
Item 2. Changes in Securities.
(c) Unregistered Sales of Securities.
Set forth below is certain information concerning all sales of securities by
the Company during the three month period ended March 31, 1999 that were not
registered under the Securities Act of 1933, as amended (the "Securities
Act").
Between January 1, 1999 and March 31, 1999, the Company issued 2,713,021
shares of common stock as part of the consideration for certain acquisitions.
These shares of common stock were issued without registration under the
Securities Act in reliance on the exemption provided by Section 4(2) of the
Securities Act.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
10.1* --Quanta Services, Inc. Management Incentive Bonus Plan for Fiscal
Year Ending December 31, 1999
27.1 --Financial data schedule
- --------
* Portions of this exhibit have been omitted and filed separately with the
Securities and Exchange Commission for confidential treatment.
(b) Reports on Form 8-K:
On February 26, 1999, the Company filed a Current Report on Form 8-K to
report the Company's acquisition of The Ryan Company, Inc. and Northern Line
Layers, Inc. on February 12, 1999 and February 16, 1999, respectively. These
acquisitions were accounted for as purchases.
17
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant, Quanta Services, Inc., has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
QUANTA SERVICES, INC.
Dated: May 14, 1999
/s/ James H. Haddox
By:__________________________________
James H. Haddox
Chief Financial Officer
18
INDEX TO EXHIBITS
Exhibit
No. Description
------- -----------
10.1* --Quanta Services, Inc. Management Incentive Bonus Plan for Fiscal
Year Ending December 31, 1999
27.1 --Financial data schedule
- --------
* Portions of this exhibit have been omitted and filed separately with the
Securities and Exchange Commission for confidential treatment.