e10vk
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
December 31, 2008
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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Commission file number 1-13831
Quanta Services, Inc.
(Exact name of registrant as
specified in its charter)
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Delaware
(State or other jurisdiction
of
incorporation or organization)
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74-2851603
(I.R.S. Employer
Identification No.)
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1360 Post Oak Boulevard, Suite 2100
Houston, Texas 77056
(Address of principal executive
offices, including ZIP Code)
(713) 629-7600
(Registrants telephone
number, including area code)
Securities registered pursuant to Section 12(b) of the
Act:
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Title of Each Class
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Name of Exchange on Which Registered
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Common Stock, $.00001 par value
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New York Stock Exchange
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Rights to Purchase Series D Junior Participating Preferred
Stock
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New York Stock Exchange
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(attached to Common Stock)
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Securities registered pursuant to Section 12(g) of the
Act:
Title of Each
Class
None
Indicate by check mark if the Registrant is a well-known
seasoned issuer (as defined in Rule 405 of the Securities
Act). Yes þ No o
Indicate by check mark if the Registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Exchange
Act. Yes o No þ
Indicate by check mark whether the Registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days: Yes þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of Registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act.
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Large
accelerated
filer þ
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Accelerated
filer o
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Non-accelerated
filer o
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Smaller
Reporting
Company o
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(Do not check if a smaller
reporting company.)
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, 2008 (the last business day of the
Registrants most recently completed second fiscal
quarter), the aggregate market value of the Common Stock and
Limited Vote Common Stock of the Registrant held by
non-affiliates of the Registrant, based on the last sale price
of the Common Stock reported by the New York Stock Exchange on
such date, was approximately $5.65 billion and
$13.96 million, respectively (for purposes of calculating
these amounts, only directors, officers and beneficial owners of
10% or more of the outstanding capital stock of the Registrant
have been deemed affiliates).
As of February 20, 2009, the number of outstanding shares
of the Common Stock of the Registrant was 196,933,163. As of the
same date, 662,293 shares of Limited Vote Common Stock were
outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the Registrants Definitive Proxy Statement for
the 2009 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, 2008
INDEX
1
PART I
General
Quanta Services, Inc. (Quanta) is a leading national provider of
specialty contracting services, and we believe we are one of the
largest contractors serving the transmission and distribution
sector of the North American electric utility industry. We
currently operate in two business segments. The infrastructure
services (Infrastructure Services) segment provides specialized
contracting services, offering end-to-end network solutions to
the electric power, gas, telecommunications and cable television
industries. Specifically, the comprehensive services provided by
the Infrastructure Services segment include designing,
installing, repairing and maintaining network infrastructure, as
well as certain ancillary services. Additionally, the dark fiber
(Dark Fiber) segment designs, procures, constructs and maintains
fiber-optic telecommunications infrastructure in select markets
and licenses the right to use point-to-point fiber-optic
telecommunications facilities to our customers. The Dark Fiber
segment services educational institutions, large industrial and
financial services customers and other entities with high
bandwidth telecommunication needs.
Our consolidated revenues for the year ended December 31,
2008 were approximately $3.78 billion, of which 56.8% was
attributable to electric power work, 20.8% to gas work, 14.2% to
telecommunications and cable television work and 6.6% to
ancillary services. In addition, 1.6% of our consolidated
revenues for the year ended December 31, 2008 was generated
by the Dark Fiber segment.
We have established a nationwide presence with a workforce of
over 14,000 employees, which enables us to quickly and
reliably serve a diversified customer base. We believe our
reputation for responsiveness, performance, geographic reach and
a comprehensive service offering has resulted in strong
relationships with numerous customers, which include many of the
leading companies in the industries we serve.
Representative customers include:
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American Electric Power
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AT&T
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BC Transmission Corporation
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CenterPoint Energy
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Comcast
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Duke Energy
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Energy Transfer
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Entergy
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Enterprise Products
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Exelon
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Florida Power & Light
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Georgia Power Company
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Mid American Energy
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Northeast Utilities System
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Pacific Gas and Electric
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Puget Sound Energy
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Qwest
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San Diego Gas & Electric
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Sempra Energy Company
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Southern California Edison
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Verizon Communications
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Westar Energy
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Xcel Energy
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We were organized as a corporation in the state of Delaware in
1997, and since that time have grown organically and made
strategic acquisitions to expand our geographic presence and
scope of services and to develop new capabilities to meet our
customers evolving needs. On August 30, 2007, we
acquired, through a merger transaction (the Merger), all of the
outstanding common stock of InfraSource Services, Inc.
(InfraSource). Similar to us, InfraSource provided design,
procurement, construction, testing and maintenance services to
electric power utilities, natural gas utilities,
telecommunication customers, government entities and heavy
industrial companies, such as petrochemical, processing and
refining businesses, primarily in the United States. As a result
of the Merger, we enhanced and expanded our position as a
leading specialized contracting services company serving the
electric power, gas, telecommunications and cable television
industries and added the Dark Fiber segment.
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Industry
Overview
Described below are various industry trends that we believe will
increase demand for our services over the long-term. We
recognize, however, that we and our customers are operating in a
challenging business environment in light of the economic
downturn and volatile capital markets. We expect these economic
and market conditions to negatively impact demand for our
services until the conditions improve significantly. Therefore,
we cannot predict the timing or magnitude that any of these
trends will have on demand for our services, particularly in the
near-term.
Need to upgrade electric power transmission and distribution
networks. The U.S. and Canadian electric
power grid, which consists of more than 200,000 miles of
high-voltage lines delivering electricity to over
300 million people, is aging and requires significant
maintenance and expansion to handle the U.S. and
Canadas current and growing power needs. In addition, the
grid must facilitate the sale of electricity across competitive
regional networks, a function for which it was not originally
designed. According to the North American Electric Reliability
Council (NERC), industry professionals rank the aging
infrastructure and limited new construction as the number one
challenge to reliability of the transmission system.
While the grid continues to deteriorate, demand for electricity
is expected to continue to grow over the long-term. According to
the 2008 Annual Energy Outlook published by the
U.S. Department of Energys Energy Information
Administration (EIA), the population in the United States has
increased by 20% since 1990, with energy consumption increasing
by a comparable 18%. The EIA also projects in the same report
that total U.S. electricity sales from producers to
consumers will increase by 41% from 3,660 billion
kilowatt-hours
in 2005 to 5,168 billion
kilowatt-hours
in 2030. NERC reports in its 2008 Long-Term Reliability
Assessment that peak demand for electricity in the U.S., which
typically occurs in the summer, is forecasted to increase by
16.6% over the next ten years.
This increasing demand, coupled with the aging infrastructure,
will affect reliability, requiring utilities to upgrade their
existing transmission and distribution systems. These system
upgrades are expected to result in increased spending over the
next several years. According to a 2008 Edison Electric
Institute (EEI) report, investor-owned utilities spent a total
of $6.9 billion on their transmission systems in 2006 and
plan to invest an additional $38.1 billion in their
transmission systems from 2007 to 2010. This represents a 60%
increase over the amount invested from 2003 to 2006. NERC
projects the number of transmission miles will increase by 9.5%
or 15,700 circuit miles in the U.S. over the next ten
years. The Brattle Group, an independent consulting firm,
reported in 2008 that by 2030, the electric utility industry
will need to make a total infrastructure investment of between
$1.5 trillion and $2.0 trillion to meet projected demand. The
estimates from the Brattle Group include investments of
$697 billion for new generation capacity, $298 billion
for new transmission infrastructure and $583 billion for
new distribution infrastructure. We believe that we are the
partner of choice for utilities in need of broad infrastructure
expertise, specialty equipment and workforce resources as they
work to address the aging infrastructure requirements and
increasing demand. We also believe that our utility customers
generally remain financially healthy and are currently able to
obtain financing for projects despite the instability in the
financial markets. A long-term or deep recession, however, will
likely have a negative impact on our customers spending,
and a continued decline in the capital markets may negatively
affect our customers plans for future projects, which
could be delayed, reduced or eliminated if funding is not
available.
Increased opportunities related to renewable
energy. We consider renewable energy, including
wind and solar, to be one of the largest, most rapidly emerging
opportunities for our engineering, project management and
installation services. Concerns about greenhouse gas emissions,
as well as the need to reduce reliance on power generation from
fossil fuels such as coal, oil and natural gas, are creating the
drive for more renewable energy. According to its annual report,
the American Wind Energy Association (AWEA) stated that
U.S. capacity to generate power from wind turbines grew by
a record 8,358 megawatts in 2008 as a result of $17 billion
in investments. This represents 50% growth and brings the
nations total renewable capacity to about 4% of the
overall generation portfolio. Under current mandates in
30 states, renewable energy is required to account for up
to 30% of a utilitys energy generation portfolio within
the next five to fifteen years. Renewable portfolio standards
require seven to nine gigawatts to be from solar generation.
Under the new presidential
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administration, there is potential for the implementation of
national renewable standards, which are expected to set a target
of generating at least 10% of the nations electricity from
renewables by 2012 and 25% by 2025. We believe that our
comprehensive services, industry knowledge and experience in the
design, installation and maintenance of renewable facilities
will enable us to support our customers renewable energy
efforts.
The latter part of 2008 experienced a slowdown in renewable
spending, due in part to the economic downturn as well as the
outcome of potential new legislation. The signing of the
American Recovery and Reinvestment Act of 2009 (ARRA) in
February 2009 resolved some of the legislative uncertainty by
the extension of renewable tax credits through 2012 for
producing wind energy. Industry experts anticipate that this
extension will stabilize the market and encourage ongoing
investment related to renewable energy facilities, although
investment may continue to be negatively impacted by constraints
on capital for new projects as a result of unfavorable economic
and market conditions.
Increased demand calls for new generation sources and related
connectivity to the grid. As we discuss above,
demand for power is increasing. As demand for power grows, the
need for new power generation sources will grow as well. There
is an increased focus on the development of renewable power
sources such as wind, solar and hydro electric. However, as
renewable power resources will only fulfill a portion of the
increased demand in the future, we also expect a continuation of
new power generation based on traditional resources, such as
natural gas. The future development of new power generation
sources will require connectivity to the grid to transport power
to demand centers. Renewable energy in particular will require
significant transmission infrastructure due to the often remote
location of renewable sources of energy. As a result, we
anticipate that future development of new power generation will
lead to increased demand over the long-term for our transmission
and substation engineering and installation services.
The Energy Policy Act of 2005 and other legislative
initiatives. We expect the Energy Policy Act of
2005 (Energy Act), which was enacted in August 2005, to result
in increased spending by the power industry over the next
decade. Since enactment, several aspects of the Energy Act have
come into effect and, as a result, have better positioned
utilities to finance and implement system enhancements. The
objectives of the Energy Act include improving the nations
electric transmission capacity and reliability and promoting
investment in the nations energy infrastructure. It
provides for a self-regulating reliability organization to
implement and enforce mandatory reliability standards on all
market participants, with oversight by the Federal Energy
Regulatory Commission (FERC). FERC has issued rules to provide a
more favorable return on equity for transmission system owners,
and it has approved incentive rates to encourage transmission
expansion and help ensure reliability in certain regions of the
nation.
We anticipate that aspects of the Energy Act will make
investment in the nations transmission system more
attractive and lead to a streamlined permitting process. For
example, the Energy Act provides for the designation of National
Interest Electric Transmission Corridors (NIETCs) to facilitate
siting of new transmission infrastructure. In October 2007, the
Department of Energy (DOE) designated two NIETCs the
Mid-Atlantic Area National Corridor and the Southwest Area
National Corridor. These NIETCs include two of the nations
most populated regions with major transmission
congestion the Northeast/Mid-Atlantic region and the
Southwest region. The NIETCs will be in effect for 12 years
to give regional transmission owners and utilities time to
evaluate, plan, and build additional transmission infrastructure
in the NIETCs. In addition, FERC was given backstop
authority to issue permits to construct or modify electric
transmission facilities in the NIETCs under certain
circumstances, and in November 2006, it issued a final rule
specifying the requirements and procedures for invoking this
backstop authority. However, both DOEs NIETC designations
and FERCs final rule regarding permitting have been
challenged and are currently subject to review in various
federal courts. In one such case, decided in February 2009, a
federal court of appeals vacated FERCs interpretation of
the scope of its backstop siting authority. Accordingly, the
long-term effect of DOEs NIETC designations and the
transmission siting rules will depend on the results of the
remaining challenges, possible further revisions to various
federal regulations or new legislation that may more clearly
define the scope of FERCs transmission siting authority.
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We also expect that certain provisions of the ARRA will create
demand for our services over the long-term. This
$787 billion economic stimulus package consists of
approximately $506 billion in spending and approximately
$281 billion in tax cuts and tax credits that are intended
to create jobs and improve the economy. Several of the
ARRAs provisions include incentives for investments in
renewable energy, energy efficiency and related infrastructure,
such as the extension of certain tax incentives for renewable
energy projects, loan guarantees for the construction of
renewable energy systems and electric power transmission and
funds for modernization of the electric grid. The stimulus
package also includes funding for the deployment of high-speed
internet to rural areas that lack sufficient bandwidth to
adequately support economic development, as well as funding to
states for restoration, repair and construction of highways,
which may create the need for relocation and upgrade of electric
power, telecommunications and natural gas infrastructure. While
we cannot predict the timing of when investments related to
these initiatives will occur or the scope of the investments
that may be made, we anticipate that certain of the ARRA
initiatives will positively impact demand for our services in
the future.
Increased outsourcing of network infrastructure installation
and maintenance. We believe that electric power,
gas, telecommunications and cable television providers are
increasingly focusing on their core competencies, resulting in
an increase in the outsourcing of network services. Total
employment in the electric utility industry declined
substantially in the last decade, reflecting, in part, the
outsourcing trend by utilities. We believe that by outsourcing
network services to third-party service providers such as us,
our customers can reduce costs, provide flexibility in budgets
and improve service and performance.
One of the largest issues facing utilities is the aging of the
workforce. NERC estimates that approximately one in three
utility workers will be 50 or older by 2010, yet there will be a
25% increase in demand for electricity by 2015. Many utilities
look to a third-party partner to help address this issue. With
more than 14,000 employees across the nation, we believe we
are well-positioned to provide skilled labor to supplement or
completely outsource a utilitys workforce. As a specialty
contractor with nationwide scope, we are able to leverage our
existing labor force and equipment infrastructure across
multiple customers and projects, resulting in better utilization
of labor and assets.
Continuing opportunities in Fiber to the Premises, or FTTP,
and Fiber to the Node, or FTTN. We believe that
several of the large telecommunications companies remain
committed to the build-out of their FTTP and FTTN initiatives
over the long-term, despite the recent slow-down in deployment.
Initiatives for the
last-mile
fiber build-out have been announced by Verizon and AT&T as
well as municipalities throughout the United States. At the end
of 2008, Verizon reported that it had passed 12 million
premises and indicated that it expects to pass 18 million
premises with its fiber network by the end of 2010, including
three million during 2009. This 2010 goal equates to more than
50% of the households in Verizons 28-state area.
At the end of 2008, AT&T had passed 17 million
premises with fiber that can deliver its U-verse suite of
services, which includes internet protocol
(IP)-based
television, high-speed internet access and voice services.
AT&T had also secured approximately one million U-verse
customers by the end of 2008.
The fiber installed by telecommunication companies will deliver
integrated
IP-based
television, high-speed internet and IP voice and wireless
bundles of products and services. More than three million North
American households have subscribed to high-speed fiber network
services. We believe the rate of growth in fiber to the home
connections will continue to increase as more Americans look to
next-generation networks for faster internet and more robust
video services, although we cannot predict the impact that the
current economic conditions will have on the timing or amount of
this growth.
While not all of the spending in the FTTP and FTTN initiatives
will be for services that we provide, we believe that we are
well-positioned to furnish infrastructure solutions for these
initiatives throughout the United States. We expect these
initiatives to result in an increase in demand for our
telecommunications and underground construction services over
the next several years, although this demand has been, and will
likely continue to be, negatively impacted by reductions in
spending due to the economic downturn and volatility in the
capital markets. This impact on demand is reflected in the
slow-down that we have seen in FTTP and FTTN deployment since
the second quarter of 2008.
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Strengths
Geographic reach and significant size and
scale. As a result of our nationwide operations
and significant scale, we are able to deploy services to
customers across the United States. This capability is
particularly important to our customers who operate networks
that span multiple states or regions. The scale of our
operations also allows us to mobilize significant numbers of
employees on short notice for emergency restoration services, as
well as reallocate certain of our resources from declining
markets to growth opportunities.
Strong financial profile. Our strong liquidity
position provides us with the flexibility to capitalize on new
business and growth opportunities. We believe our strong
financial condition is viewed favorably by our existing and
potential customers and will also enable us to better navigate a
challenging economic environment. As of December 31, 2008,
we had cash and cash equivalents of $437.9 million, working
capital of $929.7 million and long-term debt of
$143.8 million. We also have a $475.0 million credit
facility under which we had available borrowing capacity of
$314.8 million as of December 31, 2008.
Strong and diverse customer relationships. Our
customer relationships extend over multiple end markets and
include electric power, gas, telecommunications and cable
television companies, as well as commercial, industrial and
governmental entities. We have established a solid base of
long-standing customer relationships by providing high quality
services in a cost-efficient and timely manner. Many of our
customer relationships are multi-year and, in some cases,
decades old. We believe our strong and diverse customer
relationships offer opportunities for future growth.
Delivery of comprehensive and diverse
solutions. We believe that electric power, gas,
telecommunications and cable television companies will continue
to seek service providers who can design, install and maintain
their networks on a quick and reliable, yet cost effective
basis. We are one of the few network service providers capable
of regularly delivering complete solutions on a nationwide
basis. As companies in the electric power, gas,
telecommunications and cable television industries continue to
search for service providers who can effectively design, install
and maintain their networks, we believe that our service,
industry and geographical breadth places us in a strong position
to meet these needs.
Proprietary technology. Our electric power
customers benefit from our ability to perform services without
interrupting power service to their customers, which we refer to
as energized services. We hold a U.S. patent protecting our
exclusive use through 2014 of our
LineMastertm
robotic arm, which enhances our ability to deliver these
energized services to our customers. We also hold certain
international patents for the
LineMastertm
and U.S. and international patents protecting other robotic
arm technologies for various periods up to 2024, as well as
U.S. and international pending patent applications for
certain energized methodologies. We believe that delivery of
energized services is a significant factor in differentiating us
from our competition and winning new business. Our energized
services workforce is specially trained to deliver these
services and operate the
LineMastertm
robotic arm.
Experienced management team. Our executive
management team has an average of 33 years of experience
within the contracting industry, and our operating unit
executives average over 26 years of experience in
their respective industries.
Strategy
The key elements of our business strategy are:
Capitalize on favorable trends in certain key end
markets. We believe that we are well-positioned
to capitalize on future capital spending by customers across
certain key end markets. Our strong and diverse customer
relationships, geographic reach and financial strength should
allow us to benefit from investments over the long-term by,
among others, electric power customers in transmission,
distribution and renewable energy infrastructure.
Leverage existing customer relationships and expand services
to drive growth. We believe we can improve our
rate of growth by expanding the portfolio of services and
solutions we provide to our existing and
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potential customer base. Expanding our portfolio of services
allows us to develop, build and maintain networks on a regional,
national and international scale and adapt to our
customers changing needs. We believe that increasing our
geographic and technological capabilities, together with
promoting best practices and cross-selling our services to our
customers, positions us well to capitalize upon opportunities
and trends in the industries we serve.
Focus on expanding operating efficiencies. We
intend to continue to:
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focus on growth in our more profitable services and on projects
that have higher margins;
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adjust our costs to match the level of demand for our services;
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combine overlapping operations of certain operating units;
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share pricing and bidding methodologies, technology, equipment
and best practices among our operating units; and
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develop and expand the use of management information systems.
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Pursue strategic acquisitions. We continue to
evaluate potential acquisitions of companies with strong
management teams and good reputations to broaden our customer
base, expand our geographic area of operation and grow our
portfolio of services. During 2007 and 2008 and from 1998
through 2000, we grew significantly through acquisitions. We
believe that attractive acquisition candidates still exist as a
result of the highly fragmented nature of the industry, the
inability of many companies to expand and modernize due to
capital constraints and the desire of owners of acquisition
candidates for liquidity. We also believe that our financial
strength and experienced management team will be attractive to
acquisition candidates.
Pursue new business opportunities. We
continuously leverage our core expertise and pursue new business
opportunities, including renewable energy projects, gas
gathering and pipeline installations and in the government and
international arenas. In connection with renewable energy
projects, we have the capabilities to design, install and
maintain the facilities as well as provide connectivity to the
grid. We also believe that we are well-positioned to participate
in power and communications infrastructure projects for the
public sector and overseas.
Expand our dark fiber network. We intend to
continue to expand our dark fiber network in select markets.
Approximately $85.0 million of our capital spending for
2009 is targeted for the expansion of our dark fiber network.
Services
We design, install and maintain networks for the electric power,
gas, telecommunications and cable television industries as well
as provide various ancillary services to commercial, industrial
and governmental entities. The following provides an overview of
the types of services we provide:
Infrastructure
Services Segment
Electric power network services. We provide a
variety of end-to-end services to the electric power industry,
including:
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installation, repair and maintenance of electric power
transmission lines ranging in capacity from 69,000 volts to
765,000 volts;
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installation, repair and maintenance of electric power
distribution networks;
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provision of planning services for electric distribution
networks;
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energized installation, maintenance and upgrades utilizing
unique bare hand and hot stick methods and our proprietary
robotic arm technologies;
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design and construction of independent power producer (IPP)
transmission and substation facilities;
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design and construction of substation projects;
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installation of fiber optic lines for voice, video and data
transmission on existing electric power infrastructure;
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installation of smart grid technology on electric
power networks, which provides beneficial energy management
information to both utilities and end-users;
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installation and maintenance of joint trench systems, which
include electric power, natural gas and telecommunications
networks in one trench;
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trenching and horizontal boring for underground electric power
network installations;
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design and installation of wind turbine facilities and solar
arrays;
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installation of redundant systems, switchyards and transmission
networks for renewable generation power plants such as wind and
solar;
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provision of technical strategic consulting for electric
transmission and distribution systems;
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cable and fault locating; and
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storm damage and other emergency restoration work.
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Gas network services. We provide various
services to the natural gas industry, including:
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installation and maintenance of gas transmission and
distribution systems;
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trenching and horizontal boring for underground gas network
installations;
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provision of cathodic protection design and installation
services; and
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provision of pipeline testing and integrity services.
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Telecommunications and cable television network
services. Our telecommunications and cable
television network services include:
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fiber optic, copper and coaxial cable installation and
maintenance for video, data and voice transmission;
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design, construction and maintenance of DSL networks;
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engineering and erection of cellular, digital,
PCS®,
microwave and other wireless communications towers;
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design and installation of switching systems for incumbent local
exchange carriers, newly competitive local exchange carriers,
long distance providers and cable television providers;
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installation and maintenance of joint trench systems, which
include telecommunication, electric power and natural gas
networks in one trench;
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trenching and plowing applications;
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horizontal directional boring;
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vacuum excavation services;
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cable locating;
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upgrading power and telecommunications infrastructure for cable
installations;
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splicing and testing of fiber optic and copper networks and
balance sweep certification of coaxial networks;
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residential installation and customer connects, both analog and
digital, for cable television, telephone and Internet services;
and
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storm damage and other emergency restoration work.
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Ancillary services. We provide a variety of
comprehensive ancillary services to commercial, industrial and
governmental entities, including:
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design, installation, maintenance and repair of electrical
components, fiber optic cabling and building control and
automation systems;
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installation of intelligent traffic networks such as traffic
signals, controllers, connecting signals, variable message
signs, closed circuit television and other monitoring devices
for governments;
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installation of cable and control systems for light rail lines,
airports and highways;
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provision of specialty rock trenching, rock saw, rock wheel,
directional boring and road milling for industrial and
commercial customers; and
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installation of fueling systems.
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Dark
Fiber Segment
We provide comprehensive services related to fiber-optic
telecommunications facilities, including:
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design, procurement and construction of fiber-optic
telecommunications facilities, with ownership retained by us;
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licensing the right to use a portion of the capacity of the
fiber-optic telecommunications facilities; and
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ongoing maintenance of fiber-optic telecommunications facilities
licensed to customers.
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Financial
Information about Geographic Areas
We operate primarily in the United States; however, we derived
$53.6 million, $71.5 million and $98.8 million of
our revenues from foreign operations, the majority of which was
earned in Canada, during the years ended December 31, 2006,
2007 and 2008, respectively. In addition, we held property and
equipment in the amount of $6.0 million, $9.0 million
and $6.5 million in foreign countries as of
December 31, 2006, 2007 and 2008, respectively.
Our business, financial condition and results of operations in
foreign countries may be adversely impacted by monetary and
fiscal policies, currency fluctuations, energy shortages,
regulatory requirements and other political, social and economic
developments or instability.
Customers,
Strategic Alliances and Preferred Provider
Relationships
Our customers include electric power, gas, telecommunications
and cable television companies, as well as commercial,
industrial and governmental entities. Our 10 largest customers
accounted for 30.3% of our consolidated revenues during the year
ended December 31, 2008. Our largest customer accounted for
approximately 4.4% of our consolidated revenues for the year
ended December 31, 2008.
Although we have a centralized marketing strategy, management at
each of our operating units is responsible for developing and
maintaining successful long-term relationships with customers.
Our operating unit management teams build upon existing customer
relationships to secure additional projects and increase revenue
from our current customer base. Many of these customer
relationships originated decades ago and are maintained through
a partnering approach to account management that includes
project evaluation and consulting, quality performance,
performance measurement and direct customer contact. On an
operating unit level, management maintains a parallel focus on
pursuing growth opportunities with prospective customers. We
continue to encourage operating unit management to cross-sell
services of other operating units to their customers. In
addition, our business development group promotes and markets
our services for prospective large national accounts and
projects that would require services from multiple operating
units.
We strive to maintain our status as a preferred vendor to our
customers. Many of our customers and prospective customers
maintain a list of preferred vendors with whom the customer
enters into a formal contractual agreement as a result of a
request-for-proposal process. As a preferred vendor, we have met
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minimum standards for a specific category of service, maintain a
high level of performance and agree to certain payment terms and
negotiated rates.
We believe that our strategic relationships with large providers
of electric power and telecommunications services will continue
to result in future opportunities. Many of these strategic
relationships take the form of a strategic alliance or long-term
maintenance agreement. Strategic alliance agreements generally
state an intention to work together and many provide us with
preferential bidding procedures. Strategic alliances and
long-term maintenance agreements are typically agreements for an
initial term of approximately two to four years that may include
an option to add extensions at the end of the initial term.
Certain of our strategic alliance and long-term maintenance
agreements are evergreen contracts with exclusivity
clauses providing that we will be awarded all contracts, or a
right of first refusal, for a certain type of work or work in a
certain geographic region.
Backlog
Backlog represents the amount of revenue that we expect to
realize from work to be performed in the future on uncompleted
contracts, including new contractual agreements on which work
has not begun. Our backlog at December 31, 2006 was
approximately $1.48 billion based only on work expected to
be performed over the next twelve months. At that time, we did
not include estimated revenues beyond twelve months in our
calculations. Our total backlog at December 31, 2007 was
approximately $4.67 billion, of which $2.36 billion
was expected to be realized over the next twelve months, while
our total backlog at December 31, 2008 was approximately
$5.19 billion, of which $2.58 billion is expected to
be realized over the next twelve months.
The backlog estimates above include amounts under long-term
maintenance contracts in addition to construction contracts. We
determine the amount of work under long-term maintenance
contracts, or master service agreements (MSAs), to be disclosed
as backlog as the estimate of future work to be performed by
using recurring historical trends inherent in the current MSAs,
factoring in seasonal demand and projected customer needs based
upon ongoing communications with the customer. In many
instances, our customers are not contractually committed to
specific volumes of services under our MSAs, and many of our
contracts may be terminated with notice. There can be no
assurance as to our customers requirements or that our
estimates are accurate. In addition, many of our MSAs, as well
as contracts for dark fiber leasing, are subject to renewal
options. For purposes of calculating backlog, we have included
future renewal options only to the extent the renewals can
reasonably be expected to occur.
Competition
The markets in which we operate are highly competitive. We
compete with other contractors in most of the geographic markets
in which we operate, and several of our competitors are large
domestic companies that have significant financial, technical
and marketing resources. In addition, there are relatively few
barriers to entry into some of the industries in which we
operate and, as a result, any organization that has adequate
financial resources and access to technical expertise may become
a competitor. A significant portion of our revenues is currently
derived from unit price or fixed price agreements, and price is
often an important factor in the award of such agreements.
Accordingly, we could be underbid by our competitors in an
effort by them to procure such business. We believe that as
demand for our services increases, customers will increasingly
consider other factors in choosing a service provider, including
technical expertise and experience, financial and operational
resources, nationwide presence, industry reputation and
dependability, which we expect to benefit larger contractors
such as us. There can be no assurance, however, that our
competitors will not develop the expertise, experience and
resources to provide services that are superior in both price
and quality to our services, or that we will be able to maintain
or enhance our competitive position. We may also face
competition from the in-house service organizations of our
existing or prospective customers, including electric power,
gas, telecommunications, cable television and engineering
companies, which employ personnel who perform some of the same
types of services as those provided by us. Although a
significant portion of these services is currently outsourced by
our customers, there can be no assurance that our existing or
prospective customers will continue to outsource services in the
future.
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Employees
As of December 31, 2008, we had 2,117 salaried employees,
including executive officers, professional and administrative
staff, project managers and engineers, job superintendents and
clerical personnel, and 12,634 hourly employees, the number
of which fluctuates depending upon the number and size of the
projects we undertake at any particular time. Approximately 45%
of our hourly employees at December 31, 2008 were covered
by collective bargaining agreements with certain of our
subsidiaries, primarily with the International Brotherhood of
Electrical Workers (IBEW). These collective bargaining
agreements require the payment of specified wages to our union
employees, the observance of certain workplace rules and the
payment of certain amounts to multi-employer pension plans and
employee benefit trusts rather than administering the funds on
behalf of these employees. These collective bargaining
agreements have varying terms and expiration dates. The majority
of the collective bargaining agreements contain provisions that
prohibit work stoppages or strikes, even during specified
negotiation periods relating to agreement renewal, and provide
for binding arbitration dispute resolution in the event of
prolonged disagreement.
We provide health, welfare and benefit plans for employees who
are not covered by collective bargaining agreements. We have a
401(k) plan pursuant to which eligible employees who are not
provided retirement benefits through a collective bargaining
agreement may make contributions through a payroll deduction. We
make matching cash contributions of 100% of each employees
contribution up to 3% of that employees salary and 50% of
each employees contribution between 3% and 6% of such
employees salary, up to the maximum amount permitted by
law.
Our industry is experiencing a shortage of journeyman linemen in
certain geographic areas. In response to the shortage, we seek
to take advantage of various IBEW and National Electrical
Contractors Association (NECA) training programs and support the
joint IBEW/NECA Apprenticeship Program which trains qualified
electrical workers. We have also established apprenticeship
training programs approved by the U.S. Department of Labor
for employees not subject to the IBEW/NECA Apprenticeship
Program, as well as additional company-wide and project-specific
employee training and educational programs.
We believe our relationships with our employees and union
representatives are good.
Materials
Our customers typically supply most or all of the materials
required for each job. However, for some of our contracts, we
may procure all or part of the materials required. We purchase
such materials from a variety of sources and do not anticipate
experiencing any difficulties in procuring such materials.
Training,
Quality Assurance and Safety
Performance of our services requires the use of equipment and
exposure to conditions that can be dangerous. Although we are
committed to a policy of operating safely and prudently, we have
been and will continue to be subject to claims by employees,
customers and third parties for property damage and personal
injuries resulting from performance of our services. Our
operating units have established comprehensive safety policies,
procedures and regulations and require that employees complete
prescribed training and service programs prior to performing
more sophisticated and technical jobs, which is in addition to
those programs required, if applicable, by the IBEW/NECA
Apprenticeship Program or our equivalent programs. Under the
IBEW/NECA Apprenticeship Program, all journeyman linemen are
required to complete a minimum of 7,000 hours of on-the-job
training, approximately 200 hours of classroom education
and extensive testing and certification. Certain of our
operating units have established apprenticeship training
programs approved by the U.S. Department of Labor that
prescribe equivalent training requirements for employees who are
not otherwise subject to the requirements of the IBEW/NECA
Apprenticeship Program. Our operating units also benefit from
sharing best practices regarding their training and educational
programs and comprehensive safety policies and regulations.
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Regulation
Our operations are subject to various federal, state, local and
international laws and regulations including:
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licensing, permitting and inspection requirements applicable to
electricians and engineers;
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building and electrical codes;
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permitting and inspection requirements applicable to
construction projects;
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regulations relating to worker safety and environmental
protection;
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telecommunication regulations affecting our dark fiber licensing
business; and
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special bidding, procurement and other requirements on
government projects.
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We believe that we have all the licenses required to conduct our
operations and that we are in substantial compliance with
applicable regulatory requirements. Our failure to comply with
applicable regulations could result in substantial fines or
revocation of our operating licenses.
Environmental
Matters
We are committed to the protection of the environment and train
our employees to perform their duties accordingly. We are
subject to numerous federal, state, local and international
environmental laws and regulations governing our operations,
including the handling, transportation and disposal of
non-hazardous and hazardous substances and wastes, as well as
emissions and discharges into the environment, including
discharges to air, surface water and groundwater and soil. We
also are subject to laws and regulations that impose liability
and cleanup responsibility for releases of hazardous substances
into the environment. Under certain of these laws and
regulations, such liabilities can be imposed for cleanup of
previously owned or operated properties, or properties to which
hazardous substances or wastes were sent by current or former
operations at our facilities, regardless of whether we directly
caused the contamination or violated any law at the time of
discharge or disposal. The presence of contamination from such
substances or wastes could interfere with ongoing operations or
adversely affect our ability to sell, lease or use our
properties as collateral for financing. In addition, we could be
held liable for significant penalties and damages under certain
environmental laws and regulations and also could be subject to
a revocation of our licenses or permits, which could materially
and adversely affect our business and results of operations.
From time to time, we may incur costs and obligations for
correcting environmental noncompliance matters and for
remediation at or relating to certain of our properties. We
believe we are in substantial compliance with our environmental
obligations to date and that any such obligations will not have
a material adverse effect on our business or financial
performance.
Risk
Management and Insurance
We are insured for employers liability claims, subject to
a deductible of $1.0 million per occurrence, and for
general liability and auto liability subject to a deductible of
$3.0 million per occurrence. We are also insured for
workers compensation claims, subject to a deductible of
$2.0 million per occurrence. Additionally, we are subject
to an annual cumulative aggregate liability of up to
$1.0 million on workers compensation claims in excess
of $2.0 million per occurrence. We also have 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 $350,000 per claimant per year.
Losses under all of these insurance programs are accrued based
upon our estimates of the ultimate liability for claims reported
and an estimate of claims incurred but not reported, with
assistance from third-party actuaries. These insurance
liabilities are difficult to assess and estimate due to unknown
factors, including the severity of an injury, the determination
of our liability in proportion to other parties, the number of
incidents not reported and the effectiveness of our safety
program. The accruals are based upon known facts and historical
trends and management believes such accruals to be adequate. As
of December 31, 2007 and 2008, the gross amount accrued for
insurance claims totaled $152.0 million and
$147.9 million, with
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$110.1 million and $105.0 million considered to be
long-term and included in other non-current liabilities. Related
insurance recoveries/receivables as of December 31, 2007
and 2008 were $22.1 million and $12.5 million, of
which $11.9 million and $7.2 million are included in
prepaid expenses and other current assets and $10.2 million
and $5.3 million are included in other assets, net.
Our casualty insurance carrier for the policy periods from
August 1, 2000 to February 28, 2003 has experienced
financial distress. Effective September 29, 2008, Quanta
consummated a novation transaction that released this distressed
casualty insurance carrier from all further obligations in
connection with the policies in effect during that period in
exchange for the payment to us of an agreed amount. Our current
casualty insurance carrier assumed all obligations under the
policies in effect during that period; however, we are obligated
to indemnify the carrier in full for any liabilities under the
policies assumed. At December 31, 2008, we estimate that
the total future claim amounts associated with the novated
policies was $6.8 million, based on an estimate of the
potential range of these future claim amounts at
December 31, 2008 of between $2.0 million and
$8.0 million. The actual amounts ultimately paid by us in
connection with these claims, if any, could vary materially from
the above range and could be impacted by further claims
development.
Seasonality
and Cyclicality
Our revenues and results of operations can be subject to
seasonal and other variations. These variations are influenced
by weather, customer spending patterns, bidding seasons, project
schedules and timing and holidays. Typically, our revenues are
lowest in the first quarter of the year because cold, snowy or
wet conditions cause delays. The second quarter is typically
better than the first, as some projects begin, but continued
cold and wet weather can often impact second quarter
productivity. The third quarter is typically the best of the
year, as a greater number of projects are underway and weather
is more accommodating to work on projects. Revenues during the
fourth quarter of the year are typically lower than the third
quarter but higher than the second quarter. Many projects are
completed in the fourth quarter and revenues often are impacted
positively by customers seeking to spend their capital budget
before the end of the year; however, the holiday season and
inclement weather sometimes can cause delays and thereby reduce
revenues and increase costs.
Working capital needs are generally higher during the summer and
fall months due to increased construction in weather affected
regions of the country. Conversely, working capital assets are
typically converted to cash during the winter months.
Additionally, our industry can be highly cyclical. As a result,
our volume of business may be adversely affected by declines or
delays in new projects in various geographic regions in the
United States. Project schedules, in particular in connection
with larger, longer-term projects, can also create fluctuations
in the services provided under projects, which may adversely
affect us in a given quarter. The financial condition of our
customers and their access to capital, variations in the margins
of projects performed during any particular quarter, regional,
national and global economic and market conditions, timing of
acquisitions, the timing and magnitude of acquisition
assimilation costs, interest rate fluctuations and other factors
may also materially affect our quarterly results. Accordingly,
our operating results in any particular quarter or year may not
be indicative of the results that can be expected for any other
quarter or for any other year. An investor should read
Understanding Gross Margins and
Outlook included in Item 7
Managements Discussion and Analysis of Financial
Condition and Results of Operations for additional
discussion of trends and challenges that may affect our
financial condition, results of operations and cash flows.
Website
Access and Other Information
Our website address is www.quantaservices.com. You may obtain
free electronic copies of our Annual Reports on
Form 10-K,
Quarterly Reports on
Form 10-Q,
Current Reports on
Form 8-K,
and any amendments to these reports through our website under
the heading SEC Filings or through the website of
the Securities and Exchange Commission (the SEC) at www.sec.gov.
These reports are available on our website as soon as reasonably
practicable after we electronically file them with, or furnish
them to, the SEC. In addition, our Corporate Governance
Guidelines, Code of Ethics and Business Conduct and the charters
of our Audit Committee, Compensation Committee and Governance
and Nominating Committee are posted on our website
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under the heading Corporate Governance. We intend to
disclose on our website any amendments or waivers to our Code of
Ethics and Business Conduct that are required to be disclosed
pursuant to Item 5.05 of
Form 8-K.
You may obtain free copies of these items from our website or by
contacting our Corporate Secretary. This Annual Report on
Form 10-K
and our website contain information provided by other sources
that we believe are reliable. We cannot assure you that the
information obtained from other sources is accurate or complete.
No information on our website is incorporated by reference
herein.
Annual
CEO Certification
As required by New York Stock Exchange rules, on June 9,
2008, we submitted an annual certification signed by our Chief
Executive Officer certifying that he was not aware of any
violation by us of New York Stock Exchange corporate governance
listing standards as of the date of the certification.
Our business is subject to a variety of risks and uncertainties,
including, but not limited to, the risks and uncertainties
described below. The risks and uncertainties described below are
not the only ones facing our company. Additional risks and
uncertainties not known to us or not described below also may
impair our business operations. If any of the following risks
actually occur, our business, financial condition and results of
operations could be harmed and we may not be able to achieve our
goals. This Annual Report on
Form 10-K
also includes statements reflecting assumptions, expectations,
projections, intentions or beliefs about future events that are
intended as forward-looking statements under the
Private Securities Litigation Reform Act of 1995 and should be
read in conjunction with the section entitled
Uncertainty of Forward-Looking Statements and
Information included in Item 7
Managements Discussion and Analysis of Financial
Condition and Results of Operations.
Our
operating results may vary significantly from quarter to
quarter.
We typically experience lower gross and operating margins during
winter months due to lower demand for our services and more
difficult operating conditions. Additionally, our quarterly
results may be materially and adversely affected by:
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variations in the margins of projects performed during any
particular quarter;
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unfavorable regional, national or global economic and market
conditions;
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a reduction in the demand for our services;
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the budgetary spending patterns of customers;
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increases in construction and design costs;
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the timing and volume of work we perform;
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the termination of existing agreements;
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losses experienced in our operations not otherwise covered by
insurance;
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a change in the mix of our customers, contracts and business;
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payment risk associated with the financial condition of our
customers;
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changes in bonding and lien requirements applicable to existing
and new agreements;
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implementation of various information systems, which could
temporarily disrupt day-to-day operations;
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the recognition of tax benefits related to uncertain tax
positions;
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decreases in interest rates we receive on our cash and cash
equivalents;
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changes in accounting pronouncements which require us to account
for items differently than historical pronouncements have;
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costs we incur to support growth internally or through
acquisitions or otherwise;
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the timing and integration of acquisitions; and
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the timing and magnitude of acquisition costs, integration costs
and potential goodwill impairments.
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Accordingly, our operating results in any particular quarter may
not be indicative of the results that you can expect for any
other quarter or for the entire year.
The
recent economic downturn and the financial and credit crisis may
adversely impact our customers future spending as well as
payment for our services and, as a result, our operations and
growth.
The growth in economic activity has slowed substantially, and
the U.S. economy is in a recessionary period. It is
uncertain when these conditions will improve. Stagnant or
declining economic conditions may adversely impact the demand
for our services and potentially result in the delay, reduction
or cancellation of projects. Many of our customers finance their
projects through cash flow from operations, the incurrence of
debt or the issuance of equity. The credit markets have also
declined, and the availability of credit is constrained.
Additionally, many of our customers equity values have
substantially declined. A reduction in cash flow and the lack of
availability of debt or equity financing may 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
operations and our ability to grow at historical levels.
An
economic downturn in 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, a downturn in any of those industries would
adversely affect our results of operations. Specifically, an
economic downturn in any industry we serve could result in the
delay, reduction or cancellation of projects by our customers as
well as cause our customers to outsource less work, resulting in
decreased demand for our services. The telecommunications and
utility markets experienced substantial change during 2002 and
2003 as evidenced by an increased number of bankruptcies in the
telecommunications market, continued devaluation of many of our
customers debt and equity securities and pricing pressures
resulting from challenges faced by major industry participants.
These factors contributed to the delay and cancellation of
projects and reduction of capital spending, which impacted our
operations and our ability to grow at historical levels. A
number of other factors, including financing conditions and
potential bankruptcies in the industries we serve or a prolonged
economic 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. Recently,
our telecommunications and cable operations have been negatively
impacted by reductions in spending due to the economic downturn
and volatility in the capital markets. We have seen a
significant slow-down in FTTP and FTTN deployment from customers
such as AT&T and Verizon since the second quarter of 2008,
and we anticipate this slow-down will likely continue if
economic conditions remain stagnant or further deteriorate. We
have also seen reduced spending in electric distribution due to
capital expenditure reductions. Additionally, our gas
distribution installation business, which is driven in part by
the housing construction market, has decreased, and continued
declines in new housing construction could cause further
reductions in this business. Another area of our natural gas
business gas gathering and pipeline installation and
maintenance has also declined, which we believe is
due to lower natural gas prices and capital constraints on
spending by our customers. Consolidation, competition, capital
constraints or negative economic conditions in the electric
power, gas, telecommunications or cable television industries
may also result in reduced spending by, or the loss of, one or
more of our customers.
Project
delays or cancellations may result in additional costs to us,
reductions in revenues or the payment of liquidated
damages.
In certain circumstances, we guarantee project completion by a
scheduled acceptance date or achievement of certain acceptance
and performance testing levels. Failure to meet any of those
schedules or performance requirements could result in additional
costs or penalties, including liquidated damages, and such
amounts could exceed expected project profit. Many projects
involve challenging engineering, procurement and construction
phases that may occur over extended time periods, sometimes over
several years. We may
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encounter difficulties in engineering, delays in designs or
materials provided by the customer or a third party, equipment
and material delivery, schedule changes, delays from our
customers failure to timely obtain rights-of-way,
weather-related delays and other factors, some of which are
beyond our control, that impact our ability to complete the
project in accordance with the original delivery schedule. For
example, the recent increase in demand for transmission services
has strained production resources, creating significant lead
times for obtaining large transformers, transmission towers and
poles. As a result, electric transmission project revenues could
be significantly reduced or delayed due to the difficulty we or
our customers may experience in obtaining required materials. In
addition, we occasionally contract with third-party
subcontractors to assist us with the completion of contracts.
Any delay by suppliers or by subcontractors in the completion of
their portion of the project, or any failure by a subcontractor
to satisfactorily complete its portion of the project may result
in delays in the overall progress of the project or may cause us
to incur additional costs, or both. We also may encounter
project delays due to local opposition, which may include
injunctive actions as well as public protests, to the siting of
transmission lines or other facilities.
Delays and additional costs may be substantial and, in some
cases, we may be required to compensate the customer for such
delays. We may not be able to recover all of such costs. In
extreme cases, the above-mentioned factors could cause project
cancellations, and we may not be able to replace such projects
with similar projects or at all. Such delays or cancellations
may impact our reputation or relationships with customers,
adversely affecting our ability to secure new contracts.
Project contracts may require customers or other parties to
provide the design, engineering information, equipment or
materials to be used on a project. In some cases, the project
schedule or the design, engineering information, equipment or
materials may be deficient or delivered later than required by
the project schedule. Our customers may change or delay various
elements of the project after its commencement, resulting in
additional direct or indirect costs. Under these circumstances,
we generally negotiate with the customer with respect to the
amount of additional time required and the compensation to be
paid to us. We are subject to the risk that we may be unable to
obtain, through negotiation, arbitration, litigation or
otherwise, adequate amounts to compensate us for the additional
work or expenses incurred by us due to customer-requested change
orders or failure by the customer to timely deliver items, such
as engineering drawings or materials, required to be provided by
the customer. Litigation or arbitration of claims for
compensation may be lengthy and costly, and it is often
difficult to predict when and for how much the claims will be
resolved. A failure to obtain adequate compensation for these
matters could require us to record a reduction to amounts of
revenue and gross profit recognized in prior periods under the
percentage-of-completion accounting method. Any such adjustments
could be substantial. We may also be required to invest
significant working capital to fund cost overruns while the
resolution of claims is pending, which could adversely affect
liquidity and financial results in any given period.
We may
be unsuccessful at generating internal growth.
Our ability to generate internal growth will be affected by,
among other factors, our ability to:
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expand the range of services we offer to customers to address
their evolving network needs;
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attract new customers;
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increase the number of projects performed for existing customers;
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hire and retain qualified employees;
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expand geographically, including internationally, and
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address the challenges presented by difficult economic or market
conditions that may affect us or our customers.
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In addition, our customers may delay, reduce or cancel the
number or size of projects available to us due to their
inability to obtain capital or pay for services provided, the
risk of which has become heightened in light of the recent
economic downturn. Many of the factors affecting our ability to
generate internal growth may be beyond our control, and we
cannot be certain that our strategies will be successful or that
we will be
16
able to generate cash flow sufficient to fund our operations and
to support internal growth. If we are unsuccessful, we may not
be able to achieve internal growth of our business or expand our
operations.
Our
use of fixed price contracts could adversely affect our
business.
We currently generate, and expect to continue to generate, a
portion of our revenues under fixed price contracts. We must
estimate the costs of completing a particular project to bid for
fixed price contracts. The actual cost of labor and materials,
however, may vary from the costs we originally estimated. These
variations, along with other risks inherent in performing fixed
price contracts, may cause actual revenue and gross profits for
a project to differ from those we originally estimated and could
result in reduced profitability or losses on projects. Depending
upon the size of a particular project, variations from the
estimated contract costs could have a significant impact on our
operating results for any fiscal quarter or year.
Our
use of percentage-of-completion accounting could result in a
reduction or elimination of previously reported
profits.
As discussed in Item 7 Managements
Discussion and Analysis of Financial Condition and Results of
Operations Critical Accounting Policies
and in the notes to our consolidated financial statements
included in Item 8 hereof, a significant portion of our
revenues are recognized using the percentage-of-completion
method of accounting, utilizing the cost-to-cost method. This
method is used because management considers expended costs to be
the best available measure of progress on these contracts. This
accounting method is generally accepted for fixed price
contracts. The percentage-of-completion accounting practice we
use results in our recognizing contract revenues and earnings
ratably over the contract term in proportion to our incurrence
of contract costs. The earnings or losses recognized on
individual contracts are based on estimates of contract
revenues, costs and profitability. Contract losses are
recognized in full when determined to be probable and reasonably
estimatable, and contract profit estimates are adjusted based on
ongoing reviews of contract profitability. Further, a
substantial portion of our contracts contain various cost and
performance incentives. Penalties are recorded when known or
finalized, which generally occurs during the latter stages of
the contract. In addition, we record cost recovery claims when
we believe recovery is probable and the amounts can be
reasonably estimated. Actual collection of claims could differ
from estimated amounts and could result in a reduction or
elimination of previously recognized earnings. In certain
circumstances, it is possible that such adjustments could be
significant.
Our
industry is highly competitive.
Our industry is served by numerous small, owner-operated private
companies, some public companies and several large regional
companies. In addition, relatively few barriers prevent entry
into some of our industries. As a result, any organization that
has adequate financial resources and access to technical
expertise may become one of our competitors. Competition in the
industry depends on a number of factors, including price.
Certain of our competitors may have lower overhead cost
structures and, therefore, may be able to provide their services
at lower rates than we are able to provide. In addition, some of
our competitors have significant resources including financial,
technical and marketing resources. We cannot be certain that our
competitors will not develop the expertise, experience and
resources to provide services that are superior in both price
and quality to our services. Similarly, we cannot be certain
that we will be able to maintain or enhance our competitive
position within our industry or maintain our customer base at
current levels. We also may face competition from the in-house
service organizations of our existing or prospective customers.
Electric power, gas, telecommunications and cable television
service providers usually employ personnel who perform some of
the same types of services we do. We cannot be certain that our
existing or prospective customers will continue to outsource
services in the future.
Legislative
actions and incentives relating to electric power and renewable
energy may fail to result in increased demand for our
services.
Implementation of the Energy Act is still subject to
considerable fiscal and regulatory uncertainty. Regulations
implementing the components of the Energy Act that may affect
demand for our services remain
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in some cases subject to review in various federal courts. In
one such case, decided in February 2009, a federal court of
appeals vacated FERCs interpretation of the scope of its
backstop siting authority. Accordingly, the effect of these
regulations, once finally implemented, is uncertain. As a
result, the legislation may not result in increased spending on
the electric power transmission infrastructure. Continued
uncertainty regarding the implementation of the Energy Act may
result in slower growth in demand for our services. In addition,
changes to energy regulatory policy may be forthcoming due to
the new administration.
Demand for our services also may not result from renewable
energy initiatives or the ARRA. While 30 states currently
have mandates in place that require certain percentages of power
to be generated from renewable sources, states could reduce
those mandates or make them optional, which would reduce, delay
or eliminate renewable energy development in the affected
states. Additionally, renewable energy is generally more
expensive to produce and may require additional power generation
sources as backup. The locations of renewable energy projects
are often remote and are not viable unless connectivity to the
grid to transport the power to demand centers is economically
feasible. Furthermore, funding for renewable energy initiatives
may not be available, which may be further constrained as a
result of turbulent credit markets. These factors could result
in fewer renewable energy projects than anticipated or a delay
in the timing of construction of these projects and the related
infrastructure, which would negatively affect the demand for our
services. In addition, we cannot predict when programs under the
ARRA will be implemented or the timing and scope of any
investments to be made under these programs. Investments for
renewable energy, electric power infrastructure and
telecommunications fiber deployment under ARRA programs may not
occur, may be less than anticipated or may be delayed, which
would negatively impact demand for our services.
Many
of our contracts may be canceled on short notice or may not be
renewed upon completion or expiration, and we may be
unsuccessful in replacing our contracts in such
events.
We could experience a decrease in our revenue, net income and
liquidity if any of the following occur:
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our customers cancel a significant number of contracts or
contracts having significant value;
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we fail to win a significant number of our existing contracts
upon re-bid;
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we complete a significant number of non-recurring projects and
cannot replace them with similar projects; or
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we fail to reduce operating and overhead expenses consistent
with any decrease in our revenue.
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Many of our customers may cancel our contracts on short notice,
typically
30-90 days,
even if we are not in default under the contract. Certain of our
customers assign work to us on a
project-by-project
basis under master service agreements. Under these agreements,
our customers often have no obligation to assign a specific
amount of work to us. Our operations could decline significantly
if the anticipated volume of work is not assigned to us, which
may be more likely if customer spending decreases, for example,
due to the economic downturn. Many of our contracts, including
our master service agreements, are opened to public bid at the
expiration of their terms. There can be no assurance that we
will be the successful bidder on our existing contracts that
come up for re-bid.
Our
business is labor intensive, and we may be unable to attract and
retain qualified employees.
Our ability to maintain our productivity and profitability will
be limited by our ability to employ, train and retain skilled
personnel necessary to meet our requirements. We cannot be
certain that we will be able to maintain an adequate skilled
labor force necessary to operate efficiently and to support our
growth strategy. For instance, we may experience shortages of
qualified journeyman linemen. In addition, we cannot be certain
that our labor expenses will not increase as a result of a
shortage in the supply of these skilled personnel. Labor
shortages or increased labor costs could impair our ability to
maintain our business or grow our revenues.
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Backlog
may not be realized or may not result in profits.
Backlog is difficult to determine with certainty. Customers
often have no obligation under our contracts to assign or
release work to us, and many contracts may be terminated on
short notice. Reductions in backlog due to cancellation of one
or more contracts by a customer or for other reasons could
significantly reduce the revenue and profit we actually receive
from contracts included in backlog. In the event of a project
cancellation, we may be reimbursed for certain costs but
typically have no contractual right to the total revenues
reflected in our backlog. The backlog we obtain in connection
with any companies we acquire may not be as large as we believed
or may not result in the revenue or profits we expected. In
addition, projects may remain in backlog for extended periods of
time. All of these uncertainties are heightened as a result of
negative economic conditions and their impact on our
customers spending. Consequently, we cannot assure you
that our estimates of backlog are accurate or that we will be
able to realize our estimated backlog.
Our
financial results are based upon estimates and assumptions that
may differ from actual results.
In preparing our consolidated financial statements in conformity
with accounting principles generally accepted in the United
States, several estimates and assumptions are used by management
in determining the reported amounts of assets and liabilities,
revenues and expenses recognized during the periods presented
and disclosures of contingent assets and liabilities known to
exist as of the date of the financial statements. These
estimates and assumptions must be made because certain
information that is used in the preparation of our financial
statements is dependent on future events, cannot be calculated
with a high degree of precision from data available or is not
capable of being readily calculated based on generally accepted
methodologies. In some cases, these estimates are particularly
difficult to determine and we must exercise significant
judgment. Estimates are primarily used in our assessment of the
allowance for doubtful accounts, valuation of inventory, useful
lives of property and equipment, fair value assumptions in
analyzing goodwill and long-lived asset impairments,
self-insured claims liabilities, forfeiture estimates relating
to stock-based compensation, revenue recognition under
percentage-of-completion accounting and provision for income
taxes. Actual results for all estimates could differ materially
from the estimates and assumptions that we use, which could have
a material adverse effect on our financial condition, results of
operations and cash flows.
Factors
beyond our control may affect our ability to successfully
execute our acquisition strategy, which may have an adverse
impact on our growth strategy.
Our business strategy includes expanding our presence in the
industries we serve through strategic acquisitions of companies
that complement or enhance our business. We expect to face
competition for acquisition opportunities, and some of our
competitors may have access to financing on more favorable terms
than us or have greater financial resources. This competition
may limit our acquisition opportunities and our ability to grow
through acquisitions or could raise the prices of acquisitions
and make them less accretive or possibly non-accretive to us.
Acquisitions that we may pursue may also involve significant
cash expenditures, debt incurrence or the issuance of
securities. Any acquisition may ultimately have a negative
impact on our business, financial condition, results of
operations and cash flows.
We may
be unsuccessful at integrating companies that either we have
acquired or that we may acquire in the future.
As a part of our business strategy, we have acquired, and seek
to acquire in the future, companies that complement or enhance
our business. However, we cannot be sure that we will be able to
successfully integrate each of these companies with our existing
operations without substantial costs, delays or other
operational or financial problems. If we do not implement proper
overall business controls, our decentralized operating strategy
could result in inconsistent operating and financial practices
at the companies we acquire and our overall profitability could
be adversely affected. Integrating our acquired companies
involves a number of special risks which could have a negative
impact on our business, financial condition and results of
operations, including:
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failure of acquired companies to achieve the results we expect;
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diversion of our managements attention from operational
and other matters;
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difficulties integrating the operations and personnel of
acquired companies;
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inability to retain key personnel of acquired companies;
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risks associated with unanticipated events or liabilities;
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loss of business due to customer overlap;
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risks arising from the prior operations of acquired companies,
such as performance, safety or workforce issues; and
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potential disruptions of our business.
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If one of our acquired companies suffers or has suffered
customer dissatisfaction, performance problems or operational
issues, the reputation of our entire company could suffer.
Our
results of operations could be adversely affected as a result of
goodwill impairments.
When we acquire a business, we record an asset called
goodwill equal to the excess amount we pay for the
business, including liabilities assumed, over the fair value of
the tangible and intangible assets of the business we acquire.
For example, in connection with the Merger, we recorded
approximately $973.1 million in goodwill and
$158.8 million of intangible assets based on the
application of purchase accounting. Statement of Financial
Accounting Standards (SFAS) No. 142 provides that goodwill
and other intangible assets that have indefinite useful lives
not be amortized, but instead be tested at least annually for
impairment, and intangible assets that have finite useful lives
continue to be amortized over their useful lives.
SFAS No. 142 provides specific guidance for testing
goodwill and other
non-amortized
intangible assets for impairment. SFAS No. 142
requires management to make certain estimates and assumptions
when allocating goodwill to reporting units and determining the
fair value of a reporting units net assets and
liabilities, including, among other things, an assessment of
market conditions, projected cash flows, investment rates, cost
of capital and growth rates, which could significantly impact
the reported value of goodwill and other intangible assets. Fair
value is determined using a combination of the discounted cash
flow, market multiple and market capitalization valuation
approaches. Absent any impairment indicators, we perform our
impairment tests annually during the fourth quarter. If there is
a decrease in market capitalization below book value in the
future, this may be considered an impairment indicator. As part
of our 2006 annual test for goodwill impairment, goodwill in the
amount of $56.8 million was written off as a non-cash
operating expense associated with a decrease in the expected
future demand for the services of one of our businesses, which
has historically served the cable television industry. Any
future impairments, including impairments of the goodwill or
intangible assets recorded in connection with the Merger, would
negatively impact our results of operations for the period in
which the impairment is recognized.
Our
profitability and financial operations may be negatively
affected by changes in, or interpretations of, existing state or
federal telecommunications regulations or new regulations that
could adversely affect our Dark Fiber segment.
In connection with the Merger, we acquired InfraSources
dark fiber licensing business. Many of the dark fiber customers
benefit from the Universal Service
E-rate
program, which was established by Congress in the 1996
Telecommunications Act and is administered by the Universal
Service Administrative Company (USAC) under the oversight of the
Federal Communications Commission (FCC). Under the
E-rate
program, schools, libraries and certain health-care facilities
may receive subsidies for certain approved telecommunications
services, internet access and internal connections. From time to
time, bills have been introduced in Congress that would
eliminate or curtail the
E-rate
program. Passage of such actions by the FCC or USAC to further
limit E-rate
subsidies could decrease the demand for telecommunications
infrastructure services by certain customers.
The telecommunications services we provide through our dark
fiber licensing business are subject to regulation by the FCC,
to the extent that they are interstate telecommunications
services, and by state
20
regulatory agencies, when wholly within a particular state. To
remain eligible to provide services under the
E-rate
program, we must maintain telecommunications authorizations in
every state where we operate, and we must obtain such
authorizations in any new state where we plan to operate.
Changes in federal or state regulations could reduce the
profitability of our dark fiber licensing business, and delays
in obtaining new authorizations could inhibit our ability to
grow our dark fiber business in new geographic areas. We could
be subject to fines if the FCC or a state regulatory agency were
to determine that any of our activities or positions are not in
compliance with certain regulations. If the profitability of our
dark fiber licensing business were to decline, or if this
business were to become subject to fines, our results of
operations could also be adversely affected.
Our
dark fiber licensing business is capital intensive and requires
a substantial investment before returns can be
realized.
Our dark fiber licensing business requires substantial amounts
of capital investment to build out new fiber networks. In 2009,
our proposed capital expenditures for our dark fiber licensing
business is approximately $85.0 million, $70.9 million
of which is related to committed licensing arrangements as of
December 31, 2008. Although we do not commit capital to new
networks until we have a committed license arrangement in place
with at least one customer, we may not be able to recoup our
initial investment in the network if that customer defaults on
its commitment. Even if the customer does not default or we add
additional customers to the network, we still may not realize a
return on the capital investment for an extended period of time.
Additionally, new or developing technologies could negatively
impact our dark fiber licensing business. If any of the above
events occur, it could result in an impairment of our dark fiber
network.
We
extend credit to customers for purchases of our services, and in
the past we have had, and in the future we may have, difficulty
collecting receivables from major customers that have filed for
bankruptcy or are otherwise experiencing financial
difficulties.
We grant credit, generally without collateral, to our customers,
which include electric power and gas companies,
telecommunications and cable television system operators,
governmental entities, general contractors, and builders, owners
and managers of commercial and industrial properties located
primarily in the United States. Consequently, we are subject to
potential credit risk related to changes in business and
economic factors throughout the United States. In the past, our
customers in the telecommunications business have experienced
significant financial difficulties and in several instances have
filed for bankruptcy. A number of our utility customers have
also experienced financial and business challenges in the past.
In addition, some of our customers are currently experiencing
financial difficulties as a result of the recent economic
downturn. If additional major customers file for bankruptcy or
continue to experience financial difficulties, or if anticipated
recoveries relating to receivables in existing bankruptcies or
other workout situations fail to materialize, we could
experience reduced cash flows and losses in excess of current
allowances provided. In addition, material changes in any of our
customers revenues or cash flows could affect our ability
to collect amounts due from them.
We are
self-insured against potential liabilities.
Although we maintain insurance policies with respect to
employers liability, general liability, automobile and
workers compensation claims, those policies are subject to
deductibles ranging from $1.0 million to $3.0 million
per occurrence depending on the insurance policy. We are
primarily self-insured for all claims that do not exceed the
amount of the applicable deductible. Additionally, we are
subject to an annual cumulative aggregate liability of up to
$1.0 million on workers compensation claims in excess
of $2.0 million per occurrence. We also have 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 $350,000 per claimant per year.
Losses under all of these insurance programs are accrued based
upon our estimates of the ultimate liability for claims reported
and an estimate of claims incurred but not reported, with
assistance from third-party actuaries. These insurance
liabilities are difficult to assess and estimate due to unknown
factors, including the severity of an injury, the determination
of our liability in proportion to other parties, the number
21
of incidents not reported and the effectiveness of our safety
program. The accruals are based upon known facts and historical
trends and management believes such accruals to be adequate. If
we were to experience insurance claims or costs significantly
above our estimates, our results of operations could be
materially and adversely affected in a given period.
Our casualty insurance carrier for the policy periods from
August 1, 2000 to February 28, 2003 has experienced
financial distress. Effective September 29, 2008, Quanta
consummated a novation transaction that released this distressed
casualty insurance carrier for the policy periods August 1,
2000 to February 28, 2003 from all further obligations in
connection with the policies in effect during that period in
exchange for the payment to us of an agreed amount. Our current
casualty insurance carrier assumed all obligations under the
policies in effect during that period; however, we are obligated
to indemnify the carrier in full for any liabilities under the
policies assumed. At December 31, 2008, we estimated that
the total future claim amounts associated with the novated
policies was $6.8 million, based on an estimate of the
potential range of these future claim amounts at
December 31, 2008 of between $2.0 million and
$8.0 million. The actual amounts ultimately paid by us in
connection with these claims, if any, could vary materially from
the above range and could be impacted by further claims
development.
Our
unionized workforce and related obligations could adversely
affect our operations.
As of December 31, 2008, approximately 45% of our hourly
employees were covered by collective bargaining agreements.
Although the majority of these agreements prohibit strikes and
work stoppages, we cannot be certain that strikes or work
stoppages will not occur in the future. Strikes or work
stoppages would adversely impact our relationships with our
customers and could cause us to lose business and decrease our
revenue. Additionally, many of these agreements require us to
participate with other companies in multi-employer pension
plans. To the extent those plans are underfunded, the Employee
Retirement Income Security Act of 1974, as amended by the
Multi-Employer Pension Plan Amendments Act of 1980, may subject
us to substantial liabilities under those plans if we withdraw
from them or they are terminated. Furthermore, the Pension
Protection Act of 2006 added new funding rules generally
applicable to plan years beginning after 2007 for multi-employer
plans that are classified as endangered,
seriously endangered, or critical
status. For a plan in critical status, additional
required contributions or benefit reductions may apply if a plan
is determined to be underfunded.
Our ability to complete future acquisitions could be adversely
affected because of our union status for a variety of reasons.
For instance, our union agreements may be incompatible with the
union agreements of a business we want to acquire and some
businesses may not want to become affiliated with a union-based
company. Additionally, we may increase our exposure to
withdrawal liabilities for underfunded multi-employer pension
plans to which an acquired company contributes.
Approximately 55% of our hourly employees are not unionized. The
new presidential administration has expressed strong support for
proposed legislation that would create more flexibility and
opportunity for labor unions to organize non-union workers. If
passed, this legislation could result in a greater percentage of
our workforce being subject to collective bargaining agreements,
heightening the risks described above. In addition, certain of
our customers require or prefer a non-union workforce, and they
may reduce the amount of work assigned to us if our labor crews
were to become unionized.
We may
incur liabilities or suffer negative financial or reputational
impacts relating to occupational health and safety
matters.
Our operations are subject to extensive laws and regulations
relating to the maintenance of safe conditions in the workplace.
While we have invested, and will continue to invest, substantial
resources in our occupational health and safety programs, our
industry involves a high degree of operational risk and there
can be no assurance that we will avoid significant liability
exposure. Although we have taken what we believe are appropriate
precautions, we have suffered fatalities in the past and may
suffer additional fatalities in the future.
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Serious accidents, including fatalities, may subject us to
substantial penalties, civil litigation or criminal prosecution.
Claims for damages to persons, including claims for bodily
injury or loss of life, could result in substantial costs and
liabilities, which could materially and adversely affect our
financial condition, results of operations or cash flows. 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 not award us future
business.
Our
dependence on suppliers, subcontractors and equipment
manufacturers could expose us to the 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.
Although we are not dependent on any single supplier,
subcontractor or equipment manufacturer, any substantial
limitation on the availability of required suppliers,
subcontractors or equipment manufacturers could negatively
impact our operations. The risk of a lack of available
suppliers, subcontractors or equipment manufacturers is
heightened under the current turbulent market conditions and
economic downturn. To the extent we cannot engage subcontractors
or acquire equipment or materials, we could experience losses in
the performance of our operations.
Our
business growth could outpace the capability of our corporate
management infrastructure.
We cannot be certain that our infrastructure will be adequate to
support our operations as they expand. Future growth also could
impose significant additional responsibilities on members of our
senior management, including the need to recruit and integrate
new senior level managers and executives. We cannot be certain
that we will be able to recruit and retain such additional
managers and executives. To the extent that we are unable to
manage our growth effectively, or are unable to attract and
retain additional qualified management, we may not be able to
expand our operations or execute our business plan.
During
the ordinary course of our business, we may become subject to
lawsuits or indemnity claims, which could materially and
adversely affect our business and results of
operations.
We have in the past been, and may in the future be, named as a
defendant in lawsuits, claims and other legal proceedings during
the ordinary course of our business. These actions may seek,
among other things, compensation for alleged personal injury,
workers compensation, employment discrimination, breach of
contract, property damage, punitive damages, civil penalties or
other losses or injunctive or declaratory relief. In addition,
we generally indemnify our customers for claims related to the
services we provide and actions we take under our contracts with
them, and, in some instances, we may be allocated risk through
our contract terms for actions by our customers or other third
parties. Because our services in certain instances may be
integral to the operation and performance of our customers
infrastructure, we may become subject to lawsuits or claims for
any failure of the systems that we work on, even if our services
are not the cause of such failures, and we could be subject to
civil and criminal liabilities to the extent that our services
contributed to any property damage, personal injury or system
failure. The outcome of any of these lawsuits, claims or legal
proceedings could result in significant costs and diversion of
managements attention to the business. Payments of
significant amounts, even if reserved, could adversely affect
our reputation, liquidity and results of operations.
We may
not realize all of the anticipated synergies and other benefits
from acquiring InfraSource.
The success of the Merger will depend, in part, on our ability
to realize the synergies and other benefits from acquiring
InfraSource. To realize these synergies and benefits, however,
we must continue to successfully integrate the operations and
personnel of InfraSource into our business. We have
substantially completed the integration of the two companies,
but further integration may be required to fully realize the
benefits of the Merger. If this continuing integration is
unsuccessful, certain anticipated benefits of the Merger may not
be realized fully or at all, may take longer or cost more to
realize than expected. Because we and InfraSource have
previously operated as independent companies, it is possible the
integration may result in the future loss
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of valuable employees, the disruption of our business or
inconsistencies in standards, controls, procedures, practices,
policies and compensation arrangements. The size of the Merger
may also make integration difficult, expensive and disruptive,
adversely affecting our revenues and earnings.
A
portion of our business depends on our ability to provide surety
bonds. We may be unable to compete for or work on certain
projects if we are not able to obtain the necessary surety
bonds.
Current or future market conditions, including losses incurred
in the construction industry or as a result of large corporate
bankruptcies, as well as changes in our sureties
assessment of our operating and financial risk, could cause our
surety providers to decline to issue or renew, or substantially
reduce the amount of, bonds for our work and could increase our
bonding costs. These actions could be taken on short notice. If
our surety providers were to limit or eliminate our access to
bonding, our alternatives would include seeking bonding capacity
from other sureties, finding more business that does not require
bonds and posting other forms of collateral for project
performance, such as letters of credit or cash. We may be unable
to secure these alternatives in a timely manner, on acceptable
terms, or at all, which could affect our ability to bid for or
work on future projects requiring financial assurances.
We have also granted security interests in various of our assets
to collateralize our obligations to our sureties. Furthermore,
under standard terms in the surety market, sureties issue or
continue bonds on a
project-by-project
basis and can decline to issue bonds at any time or require the
posting of additional collateral as a condition to issuing or
renewing any bonds. If we were to experience an interruption or
reduction in the availability of bonding capacity as a result of
these or any other reasons, we may be unable to compete for or
work on certain projects that would require bonding.
The
departure of key personnel could disrupt our
business.
We depend on the continued efforts of our executive officers and
on senior management of our operating units, including the
businesses we acquire. Although we have entered into employment
agreements with terms of one to three years with most of our
executive officers and certain other key employees, we cannot be
certain that any individual will continue in such capacity for
any particular period of time. The loss of key personnel, or the
inability to hire and retain qualified employees, could
negatively impact our ability to manage our business. We do not
carry key-person life insurance on any of our employees.
We are
in the process of implementing an information technology
(IT) solution, which could temporarily disrupt
day-to-day operations at certain operating units.
We have begun to design a comprehensive IT solution that we
believe will allow for a seamless interface between functions
such as accounting and finance, human resources, operations,
fleet management and customer relationships. Development and
implementation of the IT solution will require substantial
financial and personnel resources. Implementation will occur on
an operating unit by operating unit basis. While the IT solution
is 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. Failure to properly implement the IT
solution 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.
We may
not be successful in continuing to meet the requirements of the
Sarbanes-Oxley Act of 2002.
The Sarbanes-Oxley Act of 2002 has many requirements applicable
to us regarding corporate governance and financial reporting,
including the requirements for management to report on our
internal controls over financial reporting and for our
independent registered public accounting firm to express an
opinion over the operating effectiveness of our internal control
over financial reporting. During 2008, we continued actions to
ensure our ability to comply with these requirements. As of
December 31, 2008, our internal control over
24
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 the identification of significant internal
control deficiencies in acquisitions already made or made in the
future could result in a decrease in the market value of our
common stock and our other publicly traded securities, the
reduced ability to obtain financing, the loss of customers,
penalties and additional expenditures to meet the requirements.
Our
failure to comply with environmental laws could result in
significant liabilities.
Our operations are subject to various environmental laws and
regulations, including those dealing with the handling and
disposal of waste products, PCBs, fuel storage and air quality.
We perform work in many different types of underground
environments. If the field location maps supplied to us are not
accurate, or if objects are present in the soil that are not
indicated on the field location maps, our underground work could
strike objects in the soil, some of which may contain
pollutants. These objects may also rupture, resulting in the
discharge of pollutants. In such circumstances, we may be liable
for fines and damages, and we may be unable to obtain
reimbursement from the parties providing the incorrect
information. In addition, we perform directional drilling
operations below certain environmentally sensitive terrains and
water bodies. Due to the inconsistent nature of the terrain and
water bodies, it is possible that such directional drilling may
cause a surface fracture, resulting in the release of subsurface
materials. These subsurface materials may contain contaminants
in excess of amounts permitted by law, potentially exposing us
to remediation costs and fines. We also own and lease several
facilities at which we store our equipment. Some of these
facilities contain fuel storage tanks which are above or below
ground. If these tanks were to leak, we could be responsible for
the cost of remediation as well as potential fines.
In addition, new laws and regulations, stricter enforcement of
existing laws and regulations, the discovery of previously
unknown contamination or leaks, or the imposition of new
clean-up
requirements could require us to incur significant costs or
become the basis for new or increased liabilities that could
negatively impact our financial condition and results of
operations. In certain instances, we have obtained
indemnification or covenants from third parties (including
predecessors or lessors) for such cleanup and other obligations
and liabilities that we believe are adequate to cover such
obligations and liabilities. However, such third-party
indemnities or covenants may not cover all of our costs, and
such unanticipated obligations or liabilities, or future
obligations and liabilities, may have a material adverse effect
on our business operations, financial condition or cash flows.
Further, we cannot be certain that we will be able to identify
or be indemnified for all potential environmental liabilities
relating to any acquired business.
Risks
associated with operating in international markets could
restrict our ability to expand globally and harm our business
and prospects.
While only a small percentage of our revenue is currently
derived from international markets, we hope to continue to
expand the volume of services that we provide internationally.
We presently conduct our international sales efforts in Canada,
Mexico and select countries overseas, but expect that the number
of countries that we operate in could expand significantly over
the next few years. Economic conditions, including those
resulting from wars, civil unrest, acts of terrorism and other
conflicts or volatility in the global markets, may adversely
affect our customers, their demand for our services and their
ability to pay for our services. In addition, there are numerous
risks inherent in conducting our business internationally,
including, but not limited to, potential instability in
international markets, changes in regulatory requirements
applicable to international operations, currency fluctuations in
foreign countries, political, economic and social conditions in
foreign countries and complex U.S. and foreign laws and
treaties, including tax laws and the U.S. Foreign Corrupt
Practices Act. These risks could restrict our ability to provide
services to international customers and could adversely affect
our ability to operate our business profitably.
Opportunities
within the government arena could subject us to increased
governmental regulation and costs.
Most government contracts are awarded through a regulated
competitive bidding process. As we pursue increased
opportunities in the government arena, managements focus
associated with the start up and bidding process may be diverted
away from other opportunities. Involvement with government
contracts could require
25
a significant amount of costs to be incurred before any revenues
are realized from these contracts. In addition, as a government
contractor, we are subject to a number of procurement rules and
other public sector liabilities, any deemed violation of which
could lead to fines or penalties or a loss of business.
Government agencies routinely audit and investigate government
contractors. Government agencies may review a contractors
performance under its contracts, cost structure, and compliance
with applicable laws, regulations and standards. If government
agencies determine through these audits or reviews that costs
were improperly allocated to specific contracts, they will not
reimburse the contractor for those costs or may require the
contractor to refund previously reimbursed costs. If government
agencies determine that we engaged in improper activity, we may
be subject to civil and criminal penalties. In addition, if the
government were to even allege improper activity, we also could
experience serious harm to our reputation. Many government
contracts must be appropriated each year. If appropriations are
not made in subsequent years we would not realize all of the
potential revenues from any awarded contracts.
The
industries we serve are subject to rapid technological and
structural changes that could reduce the demand for the services
we provide.
The electric power, gas, telecommunications and cable television
industries are undergoing rapid change as a result of
technological advances that could, in certain cases, reduce the
demand for our services, impair the value of our dark fiber
network or otherwise negatively impact our business. New or
developing technologies could displace the wireline systems used
for voice, video and data transmissions, and improvements in
existing technology may allow telecommunications and cable
television companies to significantly improve their networks
without physically upgrading them.
We may
not have access in the future to sufficient funding to finance
desired growth and operations.
If we cannot secure additional financing in the future on
acceptable terms, we may be unable to support our growth
strategy or future operations. We cannot readily predict the
ability of certain customers to pay for past services, and the
recent economic downturn may negatively impact the ability of
our customers to pay amounts owed to us. We also cannot readily
predict the timing, size and success of our acquisition efforts.
Using cash for acquisitions limits our financial flexibility and
makes us more likely to seek additional capital through future
debt or equity financings. Our existing credit facility contains
significant restrictions on our operational and financial
flexibility, including our ability to incur additional debt or
conduct equity financings, and if we seek more debt we may have
to agree to additional covenants that limit our operational and
financial flexibility. When we seek additional debt or equity
financings, we cannot be certain that additional debt or equity
will be available to us on terms acceptable to us or at all, in
particular under the current volatile market conditions.
Furthermore, our credit facility is based upon existing
commitments from several banks. With the current turbulent
credit markets, banks have become more restrictive in their
lending practices, and some may be unable or unwilling to fund
their commitments, which may limit our access to the capital
needed to fund our growth and operations. We also rely on
financing companies to fund the leasing of certain of our trucks
and trailers, support vehicles and specialty construction
equipment. The deteriorating credit market may cause certain of
these financing companies to restrict or withhold access to
capital to fund the leasing of additional equipment. Although we
are not dependent on any single equipment lessor, a widespread
lack of available capital to fund the leasing of equipment could
negatively impact our future operations. Additionally, the
market price of our common stock may change significantly in
response to various factors and events beyond our control, which
will impact our ability to use equity 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, a shortfall in our operating results from those
anticipated, negative results or other unfavorable information
relating to our market peers on the risk factors described in
this Annual Report on
Form 10-K.
26
Our
convertible subordinated notes may be convertible in the future,
which, if converted, may result in dilution to existing
stockholders, lower prevailing market prices for our common
stock or cause a significant cash outlay.
As a result of our common stock satisfying the market price
condition of our convertible subordinated notes, our 3.75%
convertible subordinated notes due 2026 (3.75% Notes) were
convertible at the option of the holders during various quarters
in 2007 and 2008. The 3.75% Notes are not presently
convertible, but may resume convertibility in future periods
upon satisfaction of the market price condition or other
conditions.
We have the right to deliver shares of our common stock, cash or
a combination of cash and shares of our common stock upon a
conversion of the notes. The number of shares issuable upon
conversion will be determined based on a conversion rate of
approximately $22.41 for the 3.75% Notes. In the event that
all 3.75% Notes were converted for common stock, we would
issue an aggregate of 6.4 million shares of our common
stock. The conversion of some or all of our 3.75% Notes
into our common stock would dilute existing stockholders. Any
sales in the public market of the common stock issued upon such
conversion could adversely affect prevailing market prices of
our common stock. In addition, the possibility that the notes
may be converted may encourage short-selling by market
participants because the conversion of the notes could depress
the price of our common stock.
If we elect to satisfy the conversion obligation in cash, the
amount of cash payable upon conversion of the notes will be
determined by the product of (i) the number of shares
issuable for the principal amount of the converted notes at a
conversion rate of approximately $22.41 per share for the
3.75% Notes and (ii) the average closing price of our
common stock during a
20-day
trading period following the holders unretracted election to
convert the notes. To the extent we decide to pay cash to settle
any conversions and the average closing price of our common
stock during this period exceeds $22.41 for the
3.75% Notes, we would have to pay cash in excess of the
principal amount of the notes being converted, which would
result in the recording of a loss on extinguishment of debt.
Certain
provisions of our corporate governing documents could make an
acquisition of our company more difficult.
The following provisions of our certificate of incorporation and
bylaws, as currently in effect, as well as our stockholder
rights plan and Delaware law, could discourage potential
proposals to acquire us, delay or 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:
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our certificate of incorporation permits our Board of Directors
to issue blank check preferred stock and to adopt
amendments to our bylaws;
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our bylaws contain restrictions regarding the right of
stockholders to nominate directors and to submit proposals to be
considered at stockholder meetings;
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our certificate of incorporation and bylaws restrict the right
of stockholders to call a special meeting of stockholders and to
act by written consent;
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we are subject to provisions of Delaware law which prohibit us
from engaging in any of a broad range of business transactions
with an interested stockholder for a period of three
years following the date such stockholder became classified as
an interested stockholder; and
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we have adopted a stockholder rights plan that could cause
substantial dilution to a person or group that attempts to
acquire us on terms not approved by our Board of Directors or
permitted by the stockholder rights plan.
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ITEM 1B.
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Unresolved
Staff Comments
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None.
27
Facilities
We lease our corporate headquarters in Houston, Texas and
maintain facilities nationwide. Our facilities are used for
offices, equipment yards, warehouses, storage and vehicle shops.
As of December 31, 2008, we own 31 of the facilities we
occupy, many of which are encumbered by our credit facility, and
we lease the remainder. We believe that our existing facilities
are sufficient for our current needs.
Equipment
We operate a nationwide fleet of owned and leased trucks and
trailers, support vehicles and specialty construction equipment,
such as backhoes, excavators, trenchers, generators, boring
machines, cranes, wire pullers and tensioners, all of which are
encumbered by our credit facility. As of December 31, 2008,
the total size of the rolling-stock fleet was approximately
24,000 units. Most of this fleet is serviced by our own
mechanics who work at various maintenance sites and facilities.
We believe that these vehicles generally are well maintained and
adequate for our present operations.
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ITEM 3.
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Legal
Proceedings
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We are from time to time a party to various lawsuits, claims and
other legal proceedings that arise in the ordinary course of
business. These actions typically seek, among other things,
compensation for alleged personal injury, breach of contract
and/or
property damages, punitive damages, civil penalties or other
losses, or injunctive or declaratory relief. With respect to all
such lawsuits, claims and proceedings, we record reserves when
it is probable that a liability has been incurred and the amount
of loss can be reasonably estimated. We do not believe that any
of these proceedings, separately or in the aggregate, would be
expected to have a material adverse effect on our financial
position, results of operations or cash flows.
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ITEM 4.
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Submission
of Matters to a Vote of Security Holders
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During the fourth quarter of the year covered by this report, no
matters were submitted to a vote of our security holders,
through the solicitation of proxies or otherwise.
PART II
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ITEM 5.
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Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
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Our common stock is listed on the New York Stock Exchange (NYSE)
under the symbol PWR. Our common stock trades with
an attached right to purchase Series D Junior Participating
Preferred Stock as more fully described under the heading
Stockholder Rights Plan in Note 10 to
our consolidated financial
28
statements included in Item 8 hereof. The following table
sets forth the high and low sales prices of our common stock per
quarter, as reported by the NYSE, for the two most recent fiscal
years.
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High
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Low
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Year Ended December 31, 2007
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1st Quarter
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$
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26.04
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$
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18.66
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2nd Quarter
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32.11
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25.27
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3rd Quarter
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32.58
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23.36
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4th Quarter
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33.42
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23.58
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Year Ended December 31, 2008
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1st Quarter
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$
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26.77
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$
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18.38
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2nd Quarter
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34.51
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23.40
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3rd Quarter
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35.39
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22.81
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4th Quarter
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26.72
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10.56
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On February 20, 2009, there were 1,548 holders of record of
our common stock and 10 holders of record of our Limited Vote
Common Stock. There is no established trading market for the
Limited Vote Common Stock; however, the Limited Vote Common
Stock converts into common stock immediately upon sale. See
Note 10 to Notes to Consolidated Financial Statements for a
description of our Limited Vote Common Stock.
Unregistered
Sales of Securities During the Fourth Quarter of 2008
In October and November 2008, we issued an aggregate
90,394 shares of our common stock in exchange for Limited
Vote Common Stock. In addition, on November 21, 2008, we
completed the acquisition of two affiliated telecommunications
engineering companies in which some of the consideration
consisted of our unregistered securities of Quanta. The
aggregate consideration paid in this transaction was
$6.2 million in cash and 281,896 shares of common
stock. This acquisition was not affiliated with any other
acquisition prior to such transaction.
All securities listed on the following table are shares of our
common stock. We relied on Section 4(2) of the Securities
Act of 1933, as amended (the Securities Act), as the basis for
exemption from registration. For all issuances, the purchasers
were accredited investors as defined in
Rule 501 of the Securities Act. All issuances were as a
result of privately negotiated transactions, and not pursuant to
public solicitations.
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Period
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Number of Shares
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Purchaser
|
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Consideration
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October 1, 2008 October 31, 2008
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4,439
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Holders of
Limited Vote
Common Stock
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Exchange for
Common Stock
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November 1, 2008 November 30, 2008
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85,955
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Holders of
Limited Vote
Common Stock
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Exchange for
Common Stock
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November 1, 2008 November 30, 2008
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281,896
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Stockholders of
acquired
companies
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Sale of
acquired
companies
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29
Issuer
Purchases of Equity Securities During the Fourth Quarter of
2008
The following table contains information about our purchases of
equity securities during the three months ended
December 31, 2008.
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(d) Maximum
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(c) Total Number
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Number of Shares
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of Shares Purchased
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That May Yet be
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as Part of Publicly
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Purchased Under
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(a) Total Number of
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(b) Average Price
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Announced Plans or
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the Plans or
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Period
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Shares Purchased
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Paid Per Share
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Programs
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Programs
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November 1, 2008 November 30, 2008
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959(i
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)
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$
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16.26
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None
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None
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December 1, 2008 December 30, 2008
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289(i
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)
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$
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19.22
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None
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None
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(i) |
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Represents shares purchased from employees to satisfy tax
withholding obligations in connection with the vesting of
restricted stock awards pursuant to the 2001 Stock Incentive
Plan (as amended and restated March 13, 2003) and the
2007 Stock Incentive Plan. |
Dividends
We currently intend to retain our future earnings, if any, to
finance the growth, development and expansion of our business.
Accordingly, we currently do not intend to declare or pay any
cash dividends on our common stock in the immediate future. The
declaration, payment and amount of future cash dividends, if
any, will be at the discretion of our Board of Directors after
taking into account various factors. These factors include our
financial condition, results of operations, cash flows from
operations, current and anticipated capital requirements and
expansion plans, the income tax laws then in effect and the
requirements of Delaware law. In addition, as discussed in
Debt Instruments Credit Facility
in Item 7 Managements Discussion and
Analysis of Financial Condition and Results of Operations,
our credit facility includes limitations on the payment of cash
dividends without the consent of the lenders.
Performance
Graph
The following Performance Graph and related information shall
not be deemed soliciting material or to be
filed with the Securities and Exchange Commission,
nor shall such information be incorporated by reference into any
future filing under the Securities Act of 1933 or Securities
Exchange Act of 1934, each as amended, except to the extent that
we specifically incorporate it by reference into such filing.
The following graph compares, for the period from
December 31, 2003 to December 31, 2008, the cumulative
stockholder return on our common stock with the cumulative total
return on the Standard & Poors 500 Index (the
S&P 500 Index), the Russell 2000 Index, a peer group index
previously selected by our management that includes five public
companies within our industry (the Previous Peer Group) and a
new peer group index selected by our management that includes
six public companies within our industry (the New Peer Group).
The comparison assumes that $100 was invested on
December 31, 2003 in our common stock, the S&P 500
Index, the Russell 2000 Index, the Previous Peer Group and the
New Peer Group, and further assumes all dividends were
reinvested. The stock price performance reflected on the
following graph is not necessarily indicative of future stock
price performance.
Due to our desire to regularly modify our peer group index, as
appropriate, to ensure that it is comprised of companies whose
operations are similar to ours, our management added MYR Group
Inc., which completed its initial public offering on
August 12, 2008, to our peer group index. Accordingly, the
New Peer Group graph assumes $100 was invested in MYR Group Inc.
on August 12, 2008, and therefore the stock price
performance for the New Peer Group and Previous Peer Group from
December 31, 2003 to August 11, 2008 is identical. The
Previous Peer Group is composed of Dycom Industries, Inc.,
MasTec, Inc., Chicago Bridge & Iron Company N.V., Shaw
Group, Inc. and Pike Electric Corporation. The New Peer Group is
composed of Dycom Industries, Inc., MasTec, Inc., Chicago
Bridge & Iron Company N.V., Shaw Group, Inc., Pike
Electric Corporation and MYR Group Inc. The companies in the New
Peer Group were selected because they comprise a broad group of
publicly held corporations, each of which has some operations
similar to ours. When taken
30
as a whole, the New Peer Group more closely resembles our total
business than any individual company in the group or than the
Previous Peer Group.
COMPARISON
OF 5 YEAR CUMULATIVE TOTAL RETURN
AMONG QUANTA SERVICES, INC., THE S&P 500 INDEX,
THE RUSSELL 2000 INDEX, THE PREVIOUS PEER GROUP
AND THE NEW PEER GROUP
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Measurement Period
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12/31/2003
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12/31/2004
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12/31/2005
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12/31/2006
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12/31/2007
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12/31/2008
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Quanta Services, Inc.
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$
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100.00
|
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109.59
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180.41
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269.45
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359.45
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271.23
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S&P 500 Index
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$
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100.00
|
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|
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110.88
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|
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116.33
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134.70
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142.10
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89.53
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Russell 2000 Index
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$
|
100.00
|
|
|
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118.33
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|
|
|
123.72
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|
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146.44
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144.15
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|
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95.44
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Previous Peer Group
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$
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100.00
|
|
|
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116.46
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|
|
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135.73
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147.72
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|
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257.30
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|
|
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81.83
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New Peer Group
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$
|
100.00
|
|
|
|
116.46
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|
|
|
135.73
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|
|
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147.72
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|
|
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257.30
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|
|
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83.05
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ITEM 6.
|
Selected
Financial Data
|
The following historical selected financial data has been
derived from the audited financial statements of Quanta. The
historical financial statement data reflects the acquisitions of
businesses accounted for as of their respective acquisition
dates, the most significant of which was InfraSource, and the
results of InfraSources operations have been included in
the consolidated financial statements subsequent to
August 31, 2007. Additionally, on August 31, 2007, we
sold the operating assets associated with the business of
Environmental Professional Associates, Limited (EPA), a Quanta
subsidiary. The statements of operations data below do not
reflect the operations of EPA in any periods since EPAs
results of operations are reflected as a discontinued operation
in our accompanying consolidated statements of operations.
Accordingly, the 2004 through 2006 amounts below do not agree to
the amounts originally reported. The historical selected
financial data should be read in conjunction with the historical
Consolidated Financial Statements and related notes thereto
included in Item 8 Financial Statements and
Supplementary Data.
31
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Year Ended December 31,
|
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|
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2004
|
|
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2005
|
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2006
|
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2007
|
|
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2008
|
|
|
|
(In thousands, except per share information)
|
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Consolidated Statements of Operations Data:
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Revenues
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$
|
1,608,577
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|
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$
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1,842,255
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$
|
2,109,632
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|
|
$
|
2,656,036
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|
|
$
|
3,780,213
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|
Cost of services (including depreciation)
|
|
|
1,428,646
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|
|
|
1,587,556
|
|
|
|
1,796,916
|
|
|
|
2,227,289
|
|
|
|
3,145,347
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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Gross profit
|
|
|
179,931
|
|
|
|
254,699
|
|
|
|
312,716
|
|
|
|
428,747
|
|
|
|
634,866
|
|
Selling, general and administrative expenses
|
|
|
170,231
|
|
|
|
186,411
|
|
|
|
181,478
|
|
|
|
240,508
|
|
|
|
309,399
|
|
Amortization of intangible assets
|
|
|
367
|
|
|
|
365
|
|
|
|
363
|
|
|
|
18,759
|
|
|
|
36,300
|
|
Goodwill impairment
|
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|
|
|
56,812
|
(a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
9,333
|
|
|
|
67,923
|
|
|
|
74,063
|
|
|
|
169,480
|
|
|
|
289,167
|
|
Interest expense
|
|
|
(25,067
|
)
|
|
|
(23,949
|
)
|
|
|
(26,822
|
)
|
|
|
(21,515
|
)
|
|
|
(17,505
|
)
|
Interest income
|
|
|
2,551
|
|
|
|
7,416
|
|
|
|
13,924
|
|
|
|
19,977
|
|
|
|
9,765
|
|
Gain (loss) on early extinguishment of debt, net
|
|
|
|
|
|
|
|
|
|
|
1,598
|
(b)
|
|
|
(34
|
)
|
|
|
(2
|
)
|
Other income (expense), net
|
|
|
17
|
|
|
|
235
|
|
|
|
425
|
|
|
|
(546
|
)
|
|
|
342
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before income taxes
|
|
|
(13,166
|
)
|
|
|
51,625
|
|
|
|
63,188
|
|
|
|
167,362
|
|
|
|
281,767
|
|
Provision (benefit) for income taxes
|
|
|
(3,689
|
)
|
|
|
22,446
|
|
|
|
46,955
|
(c)
|
|
|
34,222
|
(d)
|
|
|
115,026
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$
|
(9,477
|
)
|
|
$
|
29,179
|
|
|
$
|
16,233
|
|
|
$
|
133,140
|
|
|
$
|
166,741
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share from continuing operations
|
|
$
|
(0.08
|
)
|
|
$
|
0.25
|
|
|
$
|
0.14
|
|
|
$
|
0.98
|
|
|
$
|
0.94
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share from continuing operations
|
|
$
|
(0.08
|
)
|
|
$
|
0.25
|
|
|
$
|
0.14
|
|
|
$
|
0.87
|
|
|
$
|
0.88
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
As part of our 2006 annual goodwill test for impairment,
goodwill of $56.8 million was written off as a non-cash
operating expense associated with a decrease in the expected
future demand for the services of one of our businesses, which
has historically served the cable television industry. |
|
(b) |
|
In the second quarter of 2006, we recorded a $1.6 million
gain on early extinguishment of debt comprised of the gain from
repurchasing a portion of our 4.0% convertible subordinated
notes, partially offset by costs associated with the related
tender offer for such notes. |
|
(c) |
|
The higher tax rate in 2006 results primarily from the goodwill
impairment charge recorded during 2006, the majority of which is
not deductible for tax purposes. |
|
(d) |
|
The lower effective tax rate in 2007 results from
$34.4 million of tax benefits recorded in 2007 primarily
due to a decrease in reserves for uncertain tax positions
resulting from a settlement of a multi-year Internal Revenue
Service audit in the first quarter of 2007 and the expiration of
various federal and state tax statutes of limitations during the
third quarter of 2007. |
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2004
|
|
2005
|
|
2006
|
|
2007
|
|
2008
|
|
|
(In thousands)
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital
|
|
$
|
478,978
|
|
|
$
|
572,939
|
|
|
$
|
656,173
|
|
|
$
|
547,333
|
|
|
$
|
929,693
|
|
Goodwill
|
|
|
387,307
|
|
|
|
387,307
|
|
|
|
330,495
|
|
|
|
1,355,098
|
|
|
|
1,363,100
|
|
Total assets
|
|
|
1,459,997
|
|
|
|
1,554,785
|
|
|
|
1,639,157
|
|
|
|
3,387,832
|
|
|
|
3,554,787
|
|
Long-term debt, net of current maturities
|
|
|
21,863
|
|
|
|
7,591
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible subordinated notes, net of current maturities
|
|
|
442,500
|
|
|
|
442,500
|
|
|
|
413,750
|
|
|
|
143,750
|
|
|
|
143,750
|
|
Total stockholders equity
|
|
|
663,247
|
|
|
|
703,738
|
|
|
|
729,083
|
|
|
|
2,185,143
|
|
|
|
2,657,966
|
|
|
|
ITEM 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
The following discussion and analysis of our financial
condition and results of operations should be read in
conjunction with our historical consolidated financial
statements and related notes thereto in Item 8
Financial Statements and Supplementary Data. The
discussion below contains forward-looking statements that are
based upon our current expectations and are subject to
uncertainty and changes in circumstances. Actual results may
differ materially from these expectations due to inaccurate
assumptions and known or unknown risks and uncertainties,
including those identified in Uncertainty of
Forward-Looking Statements and Information below and in
Item 1A Risk Factors.
Introduction
We are a leading national provider of specialty contracting
services. On January 1, 2008, we began reporting our
results under two business segments. The infrastructure services
(Infrastructure Services) segment provides specialized
contracting services, offering end-to-end network solutions to
the electric power, gas, telecommunications and cable television
industries. Specifically, the comprehensive services provided by
the Infrastructure Services segment include designing,
installing, repairing and maintaining network infrastructure, as
well as certain ancillary services. Additionally, the dark fiber
(Dark Fiber) segment designs, procures, constructs and maintains
fiber-optic telecommunications infrastructure in select markets
and licenses the right to use point-to-point fiber-optic
telecommunications facilities to our customers. The Dark Fiber
segment services educational institutions, large industrial and
financial services customers and other entities with high
bandwidth telecommunication needs. The telecommunication
services provided through this business are subject to
regulation by the Federal Communications Commission and certain
state public utility commissions.
On August 30, 2007, we acquired, through a merger
transaction (the Merger), all of the outstanding common stock of
InfraSource Services, Inc. (InfraSource). Similar to us,
InfraSource provided design, procurement, construction, testing
and maintenance services to electric power utilities, natural
gas utilities, telecommunication customers, government entities
and heavy industrial companies, such as petrochemical,
processing and refining businesses, primarily in the United
States. As a result of the Merger, we enhanced and expanded our
position as a leading specialized contracting services company
serving the electric power, gas, telecommunications and cable
television industries and added the Dark Fiber segment.
We had consolidated revenues for the year ended
December 31, 2008 of approximately $3.78 billion, of
which 56.8% was attributable to electric power work, 20.8% to
gas work, 14.2% to telecommunications and cable television work
and 6.6% to ancillary services, such as inside electrical
wiring, intelligent traffic networks, fueling systems, cable and
control systems for light rail lines, airports and highways and
specialty rock trenching, directional boring and road milling
for industrial and commercial customers. In addition, 1.6% of
our consolidated revenues for the year ended December 31,
2008 was generated by our Dark Fiber segment.
Our customers include many of the leading companies in the
industries we serve. We have developed strong strategic
alliances with numerous customers and strive to develop and
maintain our status as a preferred vendor to our customers. In
our Infrastructure Services segment, we enter into various types
of contracts,
33
including competitive unit price, hourly rate, cost-plus (or
time and materials basis), and fixed price (or lump sum basis),
the final terms and prices of which we frequently negotiate with
the customer. Although the terms of our contracts vary
considerably, most are made on either a unit price or fixed
price basis in which we agree to do the work for a price per
unit of work performed (unit price) or for a fixed amount for
the entire project (fixed price). We complete a substantial
majority of our fixed price projects within one year, while we
frequently provide maintenance and repair work under open-ended
unit price or cost-plus master service agreements that are
renewable annually.
For our Infrastructure Services segment, we recognize revenue on
our unit price and cost-plus contracts when 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, revenue is
recognized based on the percentage of total costs incurred to
date in proportion to total estimated costs to complete the
contract. Fixed price contracts generally include retainage
provisions under which a percentage of the contract price is
withheld until the project is complete and has been accepted by
our customer.
The Dark Fiber segment constructs and licenses the right to use
fiber-optic telecommunications facilities to our customers
pursuant to licensing agreements, typically with terms from five
to twenty-five years, inclusive of certain renewal options.
Under those agreements, customers are provided the right to use
a portion of the capacity of a fiber-optic facility, with the
facility owned and maintained by us. Revenues earned pursuant to
these fiber-optic facility licensing agreements, including any
initial fees or advanced billings, are recognized ratably over
the expected length of the agreements, including probable
renewal periods.
We recognize that we and our customers are operating in a
challenging business environment in light of the economic
downturn and volatile capital markets. We are closely monitoring
our customers and the effect that changes in economic and market
conditions may have on them. We believe that our customers, many
of whom are regulated utilities, remain financially stable in
general, and many of our customers may be able to continue with
their business plans without substantial constraints. While our
business was not significantly impacted by the negative economic
and market conditions in 2008, we expect these conditions may
negatively impact demand for our services in the near-term until
these conditions significantly improve.
Seasonality;
Fluctuations of Results
Our revenues and results of operations can be subject to
seasonal and other variations. These variations are influenced
by weather, customer spending patterns, bidding seasons, project
schedules and timing and holidays. Typically, our revenues are
lowest in the first quarter of the year because cold, snowy or
wet conditions cause delays. The second quarter is typically
better than the first, as some projects begin, but continued
cold and wet weather can often impact second quarter
productivity. The third quarter is typically the best of the
year, as a greater number of projects are underway and weather
is more accommodating to work on projects. Revenues during the
fourth quarter of the year are typically lower than the third
quarter but higher than the second quarter. Many projects are
completed in the fourth quarter, and revenues are often impacted
positively by customers seeking to spend their capital budget
before the end of the year; however, the holiday season and
inclement weather sometimes can cause delays and thereby reduce
revenues and increase costs.
Additionally, our industry can be highly cyclical. As a result,
our volume of business may be adversely affected by declines or
delays in new projects in various geographic regions in the
United States. Project schedules, in particular in connection
with larger, longer-term projects, can also create fluctuations
in the services provided under projects, which may adversely
affect us in a given quarter. The financial condition of our
customers and their access to capital, variations in the margins
of projects performed during any particular quarter, regional,
national and global economic and market conditions, timing of
acquisitions, the timing and magnitude of acquisition
assimilation costs and interest rate fluctuations may also
materially affect quarterly results. Accordingly, our operating
results in any particular quarter or year may not be indicative
of the results that can be expected for any other quarter or for
any other year. You should read Outlook and
Understanding Gross Margins for additional
discussion of trends and challenges that may affect our
financial condition, results of operations and cash flows.
34
Understanding
Gross Margins
Our gross margin is gross profit expressed as a percentage of
revenues. Cost of services, which is subtracted from revenues to
obtain gross profit, consists primarily of salaries, wages and
benefits to employees, depreciation, fuel and other equipment
expenses, equipment rentals, subcontracted services, insurance,
facilities expenses, materials and parts and supplies. Various
factors some controllable, some not
impact our gross margins on a quarterly or annual basis.
Seasonal and Geographical. As discussed above,
seasonal patterns can have a significant impact on gross
margins. Generally, business is slower in the winter months
versus the warmer months of the year. This can be offset
somewhat by increased demand for electrical service and repair
work resulting from severe weather. In addition, the mix of
business conducted in different parts of the country will affect
margins, as some parts of the country offer the opportunity for
higher gross margins than others.
Weather. Adverse or favorable weather
conditions can impact gross margins in a given period. For
example, it is typical in the first quarter of any fiscal year
that parts of the country may experience snow or rainfall that
may negatively impact our revenues and gross margin due to
reduced productivity. In many cases, projects may be delayed or
temporarily placed on hold. Conversely, in periods when weather
remains dry and temperatures are accommodating, more work can be
done, sometimes with less cost, which would have a favorable
impact on gross margins. In some cases, severe weather, such as
hurricanes and ice storms, can provide us with higher margin
emergency restoration service work, which generally has a
positive impact on margins.
Revenue Mix. The mix of revenues derived from
the industries we serve will impact gross margins, as certain
industries provide higher margin opportunities. Additionally,
changes in our customers spending patterns in each of the
industries we serve can cause an imbalance in supply and demand
and, therefore, affect margins and mix of revenues by industry
served.
Service and Maintenance versus
Installation. Installation work is often obtained
on a fixed price basis, while maintenance work is often
performed under pre-established or negotiated prices or
cost-plus pricing arrangements. Gross margins for installation
work may vary from project to project, and can be higher than
maintenance work, because work obtained on a fixed price basis
has higher risk than other types of pricing arrangements. We
typically derive approximately 50% of our annual revenues from
maintenance work, but a higher portion of installation work in
any given period may affect our gross margins for that period.
Subcontract Work. Work that is subcontracted
to other service providers generally yields lower gross margins.
An increase in subcontract work in a given period may contribute
to a decrease in gross margin. We typically subcontract
approximately 10% to 15% of our work to other service providers.
Materials versus Labor. Margins may be lower
on projects on which we furnish materials as our
mark-up on
materials is generally lower than on labor costs. In a given
period, a higher percentage of work that has a higher materials
component may decrease overall gross margin.
Depreciation. We include depreciation in cost
of services. This is common practice in our industry, but it can
make comparability to other companies difficult. This must be
taken into consideration when comparing us to other companies.
Insurance. Gross margins could be impacted by
fluctuations in insurance accruals as additional claims arise
and as circumstances and conditions of existing claims change.
We are insured for employers liability claims, subject to
a deductible of $1.0 million per occurrence, and for
general liability and auto liability subject to a deductible of
$3.0 million per occurrence. We are also insured for
workers compensation claims, subject to a deductible of
$2.0 million per occurrence. Additionally, we are subject
to an annual cumulative aggregate liability of up to
$1.0 million on workers compensation claims in excess
of $2.0 million per occurrence. We also have 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 $350,000 per claimant per year.
35
Selling,
General and Administrative Expenses
Selling, general and administrative expenses consist primarily
of compensation and related benefits to management,
administrative salaries and benefits, marketing, office rent and
utilities, communications, professional fees, bad debt expense,
letter of credit fees and gains and losses on the sale of
property and equipment.
Results
of Operations
In accordance with SFAS No. 144, Accounting for
the Impairment or Disposal of Long-Lived Assets, the
results of operations data below does not reflect the operations
of Environmental Professional Associates, Limited (EPA) in any
periods since EPAs results of operations are reflected as
a discontinued operation in our accompanying consolidated
statements of operations. Accordingly, the 2006 amounts below do
not agree to the amounts originally reported. The following
table sets forth selected statements of operations data and such
data as a percentage of revenues for the years indicated
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
Revenues
|
|
$
|
2,109,632
|
|
|
|
100.0
|
%
|
|
$
|
2,656,036
|
|
|
|
100.0
|
%
|
|
$
|
3,780,213
|
|
|
|
100.0
|
%
|
Cost of services (including depreciation)
|
|
|
1,796,916
|
|
|
|
85.2
|
|
|
|
2,227,289
|
|
|
|
83.9
|
|
|
|
3,145,347
|
|
|
|
83.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
312,716
|
|
|
|
14.8
|
|
|
|
428,747
|
|
|
|
16.1
|
|
|
|
634,866
|
|
|
|
16.8
|
|
Selling, general and administrative expenses
|
|
|
181,478
|
|
|
|
8.6
|
|
|
|
240,508
|
|
|
|
9.0
|
|
|
|
309,399
|
|
|
|
8.2
|
|
Amortization of intangible assets
|
|
|
363
|
|
|
|
|
|
|
|
18,759
|
|
|
|
0.7
|
|
|
|
36,300
|
|
|
|
1.0
|
|
Goodwill impairment
|
|
|
56,812
|
|
|
|
2.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
74,063
|
|
|
|
3.5
|
|
|
|
169,480
|
|
|
|
6.4
|
|
|
|
289,167
|
|
|
|
7.6
|
|
Interest expense
|
|
|
(26,822
|
)
|
|
|
(1.2
|
)
|
|
|
(21,515
|
)
|
|
|
(0.8
|
)
|
|
|
(17,505
|
)
|
|
|
(0.5
|
)
|
Interest income
|
|
|
13,924
|
|
|
|
0.7
|
|
|
|
19,977
|
|
|
|
0.7
|
|
|
|
9,765
|
|
|
|
0.3
|
|
Gain (loss) on early extinguishment of debt, net
|
|
|
1,598
|
|
|
|
|
|
|
|
(34
|
)
|
|
|
|
|
|
|
(2
|
)
|
|
|
|
|
Other, net
|
|
|
425
|
|
|
|
|
|
|
|
(546
|
)
|
|
|
|
|
|
|
342
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes
|
|
|
63,188
|
|
|
|
3.0
|
|
|
|
167,362
|
|
|
|
6.3
|
|
|
|
281,767
|
|
|
|
7.4
|
|
Provision for income taxes
|
|
|
46,955
|
|
|
|
2.2
|
|
|
|
34,222
|
|
|
|
1.3
|
|
|
|
115,026
|
|
|
|
3.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
16,233
|
|
|
|
0.8
|
%
|
|
$
|
133,140
|
|
|
|
5.0
|
%
|
|
$
|
166,741
|
|
|
|
4.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
compared to 2007
Revenues. Revenues increased
$1.12 billion, or 42.3%, to $3.78 billion for the year
ended December 31, 2008. Electric power services increased
by approximately $637.1 million, or 42.2%, gas services
increased by approximately $427.4 million, or 119.7%, and
telecommunications and cable television network services
increased by approximately $92.1 million, or 20.8%. In
addition to the contribution of revenues from the InfraSource
operating units acquired through the Merger, revenues were
favorably impacted by an increase of approximately
$76.8 million in emergency restoration services, from
approximately $130.9 million in 2007 to approximately
$207.7 million in 2008, due primarily to the impact of
hurricanes in the Gulf Coast region of the United States.
Additionally, revenues increased due to an increased number and
size of projects as a result of larger capital budgets for our
customers, specifically in connection with electric transmission
projects and certain natural gas transmission projects, as well
as improved pricing. Lastly, revenues increased due to the
impact of $44.9 million in additional revenues in 2008 from
the Dark Fiber segment acquired as part of the Merger. Partially
offsetting these increases was a decrease in ancillary services
revenues of approximately
36
$77.4 million, or 23.6%, primarily due to declines in the
housing market, the timing of projects and more selectivity in
projects bid, as well as resources being utilized for projects
in other types of work.
Gross profit. Gross profit increased
$206.1 million, or 48.1%, to $634.9 million for the
year ended December 31, 2008. The increase in gross profit
results primarily from the contribution of the InfraSource
operating units acquired through the Merger coupled with the
effect of the increased revenues discussed above. As a
percentage of revenues, gross margin increased from 16.1% in
2007 to 16.8% in 2008. The gross margin was positively impacted
in 2008 as compared to 2007 by improved pricing, an increase in
the amount of emergency restoration services, as discussed
above, which typically generate higher margins, the contribution
of the higher margin Dark Fiber segment acquired as part of the
Merger and better fixed costs absorption as a result of higher
revenues. These positive factors were partially offset by
declines in margins derived from telecommunications and
ancillary revenues due to losses on a telecommunication project
and certain intelligent traffic network projects during the
third and fourth quarters of 2008.
Selling, general and administrative
expenses. Selling, general and administrative
expenses increased $68.9 million, or 28.6%, to
$309.4 million for the year ended December 31, 2008.
The increase in selling, general and administrative expenses was
primarily a result of the addition of administrative expenses
associated with the InfraSource operating units acquired through
the Merger, as well as higher salaries and benefits associated
with increased personnel, salary increases and increased
performance bonuses. Bad debt expense increased
$6.0 million in 2008 to $7.3 million primarily due to
the economic downturn and volatile capital markets experienced
during the second half of 2008. As a percentage of revenues,
selling, general and administrative expenses decreased from 9.0%
in 2007 to 8.2% in 2008 primarily due to improved cost
absorption as a result of higher revenues.
Amortization of intangible
assets. Amortization of intangible assets
increased $17.5 million to $36.3 million for the year
ended December 31, 2008. This increase is attributable to
the amortization of intangible assets associated with
acquisitions completed since the beginning of 2007, primarily
the acquisition of InfraSource completed on August 30, 2007.
Interest expense. Interest expense decreased
$4.0 million to $17.5 million for the year ended
December 31, 2008, due to the conversion, redemption or
repurchase of all of the remaining 4.5% convertible subordinated
notes on or before October 8, 2008 and the maturity and
repayment of the remaining 4.0% convertible subordinated notes
on July 2, 2007.
Interest income. Interest income was
$9.8 million for the year ended December 31, 2008,
compared to $20.0 million for the year ended
December 31, 2007. The decrease in interest income
primarily relates to a lower average investment balance and
lower average interest rates for the year ended
December 31, 2008 as compared to the year ended
December 31, 2007.
Provision for income taxes. The provision for
income taxes was $115.0 million for the year ended
December 31, 2008, with an effective tax rate of 40.8%,
compared to a provision of $34.2 million for the year ended
December 31, 2007, with an effective tax rate of 20.4%. The
lower effective tax rate for 2007 resulted from
$34.4 million of tax benefits recorded in 2007 primarily
due to a decrease in reserves for uncertain tax positions
resulting from the settlement of a multi-year Internal Revenue
Service audit in the first quarter of 2007 and the expiration of
various federal and state tax statutes of limitations during the
third quarter of 2007. Excluding the tax benefits, the effective
tax rate would have been 41.0% for the year ended
December 31, 2007.
2007
compared to 2006
Revenues. Revenues increased
$546.4 million, or 25.9%, to $2.66 billion for the
year ended December 31, 2007. Of the $546.4 million
increase, approximately $348.4 million relates to revenues
of the InfraSource operating units acquired through the Merger
for the period from September 1, 2007 through
December 31, 2007. The remaining $198.0 million
increase is due primarily to electric power services increasing
by approximately $157.3 million, or 13.7%, and
telecommunications and cable television network services
increasing by approximately $46.9 million, or 12.9%, offset
by a slight decrease in gas and ancillary
37
services. The increase in electric power services work is
primarily due to the increased number and size of projects that
are a result of larger capital budgets for our customers,
approximately $24.9 million in additional emergency
restoration service work, and improved pricing. Revenues from
telecommunications and cable television services increased
primarily due to increased services related to fiber to the
premises initiatives and improved pricing.
Gross profit. Gross profit increased
$116.0 million, or 37.1%, to $428.7 million for the
year ended December 31, 2007. Of the $116.0 million
increase, approximately $61.0 million relates to gross
profit of the InfraSource operating units acquired in the Merger
for the period September 1, 2007 through December 31,
2007. The additional $54.9 million increase in gross profit
resulted primarily from increased margins associated with
generally improved pricing for our services, higher productivity
and good weather that favorably impacted projects in the
Northeast during the summer months, higher volumes of emergency
restoration service work and better absorption of fixed costs.
These positive effects were partially offset by lower
productivity on certain projects due to heavy rainfall in the
south central United States during the second quarter of 2007
and early part of the third quarter of 2007.
Selling, general and administrative
expenses. Selling, general and administrative
expenses increased $59.0 million, or 32.5%, to
$240.5 million for the year ended December 31, 2007.
As a percentage of revenues, selling, general and administrative
expenses increased from 8.6% in 2006 to 9.0% in 2007. Of the
$59.0 million increase, $28.9 million relates to
selling, general and administrative expenses of the InfraSource
operating units acquired in the Merger for the period of
September 1, 2007 through December 31, 2007. The
remaining $30.1 million increase in selling, general and
administrative expenses resulted in part from $11.2 million
in increased salaries and benefits costs associated with
additional personnel, salary increases and higher performance
bonuses, $5.2 million in increased professional fees
primarily associated with ongoing litigation costs and
$2.4 million in third-party integration costs that were
incurred in 2007 as part of the InfraSource acquisition. Also
included were $5.3 million in net losses on sales of
equipment during 2007, as compared to $0.7 million in net
gains on sales of equipment in 2006. Included in the
$5.3 million in net losses in 2007 was an impairment charge
of $3.5 million for assets held for sale as of
December 31, 2007. As part of the Merger, management
identified excess equipment among the combined operations and
determined that this equipment would not be placed back into
service. Additionally, we had increases in travel costs of
$1.8 million and facilities costs of $1.7 million.
Amortization of intangible
assets. Amortization of intangible assets
increased $18.4 million to $18.8 million for the year
ended December 31, 2007. This increase is attributable to
the amortization of intangible assets associated with
acquisitions completed in 2007, primarily the acquisition of
InfraSource.
Goodwill impairment. A goodwill impairment
charge in the amount of $56.8 million was recorded during
the year ended December 31, 2006, while no goodwill
impairment was recorded during the year ended December 31,
2007. As part of our 2006 annual test for goodwill impairment,
goodwill in the amount of $56.8 million was written off as
a non-cash operating expense associated with a decrease in the
expected future demand for the services of one of our
businesses, which historically served the cable television
industry.
Interest expense. Interest expense decreased
$5.3 million to $21.5 million for the year ended
December 31, 2007, due partially to the expensing of
unamortized debt issuance costs of $3.3 million during 2006
as a result of replacing our prior credit facility in June 2006
and repurchasing 80.7% of our 4.0% convertible subordinated
notes in the second quarter of 2006. The 3.75% convertible
subordinated notes issued in the second quarter of 2006 have a
lower interest rate than the 4.0% convertible subordinated
notes. Additionally, interest expense decreased as a result of
the maturity and repayment of the remaining 4.0% convertible
subordinated notes on July 2, 2007.
Interest income. Interest income was
$20.0 million for the year ended December 31, 2007,
compared to $13.9 million for the year ended
December 31, 2006. The increase in interest income
primarily relates to a higher average investment balance and
higher average interest rates for the year ended
December 31, 2007 as compared to the year ended
December 31, 2006.
38
Provision for income taxes. The provision for
income taxes was $34.2 million for the year ended
December 31, 2007, with an effective tax rate of 20.4%,
compared to a provision of $47.0 million for the year ended
December 31, 2006, with an effective tax rate of 74.3%. The
lower effective tax rate for 2007 results from
$34.4 million of tax benefits recorded in 2007 primarily
due to a decrease in reserves for uncertain tax positions
resulting from the settlement of a multi-year Internal Revenue
Service audit in the first quarter of 2007 and the expiration of
various federal and state tax statutes of limitations during the
third quarter of 2007. Excluding the tax benefits, the effective
tax rate would have been 41.0% for the year ended
December 31, 2007. The higher tax rate in 2006 results
primarily from the goodwill impairment charge recorded during
the fourth quarter of 2006, the majority of which is not
deductible for tax purposes. Excluding the effect of the
goodwill impairment charge, the effective tax rate would have
been 39.2% for the year ended December 31, 2006.
Liquidity
and Capital Resources
Cash
Requirements
We anticipate that our cash and cash equivalents on hand, which
totaled $437.9 million as of December 31, 2008,
existing borrowing capacity under our credit facility, and our
future cash flows from operations will provide sufficient funds
to enable us to meet our future operating needs, debt service
requirements and planned capital expenditures, as well as
facilitate our ability to grow in the foreseeable future.
Management assesses our liquidity in terms of our ability to
generate cash to fund our operating, investing and financing
activities. Increased demand for services resulting from, for
example, initiatives to rebuild the United States electric power
grid or support renewable energy projects may require a
significant amount of additional working capital. We also
evaluate opportunities for strategic acquisitions from time to
time that may require cash.
Although recent distress in the financial markets has not had a
significant impact on our financial position, results of
operations or cash flows as of and for the year ended
December 31, 2008, management continues to monitor the
financial markets and general national and global economic
conditions. If further changes in financial markets or other
areas of the economy adversely impacted our ability to access
capital markets, we would expect to rely on a combination of
available cash and borrowing capacity under our credit facility
to provide short-term funding. We consider our cash investment
policies to be conservative in that we maintain a diverse
portfolio of what we believe to be high-quality cash investments
with short-term maturities. We were in compliance with our
covenants under our credit facility at December 31, 2008.
Accordingly, we do not anticipate that the current volatility in
the capital markets will have a material impact on the principal
amounts of our cash investments or our ability to rely upon our
existing credit facility for funds. To date, we have experienced
no loss or lack of access to our invested cash or cash
equivalents; however, we can provide no assurances that access
to our invested cash and cash equivalents will not be impacted
by adverse conditions in the financial markets.
Capital expenditures are expected to be approximately
$180 million for 2009. Approximately $85 million of
the expected 2009 capital expenditures are targeted for the
expansion of our dark fiber network, primarily in connection
with committed customer arrangements, with the majority of the
remaining expenditures for operating equipment in the
Infrastructure Services segment.
Our 3.75% convertible subordinated notes due 2026
(3.75% Notes) are not presently convertible into our common
stock, although they have been convertible in certain prior
quarters as a result of the satisfaction of the market price
condition described in further detail in Debt
Instruments 3.75% Convertible Subordinated
Notes below. The 3.75% Notes could become
convertible in future periods upon the satisfaction of the
market price condition or other conditions. If any holder of the
convertible notes requests to convert their notes, we have the
option to deliver cash, shares of our common stock or a
combination thereof, with the amount of cash determined in
accordance with the terms of the indenture under which the notes
were issued.
39
Sources
and Uses of Cash
As of December 31, 2008, we had cash and cash equivalents
of $437.9 million, working capital of $929.7 million
and long-term debt of $143.8 million, net of current
maturities. We also had $160.2 million of letters of credit
outstanding under our credit facility, leaving
$314.8 million available for revolving loans or issuing new
letters of credit.
Operating
Activities
Cash flow from operations is primarily influenced by demand for
our services, operating margins and the type of services we
provide but can also be influenced by working capital needs such
as the timing of collection of receivables. Working capital
needs are generally higher during the summer and fall months due
to increased services in weather affected regions of the
country. Conversely, working capital assets are typically
converted to cash during the winter months. Operating activities
provided net cash to us of $242.5 million during 2008 as
compared to $219.2 million and $120.6 million during
2007 and 2006. The increase in operating cash flows in 2008 as
compared to 2007 relates primarily to higher levels of income
due to year over year growth and contributions from higher
profit margins, and was largely offset by increased accounts
receivable at December 31, 2008, which resulted in part
from the timing of collections that occurred shortly after
year-end. Accounts receivable also included larger retainage
balances on certain projects that were billed and collected in
2009.
The increase in operating cash flows in 2007 as compared to 2006
relates primarily to the growth in net income and revenues as a
result of the Merger and internal growth as described above.
Investing
Activities
During 2008, we used net cash in investing activities of
$219.3 million as compared to $120.6 million and
$38.5 million used in investing activities in 2007 and
2006. Investing activities in 2008 included $185.6 million
used for capital expenditures, partially offset by
$15.4 million of proceeds from the sale of equipment.
During 2007 and 2006, we used $127.9 and $48.5 million for
capital expenditures, partially offset by $27.5 million and
$10.0 million of proceeds from the sale of equipment. The
increase in capital expenditures of $57.7 million in 2008
compared to 2007 and $79.5 million in 2007 compared to 2006
are related primarily to the growth in our business and capital
expenditure requirements as a result of the Merger, primarily
from our Dark Fiber segment, which expended $99.6 million
and $23.7 million during 2008 and 2007. Investing
activities during 2008 also include $34.5 million in net
cash outlays for three acquisitions and $14.6 million paid
to secure patents and developed technology. Quanta made four
acquisitions during 2007, including the Merger. Investing cash
flows in 2007 include $20.1 million in net cash outlay for
these acquisitions, including $12.1 million of acquisition
expenses related to the Merger. Investing activities in 2006 and
the first quarter of 2007 included purchases and sales of
variable rate demand notes (VRDNs), which are classified as
short-term investments, available for sale when held. We did not
invest in VRDNs after the first quarter of 2007.
Financing
Activities
In 2008, financing activities provided net cash of
$8.2 million as compared to $78.9 million and
$2.7 million used in financing activities in 2007 and 2006.
Net cash provided by financing activities in 2008 resulted
primarily from $6.0 million received from the exercise of
stock options. Net cash used in financing activities in 2007
resulted primarily from a $60.5 million repayment of debt
associated with the Merger and a $33.3 million repayment of
the 4.0% convertible subordinated notes. The $2.7 million
net use of cash in 2006 resulted primarily from a repayment of
$7.5 million under the term loan portion of our prior
credit facility coupled with $6.0 million in debt issuance
costs, partially offset by $5.8 million in net borrowings
and certain activity related to stock compensation. The
$5.8 million in net borrowings primarily relates to the
issuance of $143.8 million aggregate principal amount of
our 3.75% convertible subordinated notes and the repurchase
through a tender offer of $137.1 million aggregate
principal amount of our 4.0% convertible subordinated notes.
40
Debt
Instruments
Credit
Facility
We have a credit facility with various lenders that provides for
a $475.0 million senior secured revolving credit facility
maturing on September 19, 2012. Borrowings under the credit
facility are to be used for working capital, capital
expenditures and other general corporate purposes. The entire
unused portion of the credit facility is available for the
issuance of letters of credit.
As of December 31, 2008, we had approximately
$160.2 million of letters of credit issued under the credit
facility and no outstanding revolving loans. The remaining
$314.8 million was available for revolving loans or issuing
new letters of credit. Amounts borrowed under the credit
facility bear interest, at our option, at a rate equal to either
(a) the Eurodollar Rate (as defined in the credit facility)
plus 0.875% to 1.75%, as determined by the ratio of our total
funded debt to consolidated EBITDA (as defined in the credit
facility), or (b) the base rate (as described below) plus
0.00% to 0.75%, as determined by the ratio of our total funded
debt to consolidated EBITDA. Letters of credit issued under the
credit facility are subject to a letter of credit fee of 0.875%
to 1.75%, based on the ratio of Quantas total funded debt
to consolidated EBITDA. We are also subject to a commitment fee
of 0.15% to 0.35%, based on the ratio of its total funded debt
to consolidated EBITDA, on any unused availability under the
credit facility. The base rate equals the higher of (i) the
Federal Funds Rate (as defined in the credit facility) plus
1/2
of 1% or (ii) the banks prime rate.
The credit facility contains certain covenants, including
covenants with respect to maximum funded debt to consolidated
EBITDA, maximum senior debt to consolidated EBITDA and minimum
interest coverage, in each case as specified in the credit
facility. For purposes of calculating the maximum funded debt to
consolidated EBITDA ratio and the maximum senior debt to
consolidated EBITDA ratio, our maximum funded debt and maximum
senior debt are reduced by all cash and cash equivalents (as
defined in the credit facility) held by us in excess of
$25.0 million. As of December 31, 2008, we were in
compliance with all of its covenants. The credit facility limits
certain acquisitions, mergers and consolidations, capital
expenditures, asset sales and prepayments of indebtedness and,
subject to certain exceptions, prohibits liens on material
assets. The credit facility also limits the payment of dividends
and stock repurchase programs in any fiscal year except those
payments or other distributions payable solely in capital stock.
The credit facility provides for customary events of default and
carries cross-default provisions with all of our existing
subordinated notes, our continuing indemnity and security
agreement with our sureties and all of our other debt
instruments exceeding $15.0 million in borrowings. If an
event of default (as defined in the credit facility) occurs and
is continuing, on the terms and subject to the conditions set
forth in the credit facility, amounts outstanding under the
credit facility may be accelerated and may become or be declared
immediately due and payable.
The credit facility is secured by a pledge of all of the capital
stock of our U.S. subsidiaries, 65% of the capital stock of
our foreign subsidiaries and substantially all of our assets.
Our U.S. subsidiaries guarantee the repayment of all
amounts due under the credit facility. Our obligations under the
credit facility constitute designated senior indebtedness under
our 3.75% Notes.
4.0% Convertible
Subordinated Notes
During the first half of 2007, we had outstanding
$33.3 million aggregate principal amount of 4.0%
convertible subordinated notes due 2007 (4.0% Notes), which
matured on July 1, 2007. The outstanding principal balance
of the 4.0% Notes plus accrued interest was repaid on
July 2, 2007, the first business day after the maturity
date.
4.5% Convertible
Subordinated Notes
At December 31, 2008, none of our 4.5% convertible
subordinated notes due 2023 (4.5% Notes) were outstanding.
The 4.5% Notes were originally issued in October 2003
for an aggregate principal amount of $270.0 million and
required semi-annual interest payments on April 1 and October 1
until maturity. The resale of the 4.5% Notes and the shares
issuable upon their conversion was registered for the benefit of
the holders on a shelf registration statement filed with
the SEC.
41
The indenture under which the 4.5% Notes was issued
provided the holders of the notes the right to require us to
repurchase in cash, on October 1, 2008, all or some of
their notes at the principal amount thereof plus accrued and
unpaid interest. As a result of this repurchase right, we
reclassified approximately $270.0 million outstanding
aggregate principal amount of the 4.5% Notes as a current
obligation in October 2007.
The indenture also provided that, beginning October 8,
2008, we had the right to redeem for cash some or all of the
4.5% Notes at the principal amount thereof plus accrued and
unpaid interest. On August 27, 2008, we notified the
registered holders of the 4.5% Notes that we would redeem
the notes on October 8, 2008. Upon notification of the
redemption and until October 6, 2008, the holders of the
4.5% Notes had the right to convert all or a portion of the
principal amount of their notes to shares of our common stock at
a conversion rate of 89.7989 shares of common stock for
each $1,000 principal amount of notes converted, which equates
to a conversion price of $11.14 per share.
During 2008, the holders of $269.8 million aggregate
principal amount of the 4.5% Notes elected to convert their
notes, resulting in the issuance of 24,229,781 shares of
our common stock, substantially all of which followed the
redemption notice. We also repurchased $106,000 aggregate
principal amount of the 4.5% Notes on October 1, 2008
pursuant to the holders election and redeemed for cash
$49,000 aggregate principal amount of the notes, plus accrued
and unpaid interest, on October 8, 2008. As a result of all
of these transactions, none of the 4.5% Notes remained
outstanding as of October 8, 2008.
3.75% Convertible
Subordinated Notes
At December 31, 2008, we had outstanding
$143.8 million aggregate principal amount of
3.75% Notes. The resale of the notes and the shares
issuable upon conversion thereof was registered for the benefit
of the holders on a shelf registration statement filed with the
SEC. The 3.75% Notes mature on April 30, 2026 and bear
interest at the annual rate of 3.75%, payable semi-annually on
April 30 and October 30, until maturity.
The 3.75% Notes are convertible into our common stock,
based on an initial conversion rate of 44.6229 shares of
our common stock per $1,000 principal amount of 3.75% Notes
(which is equal to an initial conversion price of approximately
$22.41 per share), subject to adjustment as a result of certain
events. The 3.75% Notes are convertible by the holder
(i) during any fiscal quarter if the closing price of our
common stock is greater than 130% of the conversion price for at
least 20 trading days in the period of 30 consecutive trading
days ending on the last trading day of the immediately preceding
fiscal quarter, (ii) upon us calling the 3.75% Notes
for redemption, (iii) upon the occurrence of specified
distributions to holders of our common stock or specified
corporate transactions or (iv) at any time on or after
March 1, 2026 until the business day immediately preceding
the maturity date of the 3.75% Notes. The 3.75% Notes
are not presently convertible, although they have been
convertible in certain prior quarters as a result of the
satisfaction of the market price condition in clause (i)
above. If the 3.75% Notes become convertible under any of
these circumstances, we have the option to deliver cash, shares
of our common stock or a combination thereof, with the amount of
cash determined in accordance with the terms of the indenture
under which the notes were issued. Conversions that may occur in
the future could result in the recording of losses on
extinguishment of debt if the conversions are settled in cash
for an amount in excess of the principal amount. The holders of
the 3.75% Notes who convert their notes in connection with
certain change in control transactions, as defined in the
indenture, may be entitled to a make whole premium in the form
of an increase in the conversion rate. In the event of a change
in control, in lieu of paying holders a make whole premium, if
applicable, we may elect, in some circumstances, to adjust the
conversion rate and related conversion obligations so that the
3.75% Notes are convertible into shares of the acquiring or
surviving company.
Beginning on April 30, 2010 until April 30, 2013, we
may redeem for cash all or part of the 3.75% Notes at a
price equal to 100% of the principal amount plus accrued and
unpaid interest, if the closing price of our common stock is
equal to or greater than 130% of the conversion price then in
effect for the 3.75% Notes for at least 20 trading days in
the 30 consecutive trading day period ending on the trading day
immediately prior to the date of mailing of the notice of
redemption. In addition, we may redeem for cash all or part of
the 3.75% Notes at any time on or after April 30, 2010
at certain redemption prices, plus accrued and unpaid
42
interest. Beginning with the six-month interest period
commencing on April 30, 2010, and for each six-month
interest period thereafter, we will be required to pay
contingent interest on any outstanding 3.75% Notes during
the applicable interest period if the average trading price of
the 3.75% Notes reaches a specified threshold. The
contingent interest payable within any applicable interest
period will equal an annual rate of 0.25% of the average trading
price of the 3.75% Notes during a five trading day
reference period.
The holders of the 3.75% Notes may require us to repurchase
all or a part of the notes in cash on each of April 30,
2013, April 30, 2016 and April 30, 2021, and in the
event of a change in control of the company, as defined in the
indenture, at a purchase price equal to 100% of the principal
amount of the 3.75% Notes plus accrued and unpaid interest.
The 3.75% Notes carry cross-default provisions with our
other debt instruments exceeding $20.0 million in
borrowings, which includes our existing credit facility.
Off-Balance
Sheet Transactions
As is common in our industry, we have entered into certain
off-balance sheet arrangements in the ordinary course of
business that result in risks not directly reflected in our
balance sheets. Our significant off-balance sheet transactions
include liabilities associated with non-cancelable operating
leases, letter of credit obligations, commitments to expand our
dark fiber network and surety guarantees. We have not engaged in
any off-balance sheet financing arrangements through special
purpose entities, and we have no material guarantees of the work
or obligations of third parties.
Leases
We enter into non-cancelable operating leases for many of our
facility, vehicle and equipment needs. These leases allow us to
conserve cash by paying a monthly lease rental fee for use of
facilities, vehicles and equipment rather than purchasing them.
We may decide to cancel or terminate a lease before the end of
its term, in which case we are typically liable to the lessor
for the remaining lease payments under the term of the lease.
We have guaranteed the residual value of the underlying assets
under certain of our equipment operating leases at the date of
termination of such leases. We have agreed to pay any difference
between this residual value and the fair market value of each
underlying asset as of the lease termination date. As of
December 31, 2008, the maximum guaranteed residual value
was approximately $156.6 million. We believe that no
significant payments will be made as a result of the difference
between the fair market value of the leased equipment and the
guaranteed residual value. However, there can be no assurance
that future significant payments will not be required.
Letters
of Credit
Certain of our vendors require letters of credit to ensure
reimbursement for amounts they are disbursing on our behalf,
such as to beneficiaries under our self-funded insurance
programs. In addition, from time to time some customers require
us to post letters of credit to ensure payment to our
subcontractors and vendors under those contracts and to
guarantee performance under our contracts. Such letters of
credit are generally issued by a bank or similar financial
institution. The letter of credit commits the issuer to pay
specified amounts to the holder of the letter of credit if the
holder demonstrates that we have failed to perform specified
actions. If this were to occur, we would be required to
reimburse the issuer of the letter of credit. Depending on the
circumstances of such a reimbursement, we may also have to
record a charge to earnings for the reimbursement. We do not
believe that it is likely that any claims will be made under a
letter of credit in the foreseeable future.
As of December 31, 2008, we had $160.2 million in
letters of credit outstanding under our credit facility
primarily to secure obligations under our casualty insurance
program. These are irrevocable stand-by letters of credit with
maturities generally expiring at various times throughout 2009.
Upon maturity, it is expected that the majority of these letters
of credit will be renewed for subsequent one-year periods.
43
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 under a contract or to pay
subcontractors and vendors, the customer may demand that the
surety make payments or provide services under the bond. We must
reimburse the surety for any expenses or outlays it incurs.
Under our continuing indemnity and security agreement with our
sureties and with the consent of our lenders under our credit
facility, we have granted security interests in certain of our
assets to collateralize our obligations to the sureties. In
addition, under our agreement with the surety that issued bonds
on behalf of InfraSource, which remains in place for any bonds
that were outstanding under it at the closing of the Merger and
have not expired or been replaced, we will be required to
transfer to the surety certain of our assets as collateral in
the event of a default under the agreement. We may be required
to post letters of credit or other collateral in favor of the
sureties or our customers in the future. Posting letters of
credit in favor of the sureties or our customers would reduce
the borrowing availability under our 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,
2008, an aggregate of approximately $918.9 million in
original face amount of bonds issued by our sureties were
outstanding. Our estimated cost to complete these bonded
projects was approximately $201.6 million as of
December 31, 2008.
From time to time, we guarantee the obligations of our wholly
owned subsidiaries, including obligations under certain
contracts with customers, certain lease obligations and, in some
states, obligations in connection with obtaining contractors
licenses.
Contractual
Obligations
As of December 31, 2008, our future contractual obligations
are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
Thereafter
|
|
|
Long-term obligations principal
|
|
$
|
144,905
|
|
|
$
|
1,155
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
143,750
|
|
|
$
|
|
|
Long-term obligations cash interest
|
|
|
23,359
|
|
|
|
5,391
|
|
|
|
5,391
|
|
|
|
5,391
|
|
|
|
5,391
|
|
|
|
1,795
|
|
|
|
|
|
Operating lease obligations
|
|
|
175,489
|
|
|
|
56,386
|
|
|
|
38,781
|
|
|
|
30,652
|
|
|
|
20,328
|
|
|
|
15,079
|
|
|
|
14,263
|
|
Committed capital expenditures for dark fiber networks under
contracts with customers
|
|
|
71,190
|
|
|
|
70,872
|
|
|
|
294
|
|
|
|
24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
414,943
|
|
|
$
|
133,804
|
|
|
$
|
44,466
|
|
|
$
|
36,067
|
|
|
$
|
25,719
|
|
|
$
|
160,624
|
|
|
$
|
14,263
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The committed capital expenditures for dark fiber networks
represent commitments related to signed contracts with
customers. The amounts are estimates of costs required to build
the networks under contract. The actual capital expenditures
related to building the networks could vary materially from
these estimates.
Actual maturities of our long-term debt may differ from
contractual maturities because convertible note holders may
convert their notes prior to the maturity dates or subsequent to
optional maturity dates.
As of December 31, 2008, the total unrecognized tax benefit
related to uncertain tax positions was $59.2 million. We
estimate that none of this will be paid within the next twelve
months. However, we believe that it is reasonably possible that
within the next 12 months unrecognized tax benefits will
decrease up to $24.8 million due to the expiration of
certain statutes of limitations. We are unable to make
reasonably reliable estimates regarding the timing of future
cash outflows, if any, associated with the remaining
unrecognized tax benefits.
44
Our multi-employer pension plan contributions are determined
annually based on our union employee payrolls, which cannot be
determined in advance for future periods. We may also be
required to make additional contributions to our multi-employer
pension plans if they become underfunded. For further
information, see our risk factor regarding our unionized
operations in Item 1A. Risk Factors.
Self-Insurance
We are insured for employers liability claims, subject to
a deductible of $1.0 million per occurrence, and for
general liability and auto liability subject to a deductible of
$3.0 million per occurrence. We are also insured for
workers compensation claims, subject to a deductible of
$2.0 million per occurrence. Additionally, we are subject
to an annual cumulative aggregate liability of up to
$1.0 million on workers compensation claims in excess
of $2.0 million per occurrence. We also have 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 $350,000 per claimant per year.
Losses under all of these insurance programs are accrued based
upon our estimates of the ultimate liability for claims reported
and an estimate of claims incurred but not reported, with
assistance from third-party actuaries. These insurance
liabilities are difficult to assess and estimate due to unknown
factors, including the severity of an injury, the determination
of our liability in proportion to other parties, the number of
incidents not reported and the effectiveness of our safety
program. The accruals are based upon known facts and historical
trends and management believes such accruals to be adequate. As
of December 31, 2007 and December 31, 2008, the gross
amount accrued for insurance claims totaled $152.0 million
and $147.9 million, with $110.1 million and
$105.0 million considered to be long-term and included in
other non-current liabilities. Related insurance
recoveries/receivables as of December 31, 2007 and
December 31, 2008 were $22.1 million and
$12.5 million, of which $11.9 million and
$7.2 million are included in prepaid expenses and other
current assets and $10.2 million and $5.3 million are
included in other assets, net.
Our casualty insurance carrier for the policy periods from
August 1, 2000 to February 28, 2003 has experienced
financial distress. Effective September 29, 2008, Quanta
consummated a novation transaction that released this distressed
casualty insurance carrier from all further obligations in
connection with the policies in effect during that period in
exchange for the payment to us of an agreed amount. Our current
casualty insurance carrier assumed all obligations under the
policies in effect during that period; however, we are obligated
to indemnify the carrier in full for any liabilities under the
policies assumed. At December 31, 2008, we estimated that
the total future claim amounts associated with the novated
policies was $6.8 million, based on an estimate of the
potential range of these future claim amounts at
December 31, 2008 of between $2.0 million and
$8.0 million. The actual amounts ultimately paid by us in
connection with these claims, if any, could vary materially from
the above range and could be impacted by further claims
development. During the second quarter of 2008, we recorded an
allowance of $3.4 million for potentially uncollectible
amounts estimated to be ultimately due from the distressed
insurer. As a result of the novation transaction, the net
receivable balance remaining was written off in the third
quarter of 2008, with an immaterial impact to the three month
period ended September 30, 2008 and the year ended
December 31, 2008.
Concentration
of Credit Risk
We are subject to concentrations of credit risk related
primarily to our cash and cash equivalents and accounts
receivable. Substantially all of our cash investments 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 this cash in a diversified
portfolio of what we believe to be high quality investments,
which primarily include interest-bearing demand deposits, money
market mutual funds and investment grade commercial paper with
original maturities of three months or less. Although we do not
currently believe the principal amount of these investments is
subject to any material risk of loss, the recent volatility in
the financial markets is likely to significantly 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
gas companies, telecommunications and cable television system
operators, governmental entities, general contractors, and
builders, owners and managers of commercial and industrial
properties located primarily in
45
the United States. Consequently, we are subject to potential
credit risk related to changes in business and economic factors
throughout the United States, which may be heightened as a
result of the current financial crisis and volatility of the
markets. However, we generally have certain statutory lien
rights with respect to services provided. Under certain
circumstances, such as foreclosures or negotiated settlements,
we may take title to the underlying assets in lieu of cash in
settlement of receivables. In such circumstances, extended time
frames may be required to liquidate these assets, causing the
amounts realized to differ from the value of the assumed
receivable. Historically, some 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 collectability of receivables
for services we have performed. No customer accounted for more
than 10% of accounts receivable as of December 31, 2008 or
revenues for the years ended December 31, 2006, 2007 or
2008.
Litigation
We are from time to time party to various lawsuits, claims and
other legal proceedings that arise in the ordinary course of
business. These actions typically seek, among other things,
compensation for alleged personal injury, breach of contract
and/or
property damages, punitive damages, civil penalties or other
losses, or injunctive or declaratory relief. With respect to all
such lawsuits, claims and proceedings, we record reserves when
it is probable that a liability has been incurred and the amount
of loss can be reasonably estimated. We do not believe that any
of these proceedings, separately or in the aggregate, would be
expected to have a material adverse effect on our financial
position, results of operations or cash flows.
Related
Party Transactions
In the normal course of business, we enter into transactions
from time to time with related parties. These transactions
typically take the form of facility leases with prior owners of
certain acquired companies and payables to prior owners who are
now employees.
Inflation
Due to relatively low levels of inflation experienced during the
years ended December 31, 2006, 2007 and 2008, inflation did
not have a significant effect on our results.
New
Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements. SFAS No. 157
defines fair value, establishes methods used to measure fair
value and expands disclosure requirements about fair value
measurements. SFAS No. 157 is effective for financial
statements issued for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal
periods, as it relates to financial assets and liabilities, as
well as for any non-financial assets and liabilities that are
carried at fair value. SFAS No. 157 also requires
certain tabular disclosure related to the application of
SFAS No. 144, Accounting for Impairment or
Disposal of Long-Lived Assets and SFAS No. 142,
Goodwill and Other Intangible Assets. On
November 14, 2007, the FASB provided a one year deferral
for the implementation of SFAS No. 157 for
non-financial assets and liabilities. SFAS No. 157
excludes from its scope SFAS No. 123 (revised 2004),
Share-Based Payment (SFAS No. 123(R)) and
its related interpretive accounting pronouncements that address
share-based payment transactions. We adopted
SFAS No. 157 on January 1, 2008 as it applies to
our financial assets and liabilities, and based on the
November 14, 2007 deferral of SFAS No. 157 for
non-financial assets and liabilities, we will begin following
the guidance of SFAS No. 157 with respect to our
non-financial assets and liabilities in the quarter ended
March 31, 2009. At December 31, 2008, we had no
material financial assets and liabilities on our balance sheet
carried at fair value other than cash and cash equivalents
balances which are disclosed as Level 1 assets in
Note 2 to our Consolidated Financial Statements, and
therefore the partial adoption of SFAS No. 157 did not
have a material impact on our consolidated financial position,
results of operations or cash flows. Additionally, we do not
currently have any material non-financial assets or liabilities
that are carried at fair value on a recurring basis; however, we
do have non-financial assets that are evaluated against measures
of fair value on a non-recurring or as-needed basis, including
goodwill, other intangibles and
46
long-term assets held and used. Based on the financial and
non-financial assets and liabilities on our balance sheet as of
December 31, 2008, we do not expect the adoption of
SFAS No. 157 to have a material impact on our
consolidated financial position, results of operations or cash
flows. In October 2008, the FASB issued FASB Staff Position FSP
FAS 157-3
Determining the Fair Value of a Financial Asset When the
Market for That Asset Is Not Active. FSP
FAS 157-3
provides clarifying guidance with respect to the application of
SFAS No. 157 in determining the fair value of a
financial asset when the market for that asset in not active.
FSP
FAS 157-3
was effective upon its issuance. The application of FSP
FAS 157-3
did not have a material impact on our consolidated financial
position, results of operations or cash flows as of and for the
year ended December 31, 2008 and is not expected to have a
material impact on our consolidated financial position, results
of operations or cash flows in the near-term.
On January 1, 2008, we adopted SFAS No. 159,
The Fair Value Option for Financial Assets and Financial
Liabilities, including an amendment of FASB No. 115.
SFAS No. 159 permits entities to choose to measure at
fair value many financial instruments and certain other items at
fair value that were not previously required to be measured at
fair value. Unrealized gains and losses on items for which the
fair value option has been elected are reported in earnings.
SFAS No. 159 does not affect any existing accounting
literature that requires certain assets and liabilities to be
carried at fair value. The adoption of SFAS No. 159
did not have a material impact on our consolidated financial
position, results of operations or cash flows as of and for the
year ended December 31, 2008 and is not expected to have a
material impact on our consolidated financial position, results
of operations or cash flows in the near-term.
On January 1, 2008, we adopted EITF Issue
No. 06-11,
Accounting for Income Tax Benefits of Dividends on
Share-Based Payment Awards.
EITF 06-11
requires that a realized income tax benefit from dividends or
dividend equivalent units paid on unvested restricted shares and
restricted share units be reflected as an increase in
contributed surplus and as an addition to the companys
excess tax benefit pool, as defined under
SFAS No. 123(R). Because we did not declare any
dividends during 2008 and do not currently anticipate declaring
dividends in the near future, the adoption of
EITF 06-11
did not have any impact during the year ended December 31,
2008, and is not expected to have a material impact in the
near-term, on our consolidated financial position, results of
operations or cash flows.
In December 2007, the FASB issued SFAS No. 160,
Non-controlling Interests in Consolidated Financial
Statements an amendment of ARB No. 51.
SFAS No. 160 addresses the accounting and reporting
framework for minority interests by a parent company.
SFAS No. 160 is to be effective for fiscal years, and
interim periods within those fiscal years, beginning on or after
December 15, 2008. Accordingly, we adopted
SFAS No. 160 on January 1, 2009, with no material
impact to our consolidated financial position, results of
operations or cash flows on the date of adoption. As we do not
currently have any material subsidiaries with non-controlling
interests, the adoption of SFAS No. 160 is not
anticipated to have a material impact on our consolidated
financial position, results of operations or cash flows in the
near-term.
In December 2007, the FASB issued SFAS No. 141(R),
Business Combinations. SFAS No. 141(R) is
effective for fiscal years beginning after December 15,
2008, and accordingly, we adopted SFAS No. 141(R) on
January 1, 2009. Earlier application was prohibited, and
assets and liabilities that arose from business combinations
occurring prior to the adoption of SFAS No. 141(R)
cannot be adjusted upon the adoption of
SFAS No. 141(R). SFAS No. 141(R) requires
the acquiring entity in a business combination to recognize all
(and only) the assets acquired and liabilities assumed in the
business combination; establishes the acquisition date as the
measurement date to determine the fair value for all assets
acquired and liabilities assumed; and requires the acquirer to
disclose to investors and other users all of the information
needed to evaluate and understand the nature and financial
effect of the business combination. As it relates to recognizing
all (and only) the assets acquired and liabilities assumed in a
business combination, costs an acquirer expects but is not
obligated to incur in the future to exit an activity of an
acquiree or to terminate or relocate an acquirees
employees are not liabilities at the acquisition date but must
be expensed in accordance with other applicable generally
accepted accounting principles. If the initial accounting for a
business combination is incomplete by the end of the reporting
period in which the combination occurs, the acquirer must report
in its financial statements provisional amounts for the items
for which the accounting is incomplete. During the measurement
period, which must not exceed one year from the acquisition
date, the acquirer will retrospectively adjust the
47
provisional amounts recognized at the acquisition date to
reflect new information obtained about facts and circumstances
that existed as of the acquisition date that, if known, would
have affected the measurement of the amounts recognized as of
that date. The acquirer will be required to expense all
acquisition-related costs in the periods such costs are
incurred, other than costs to issue debt or equity securities in
connection with the acquisition. SFAS No. 141(R) is
not expected to have a material impact on our consolidated
financial position, results of operations or cash flows at the
date of adoption, but we expect that it may have a material
impact on our consolidated financial position, results of
operations or cash flows as a result of acquisitions in future
periods.
In December 2007, the SEC published Staff Accounting Bulletin
(SAB) No. 110 (SAB 110). SAB 110 expresses the
views of the SEC staff regarding the use of a
simplified method, as discussed in
SAB No. 107 (SAB 107), in developing an estimate
of the expected term of plain vanilla share options
in accordance with SFAS No. 123(R). In particular, the
SEC staff indicated in SAB 107 that it will accept a
companys election to use the simplified method, regardless
of whether the company has sufficient information to make more
refined estimates of the expected term. However, the SEC staff
stated in SAB 107 that it would not expect a company to use
the simplified method for share option grants after
December 31, 2007. In SAB 110, the SEC staff states
that they would continue to accept, under certain circumstances,
the use of the simplified method beyond December 31, 2007.
Because we did not issue any stock options in 2008, SAB 110
had no impact on our consolidated financial position, results of
operations or cash flows in 2008. Furthermore, because we
currently do not anticipate issuing stock options in the near
future, SAB 110 is not anticipated to have a material
impact on our consolidated financial position, results of
operations or cash flows in the near-term.
In March 2008, the FASB issued SFAS No. 161,
Disclosures about Derivative Instruments and Hedging
Activities An Amendment of FASB No. 133.
SFAS No. 161 requires enhanced disclosures to enable
investors to better understand how a reporting entitys
derivative instruments and hedging activities impact the
entitys financial position, financial performance and cash
flows. SFAS No. 161 is effective for financial
statements issued after November 15, 2008, including
interim financial statements. We adopted SFAS No. 161
on January 1, 2009, with no material impact on our
consolidated financial position, results of operations or cash
flows on the date of adoption. As we have not entered into any
material derivatives or hedging activities and do not currently
anticipate doing so, the adoption of SFAS No. 161 is
not anticipated to have a material impact on our consolidated
financial position, results of operations, cash flows or
disclosures.
In April 2008, the FASB issued
FSP 142-3,
Determination of the Useful Life of Intangible
Assets.
FSP 142-3
amends the factors that should be considered in developing
renewal or extension assumptions used to determine the useful
life of a recognized intangible asset under
SFAS No. 142. The intent of
FSP 142-3
is to improve the consistency between the useful life of an
intangible asset and the period of expected cash flows used to
measure its fair value and to enhance existing disclosure
requirements relating to intangible assets.
FSP 142-3
is effective for fiscal years beginning after December 15,
2008 and should be applied prospectively to intangible assets
acquired after the effective date. Early adoption is prohibited.
Accordingly, we adopted
FSP 142-3
on January 1, 2009.
FSP 142-3
did not have an impact on our consolidated financial position,
results of operations or cash flows at the date of adoption, but
we expect that it may have a material impact on our consolidated
financial position, results of operations or cash flows in
future periods.
In May 2008, the FASB issued SFAS No. 162, The
Hierarchy of Generally Accepted Accounting Principles.
SFAS No. 162 identifies the sources of accounting
principles and the framework for selecting the principles to be
used in the preparation of financial statements of
non-governmental entities that are presented in conformity with
generally accepted accounting principles in the United States.
SFAS No. 162 will be effective 60 days following
the SECs approval of the Public Company Accounting
Oversight Board amendments to AU Section 411, The
Meaning of Present Fairly in Conformity With Generally Accepted
Accounting Principles. We will adopt
SFAS No. 162 once it is effective, but we have not yet
determined the impact, if any, on our consolidated financial
statements.
In May 2008, the FASB issued FASB Staff Position (FSP) FSP APB
14-1,
Accounting for Convertible Debt Instruments That May Be
Settled in Cash upon Conversion (Including Partial Cash
Settlement). FSP APB
14-1
requires issuers of such instruments to separately account for
the liability and equity components in
48
a manner that will reflect the entitys non-convertible
debt borrowing rate and interest cost. The value of the equity
component is recognized with an offsetting discount to the face
value of the debt, which will be amortized as non-cash interest
expense over the expected life of the debt.
FSP APB 14-1
is effective for financial statements issued for fiscal years
beginning after December 15, 2008 and interim periods
within those fiscal years, and will be applied retrospectively
to all periods presented. Accordingly, we adopted FSP APB
14-1 on
January 1, 2009 and will apply FSP APB
14-1
retrospectively to all periods presented in future filings. We
will record a cumulative effect of the change in accounting
principle as of January 1, 2007 of approximately
$29.6 million and non-cash interest expense of
approximately $17.8 million ($11.3 million after-tax)
and $14.5 million ($9.2 million after-tax) for the
years ended December 31, 2007 and 2008. In addition, we
will record additional non-cash interest expense annually
thereafter until our 3.75% Notes are redeemable at the
holders option in April 2013, with approximately
$4.3 million ($2.7 million after-tax) to be recorded
in 2009.
In June 2008, the FASB issued FSP
EITF 03-6-1,
Determining Whether Instruments Granted in Share-Based
Payment Transactions Are Participating Securities. FSP
EITF 03-6-1 states
that unvested share-based payment awards that contain
non-forfeitable rights to dividends or dividend equivalents
(whether paid or unpaid) are participating securities under the
definition of SFAS No. 128, Earnings per
Share and should be included in the computation of both
basic and diluted earnings per share. FSP
EITF 03-6-1
is effective for financial statements issued for fiscal years
beginning after December 15, 2008, and interim periods
within those years. Accordingly, we adopted FSP
EITF 03-6-1
on January 1, 2009. All prior period earnings per share
data presented will be adjusted retrospectively to conform to
the provisions of FSP
EITF 03-6-1.
Early application was not permitted. All of our restricted stock
grants have non-forfeitable rights to dividends and are
considered participating securities under FSP
EITF 03-06-1.
Through December 31, 2008, any unvested restricted stock
grants are accounted for under the treasury stock method. Under
this method unvested restricted common shares were not included
in the calculation of weighted average basic shares outstanding
and were included in the calculation of weighted average diluted
shares outstanding to the extent the grant price was less than
the average share price for the respective period. Beginning in
the first quarter of 2009, under FSP ETIF
03-6-1, we
will retrospectively restate earnings per share data for all
prior and future periods presented to include all participating
unvested restricted common shares in the calculation of weighted
average basic and dilutive shares outstanding. The impact of the
retrospective application of FSP ETIF
03-6-1 on
earnings per share is anticipated to be immaterial.
In June 2008, the FASB ratified EITF Issue
07-5,
Determining Whether an Instrument (or Embedded Feature) Is
Indexed to an Entitys Own Stock
(EITF 07-5).
The primary objective of
EITF 07-5
is to provide guidance for determining whether an equity-linked
financial instrument or embedded feature within a contract is
indexed to an entitys own stock, which is a key criterion
of the scope exception to paragraph 11(a) of
SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. This criterion is also
important in evaluating whether
EITF 00-19,
Accounting for Derivative Financial Instruments Indexed
to, and Potentially Settled in, a Companys Own Stock
applies to certain financial instruments that are not
derivatives under SFAS No. 133. An equity-linked
financial instrument or embedded feature within a contract that
is not considered indexed to an entitys own stock could be
required to be classified as an asset or liability and
marked-to-market through earnings.
EITF 07-5
specifies a two-step approach in evaluating whether an
equity-linked financial instrument or embedded feature within a
contract is indexed to its own stock. The first step involves
evaluating the instruments contingent exercise provisions,
if any, and the second step involves evaluating the
instruments settlement provisions.
EITF 07-5
is effective for financial statements issued for fiscal years
beginning after December 15, 2008, and must be applied to
all instruments outstanding as of the effective date.
Accordingly, we adopted
EITF 07-5
on January 1, 2009, with no material impact to our
consolidated financial position, results of operations or cash
flows on the date of adoption. We also do not anticipate the
adoption of
EITF 07-5
to have a material impact on our consolidated financial
position, results of operations and cash flows in the near-term.
In November 2008, the FASB ratified EITF Issue
08-6,
Equity Method Investment Accounting Considerations
(EITF 08-06).
EITF 08-6
requires that the initial measurement of an equity method
investment be at cost in accordance with
SFAS No. 141(R). It also requires that an equity
method investor recognize
49
other-than-temporary impairments of an equity method investment
in accordance with paragraph 19(h) of APB Opinion 18.
Additionally, an equity method investor shall not separately
test an investees underlying indefinite-lived intangible
assets for impairment, and an equity method investor shall
account for a share issuance by an investee as if the investor
had sold a proportionate share of its investment. Any gain or
loss to the investor resulting from an investees share
issuance shall be recognized in earnings, subject to certain
exceptions.
EITF 08-6
is effective on a prospective basis in fiscal years beginning on
or after December 15, 2008, and interim periods within
those fiscal years. Accordingly, we adopted
EITF 08-6
on January 1, 2009, with no material impact to our
consolidated financial position, results of operations or cash
flows on the date of adoption. We also do not anticipate the
adoption of
EITF 08-6
to have a material impact on our consolidated financial
position, results of operations and cash flows in the near term.
In November 2008, the FASB ratified EITF Issue
08-7,
Accounting for Defensible Intangible Assets.
EITF 08-7
requires that a defensible intangible asset should be accounted
for as a separate unit of account rather than as part of the
cost of an acquirers existing intangible assets and that
the useful life assigned to such defensible intangible asset
should reflect the entitys consumption of the expected
benefits related to the asset.
EITF 08-7
is effective on a prospective basis in fiscal years beginning on
or after December 15, 2008. Accordingly, we adopted
EITF 08-7
on January 1, 2009, with no impact on our consolidated
financial position, results of operations or cash flows at the
date of adoption. We anticipate that the adoption of
EITF 08-7
may have a material impact on our consolidated financial
position, results of operations or cash flows in the future when
it is applied to acquisitions which occur in future periods.
In November 2008, the FASB ratified EITF Issue
08-8,
Accounting for an Instrument (or an Embedded Feature) with
a Settlement Amount That is Based on the Stock of an
Entitys Consolidated Subsidiary.
EITF 08-8
provides guidance regarding the accounting for a financial
instrument or embedded feature when it is indexed to a
subsidiary considered to be a substantive entity in that such
instrument or feature is not precluded from being considered
indexed to the entitys own stock in the consolidated
financial statements of the parent. Additionally, an
equity-classified instrument or feature within the scope of
EITF 08-8
shall be presented as a component of noncontrolling interest in
the consolidated financial statements, whether the instrument
was entered into by the parent or subsidiary.
EITF 08-8
is effective in fiscal years beginning on or after
December 15, 2008. Accordingly, we adopted
EITF 08-8
on January 1, 2009, with no impact to our consolidated
financial position on the date of adoption because we had no
such instruments or embedded features at December 31, 2008.
We also do not expect the adoption of
EITF 08-8
to have a material impact on our consolidated financial
position, results of operations or cash flows in the near-term.
Critical
Accounting Policies
The discussion and analysis of our financial condition and
results of operations are based on our consolidated financial
statements, which have been prepared in accordance with
accounting principles generally accepted in the United States.
The preparation of these consolidated financial statements
requires us to make estimates and assumptions that affect the
reported amounts of assets and liabilities, disclosures of
contingent assets and liabilities known to exist 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
Board of Directors. We believe the following accounting policies
affect our more significant judgments and estimates used in the
preparation of our consolidated financial statements:
Revenue
Recognition
Infrastructure Services We design, install and
maintain networks for the electric power, gas,
telecommunications and cable television industries, as well as
provide various ancillary services to commercial,
50
industrial and governmental entities. These services may be
provided pursuant to master service agreements, repair and
maintenance contracts and fixed price and non-fixed price
installation contracts. Pricing under these contracts may be
competitive unit price, cost-plus/hourly (or time and materials
basis) or fixed price (or lump sum basis), and the final terms
and prices of these contracts are frequently negotiated with the
customer. Under unit-based contracts, the utilization of an
output-based measurement is appropriate for revenue recognition.
Under these contracts, we recognize revenue when units are
completed based on pricing established between us and the
customer for each unit of delivery, which best reflects the
pattern in which the obligation to the customer is fulfilled.
Under our cost-plus/hourly and time and materials type
contracts, we recognize revenue on an input-basis, as labor
hours are incurred and services are performed.
Revenues from fixed price contracts are recognized using the
percentage-of-completion method, measured by the percentage of
costs incurred to date to total estimated costs for each
contract. These contracts provide for a fixed amount of revenues
for the entire project. Such contracts provide that the customer
accept completion of progress to date and compensate us for
services rendered, measured in terms of units installed, hours
expended or some other measure of progress. Contract costs
include all direct material, labor and subcontract costs and
those indirect costs related to contract performance, such as
indirect labor, supplies, tools, repairs and depreciation costs.
Much of the materials associated with our work are
owner-furnished and are therefore not included in contract
revenues and costs. The cost estimation process is based on the
professional knowledge and experience of our engineers, project
managers and financial professionals. Changes in job
performance, job conditions and final contract settlements are
factors that influence managements assessment of the total
estimated costs to complete those contracts and therefore, our
profit recognition. Changes in these factors may result in
revisions to costs and income and their effects are recognized
in the period in which the revisions are determined. Provisions
for the total estimated losses on uncompleted contracts are made
in the period in which such losses are determined to be probable
and can be reasonably estimated. If actual results significantly
differ from our estimates used for revenue recognition and claim
assessments, our financial condition and results of operations
could be materially impacted.
We may incur costs related to change orders, whether approved or
unapproved by the customer,
and/or
claims related to certain contracts. We determine 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 a cost of contract
performance in the period incurred if it is not probable that
the costs will be recovered or will recognize revenue if it is
probable that the contract price will be adjusted and can be
reliably estimated.
The current asset Costs and estimated earnings in excess
of billings on uncompleted contracts represents revenues
recognized in excess of amounts billed for fixed price
contracts. The current liability Billings in excess of
costs and estimated earnings on uncompleted contracts
represents billings in excess of revenues recognized for fixed
price contracts.
Dark Fiber Quanta has fiber-optic facility licensing
agreements with various customers, pursuant to which it
recognizes revenues, including any initial fees or advance
billings, ratably over the expected length of the agreements,
including probable renewal periods. As of December 31, 2007
and 2008, initial fees and advanced billings on these licensing
agreements not yet recorded in revenue were $23.2 million
and $34.6 million and are recognized as deferred revenue,
with $15.6 million and $25.1 million considered to be
long-term and included in other non-current liabilities. Actual
revenues may differ from those estimates if the contracts are
not renewed as expected.
Self-Insurance. We are insured for
employers liability claims, subject to a deductible of
$1.0 million per occurrence, and for general liability and
auto liability subject to a deductible of $3.0 million per
occurrence. We are also insured for workers compensation
claims, subject to a deductible of $2.0 million per
occurrence. Additionally, we are subject to an annual cumulative
aggregate liability of up to $1.0 million on workers
compensation claims in excess of $2.0 million per
occurrence. We also have 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 $350,000
per claimant per year.
51
Losses under all of these insurance programs are accrued based
upon our estimates of the ultimate liability for claims reported
and an estimate of claims incurred but not reported, with
assistance from third-party actuaries. These insurance
liabilities are difficult to assess and estimate due to unknown
factors, including the severity of an injury, the determination
of our liability in proportion to other parties, the number of
incidents not reported and the effectiveness of our safety
program. The accruals are based upon known facts and historical
trends and management believes such accruals to be adequate. As
of December 31, 2007 and December 31, 2008, the gross
amount accrued for insurance claims totaled $152.0 million
and $147.9 million, with $110.1 million and
$105.0 million considered to be long-term and included in
other non-current liabilities. Related insurance
recoveries/receivables as of December 31, 2007 and
December 31, 2008 were $22.1 million and
$12.5 million, of which $11.9 million and
$7.2 million are included in prepaid expenses and other
current assets and $10.2 million and $5.3 million are
included in other assets, net.
Our casualty insurance carrier for the policy periods from
August 1, 2000 to February 28, 2003 has experienced
financial distress. Effective September 29, 2008, Quanta
consummated a novation transaction that released this distressed
casualty insurance carrier from all further obligations in
connection with the policies in effect during that period in
exchange for the payment to us of an agreed amount. Our current
casualty insurance carrier assumed all obligations under the
policies in effect during that period; however, we are obligated
to indemnify the carrier in full for any liabilities under the
policies assumed. At December 31, 2008, we estimated that
the total future claim amounts associated with the novated
policies was $6.8 million, based on an estimate of the
potential range of these future claim amounts at
December 31, 2008 of between $2.0 million and
$8.0 million. The actual amounts ultimately paid by us in
connection with these claims, if any, could vary materially from
the above range and could be impacted by further claims
development. During the second quarter of 2008, we recorded an
allowance of $3.4 million for potentially uncollectible
amounts estimated to be ultimately due from the distressed
insurer. As a result of the novation transaction, the net
receivable balance remaining was written off in the third
quarter of 2008, with an immaterial impact to the three month
period ended September 30, 2008 and the year ended
December 31, 2008.
Valuation of Intangibles and Long-Lived
Assets. SFAS No. 142 provides that
goodwill and other intangible assets that have indefinite useful
lives not be amortized but, instead, must be tested at least
annually for impairment, and intangible assets that have finite
useful lives should continue to be amortized over their useful
lives. SFAS No. 142 also provides specific guidance
for testing goodwill and other nonamortized intangible assets
for impairment. The first step compares the fair value of a
reporting unit to its carrying amount, including goodwill. If
the carrying amount of a reporting unit exceeds its fair value,
the second step is then performed. The second step compares the
carrying amount of the reporting units goodwill to the
fair value of the goodwill. If the fair value of the goodwill is
less than the carrying amount, an impairment loss would be
recorded in income (loss) from operations in the consolidated
statements of operations.
SFAS No. 142 does not allow increases in the carrying
value of reporting units that may result from our impairment
test; therefore, we may record goodwill impairments in the
future, even when the aggregate fair value of our reporting
units and the company as a whole may increase. Goodwill of a
reporting unit will be tested for impairment between annual
tests if an event occurs or circumstances change that would more
likely than not reduce the fair value of a reporting unit below
its carrying amount. Examples of such events or circumstances
may include a significant change in business climate, loss of a
significant customer or a loss of key personnel, among others.
Additionally, a decrease in market capitalization below book
value may trigger the need for interim impairment testing.
SFAS No. 142 requires that management make certain
estimates and assumptions in order to allocate goodwill to
reporting units and to determine the fair value of reporting
unit net assets and liabilities, including, among other things,
an assessment of market conditions, projected cash flows, cost
of capital and growth rates, which could significantly impact
the reported value of goodwill and other intangible assets. When
necessary, we engage third party specialists to assist us with
our valuations. The valuations employ a combination of present
value techniques and market multiple techniques to measure fair
value. These valuations are based on a discount rate determined
by management to be consistent with industry discount rates and
the risks inherent in our current business model. A provision
for impairment could be required in a future period if future
operating results and residual values differ from our estimates.
Intangible
52
assets with definite lives are also reviewed for impairment if
events or changes in circumstances indicate that the carrying
amount may not be realizable.
As part of our 2006 annual test for goodwill impairment,
goodwill in the amount of $56.8 million was written off as
a non-cash operating expense associated with a decrease in the
expected future demand for the services of one of our
businesses, which had historically served the cable television
industry. This operating unit had transitioned to FTTN and FTTP
deployments for our customers and had previously forecasted
expectations to begin deployments of the broadband over power
line (BPL) technology in late 2005. However, because the
prospective BPL customers were still analyzing the costs and
benefits of using this technology at the end of 2006, management
determined the BPL work would be delayed. With the future
revenue growth related to BPL delayed, and the resulting impact
on projected cash flows reduced at December 31, 2006,
management determined that the estimated fair value of the
reporting unit was less than its carrying value and,
consequently, a goodwill impairment charge was recognized. For
this operating unit, the remaining unimpaired balance of
goodwill is $30.3 million. This operating unit, as well as
others that had previously served the cable television industry,
had successfully expanded its services to include FTTN and FTTP
services and therefore, currently operates with sufficient cash
flows to support any remaining goodwill balances.
Estimating future cash flows requires significant judgment, and
our projections may vary from cash flows eventually realized.
Changes in our judgments and projections could result in a
significantly different estimate of the fair value of reporting
units and intangible assets and could result in an impairment.
Variances in the assessment of market conditions, projected cash
flows, cost of capital, growth rates and acquisition multiples
applied could have an impact on the assessment of impairments
and any amount of goodwill impairment charges recorded. For
example, lower growth rates, lower acquisition multiples or
higher costs of capital assumptions would all individually lead
to lower fair value assessments and potentially increased
frequency or size of goodwill impairments. Any goodwill or other
intangible impairment would be included in the consolidated
statements of operations.
Our goodwill is included in multiple reporting units. Due to the
cyclical nature of our business, and the other factors described
under Risk Factors in Item 1A, the
profitability of our individual reporting units may suffer from
downturns in customer demand and other factors. These factors
may have a disproportionate impact on the individual reporting
units as compared to Quanta as a whole and might adversely
affect the fair value of the individual reporting units. If
material adverse conditions occur that impact our reporting
units, our future estimates of fair value may not support the
carrying amount of one or more of our reporting units, and the
related goodwill would need to be written down to an amount
considered recoverable.
The estimated fair value of our reporting units exceeded their
carrying value for the annual goodwill impairment test at
December 31, 2008. As of December 31, 2008, we believe
the goodwill is recoverable for all of the reporting units,
however there can be no assurances that the goodwill will not be
impaired in future periods.
We review long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount may
not be realizable. If an evaluation is required, the estimated
future undiscounted cash flows associated with the asset are
compared to the assets carrying amount to determine if an
impairment of such asset is necessary. This requires us to make
long-term forecasts of the future revenues and costs related to
the assets subject to review. Forecasts require assumptions
about demand for our products and future market conditions.
Since estimating future cash flows requires significant
judgment, our projections may vary from cash flows eventually
realized. Future events and unanticipated changes to assumptions
could require a provision for impairment in a future period. The
effect of any impairment would be to expense the difference
between the fair value of such asset and its carrying value.
Such expense would be reflected in income (loss) from operations
in the consolidated statements of operations. In addition, we
estimate the useful lives of our long-lived assets and other
intangibles and periodically review these estimates to determine
whether these lives are appropriate.
Current and Non-Current Accounts and Notes Receivable and
Provision for Doubtful Accounts. We provide an
allowance for doubtful accounts when collection of an account or
note receivable is considered doubtful, and receivables are
written off against the allowance when deemed uncollectible.
Inherent in the
53
assessment of the allowance for doubtful accounts are certain
judgments and estimates including, among others, our
customers access to capital, our customers
willingness or ability to pay, general economic conditions and
the ongoing relationship with the customer. Under certain
circumstances such as foreclosure or negotiated settlements, we
may take title to the underlying assets in lieu of cash in
settlement of receivables. Material changes in Quantas
customers business of cash flows, which may be further
impacted by the current financial crisis and volatility of the
markets, could affect its ability to collect amounts due from
them. Certain of our customers, several of them large public
telecommunications carriers and utility customers, have
experienced financial difficulties in the past. Should any major
customers experience difficulties or file for bankruptcy, or
should anticipated recoveries relating to the receivables in
existing bankruptcies and other workout situations fail to
materialize, we could experience reduced cash flows and losses
in excess of current reserves.
Income Taxes. We follow the liability method
of accounting for income taxes in accordance with
SFAS No. 109, Accounting for Income Taxes.
Under this method, deferred tax assets and liabilities are
recorded for future tax consequences of temporary differences
between the financial reporting and tax bases of assets and
liabilities, and are measured using the enacted tax rates and
laws that are expected to be in effect when the underlying
assets or liabilities are recovered or settled.
We regularly evaluate valuation allowances established for
deferred tax assets for which future realization is uncertain.
The estimation of required valuation allowances includes
estimates of future taxable income. The ultimate realization of
deferred tax assets is dependent upon the generation of future
taxable income during the periods in which those temporary
differences become deductible. We consider projected future
taxable income and tax planning strategies in making this
assessment. If actual future taxable income differs from our
estimates, we may not realize deferred tax assets to the extent
estimated.
On January 1, 2007, we adopted FASB Interpretation
No. 48 Accounting for Uncertainty in Income
Taxes An Interpretation of FASB Statement
No. 109 (FIN No. 48). FIN No. 48
prescribes a comprehensive model for how companies should
recognize, measure, present and disclose in their financial
statements uncertain tax positions taken or to be taken on a tax
return. We record reserves for expected tax consequences of such
uncertain positions assuming the taxing authorities full
knowledge of the position and all relevant facts.
The income tax laws and regulations are voluminous and are often
ambiguous. As such, we are required to make many subjective
assumptions and judgments regarding our tax positions that can
materially affect amounts recognized in our future consolidated
balance sheets and statements of operations.
Outlook
Over the past two years, many utilities across the country
increased or indicated plans to increase spending on their
transmission and distribution systems, with a more significant
focus on the upgrade and build-out of the transmission grid. As
a result, new construction, pole change-outs, line upgrades and
maintenance projects on many systems are occurring. While we
expect this trend to continue over the next few quarters,
capital constraints impacting our customers as a result of the
current economic downturn could slow this spending, particularly
in connection with their distribution systems.
We believe that renewable energy initiatives, including wind and
solar, will create opportunities over the long-term for us to
provide engineering, project management and installation
services for renewable projects. State mandates, which set
standards for how much power is required to be generated from
renewable energy sources, as well as general environmental
concerns, are driving the development of additional renewable
energy projects. While the latter part of 2008 experienced a
decline in renewable energy spending, we expect future spending
on renewable energy initiatives to increase, although
investments could be impacted by capital constraints if the
financial markets continue to deteriorate.
We also anticipate increased spending over the next decade as a
result of the Energy Policy Act of 2005 (the Energy Act), which
requires the power industry to meet federal reliability
standards for its transmission and distribution systems and
provides further incentives to the industry to invest in and
improve maintenance
54
on its systems, although rule-making initiatives under the
Energy Act could be impacted, both in timing and in scope, by
the new presidential administration. Additionally, we expect the
construction of renewable energy facilities, including wind and
solar power generation, to result in the need for additional
transmission lines and substations. As a result of these and
other factors, we expect a continued shift in our services mix
to a greater proportion of high-voltage electric power
transmission and substation projects over the long-term, as well
as opportunities to provide installation services for renewable
projects. Many of these projects have a long-term horizon, and
timing and scope can be negatively affected by numerous factors,
including regulatory permitting, availability of funding and the
effect of negative economic and market conditions.
We believe that certain provisions of the American Recovery and
Reinvestment Act of 2009 (ARRA), enacted in February 2009, will
also increase demand for our services over the long-term. The
economic stimulus programs under the ARRA include incentives in
the form of direct spending and tax cuts and credits for
renewable energy, energy efficiency and electric power and
telecommunications infrastructure. For example, the ARRA
extended tax credits for wind projects until 2012, which we
expect will encourage further development in wind energy. Funds
provided to the states for the restoration, repair and
construction of highways will also likely require the relocation
and upgrade of electric power, telecommunications and natural
gas infrastructure. We anticipate investments in many of these
initiatives to create opportunities for our operations, although
we cannot predict the timing of the implementation of the
programs that support these investments or the timing or scope
of the investments once the programs are implemented.
Several industry and market trends are also prompting customers
in the electric power industry to seek outsourcing partners,
such as us. These trends include an aging utility workforce,
increasing volumes of work, increasing costs and labor issues.
The need to ensure available labor resources for larger projects
is also driving strategic relationships with customers.
We also see potential growth opportunities in our gas
operations, primarily in natural gas gathering and pipeline
installation and maintenance services, although recently this
business has been negatively impacted by lower natural gas
prices and capital constraints on spending by our customers. In
the past, our gas operations have been challenged by lower
margins overall, due in part to our gas distribution services
that have been impacted by certain lower margin contracts and by
recent declines in new housing construction in certain sectors
of the country. We have allocated resources to more profitable
services, and we are optimistic about these operations in the
future, although economic and market conditions as well as the
level of natural gas prices may continue to negatively affect
this business in the near-term.
In the telecommunications industry, various initiatives are
underway by several wireline carriers and government
organizations that provide us with opportunities, in particular,
initiatives for fiber to the premises (FTTP) and fiber to the
node (FTTN). Such initiatives have been underway by Verizon,
AT&T and other telecommunications providers, and
municipalities and other government jurisdictions have also
become active in these initiatives. Since the second quarter of
2008, we have seen a significant slow-down in FTTP and FTTN
deployment, and we anticipate this slow-down to continue if
economic and market conditions remain stagnant or further
deteriorate. In connection with our wireless operations, several
wireless companies have announced plans to increase their cell
site deployments over the next few years, including the
expansion of next generation technology. We anticipate increased
opportunities from these plans over the long-term, with the
timing and amount of spending on these plans somewhat dependent
on future economic and market conditions.
We anticipate that the future initiatives by the
telecommunication carriers will serve as a catalyst for the
cable industry to begin a new network upgrade cycle to expand
its service offerings in an effort to retain and attract
customers; however, the timing of any upgrades is uncertain.
Our Dark Fiber segment is also experiencing growth primarily
through the expansion into additional geographic markets, with a
focus within those markets on education and healthcare customers
where secure high-speed networks are important. We continue to
see opportunities for growth both in the markets we currently
serve and new markets, although we cannot predict the negative
impact, if any, of the current economic downturn on these growth
opportunities. To support the growth in this business, we
anticipate the need for continued significant capital
expenditures. Our Dark Fiber segment typically generates higher
margins
55
than our Infrastructure Services segment, but we can give no
assurance that the Dark Fiber segment margins will continue at
historical levels.
Historically, our customers have continued to spend throughout
short-term economic softness or weak recessions. A long-term or
deep recession, however, would likely have some negative impact
on our customers spending. In addition, the volatility of
the capital markets may negatively affect our customers
plans for future projects, which could be delayed, reduced or
suspended if funding is not available. It is uncertain when and
to what extent the current unfavorable economic and market
conditions will improve, or if they will deteriorate further.
Despite reductions in capital spending by some of our customers,
our revenues in certain of the industries we serve may not
decline, as utilities continue outsourcing more of their work,
in part due to their aging workforce issues. Additionally, many
of the capital expenditure reductions announced by utilities
relate to power generation and areas other than transmission and
distribution systems, and therefore, we may not be significantly
impacted by these reductions. We believe that we remain the
partner of choice for many utilities in need of broad
infrastructure expertise, specialty equipment and workforce
resources. Furthermore, as new technologies emerge in the future
for communications and digital services such as voice, video and
data, telecommunications and cable service providers are
expected to work quickly to deploy fast, next-generation fiber
networks, and we are recognized as a key partner in deploying
these services.
With the growth in several of our markets and our margin
enhancement initiatives, we continue to see our gross margins
generally improve, although reductions in spending by our
customers, particularly in our telecommunications operations,
could negatively affect our margins. We continue to focus on the
elements of the business we can control, including costs, the
margins we accept on projects, collecting receivables, ensuring
quality service and rightsizing initiatives to match the markets
we serve. These initiatives include aligning our workforce with
our current revenue base, evaluating opportunities to reduce the
number of field offices and evaluating our non-core assets for
potential sale. Such initiatives could result in future charges
related to, among other things, severance, retention, the
shutdown and consolidation of facilities, property disposal and
other exit costs.
Capital expenditures for 2009 are expected to be approximately
$180 million, of which $85 million of these
expenditures are targeted for dark fiber network expansion with
the majority of the remaining expenditures for operating
equipment in the Infrastructure Services segment. We expect 2009
capital expenditures to continue to be funded substantially
through internal cash flows and cash on hand.
On August 30, 2007, we consummated the Merger with
InfraSource, which enhanced our resources and expanded our
service portfolio through InfraSources complementary
businesses, strategic geographic footprint and skilled
workforce. We have already begun to realize the benefits of the
Merger through additional opportunities, and we continue to
expect that the combined company will be able to better serve
our customers as demand grows in their respective industries.
We continue to evaluate other potential strategic acquisitions
of companies to broaden our customer base, expand our geographic
area of operation and grow our portfolio of services. We believe
that additional attractive acquisition candidates exist
primarily as a result of the highly fragmented nature of the
industry, the inability of many companies to expand and
modernize due to capital constraints and the desire of owners of
acquisition candidates for liquidity. We also believe that our
financial strength and experienced management team will be
attractive to acquisition candidates.
We believe that we are adequately positioned to capitalize upon
opportunities and trends in the industries we serve because of
our proven full-service operating units with broad geographic
reach, financial capability and technical expertise.
Additionally, we believe that these industry opportunities and
trends will increase the demand for our services; however, we
cannot predict the actual timing, magnitude or impact these
opportunities and trends will have on our operating results and
financial position, especially in light of the economic downturn
and volatile capital markets.
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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:
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Projected operating or financial results;
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The effects of any acquisitions and divestitures we may make,
including the acquisition of InfraSource;
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Expectations regarding our business outlook, growth and capital
expenditures;
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The effects of competition in our markets;
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The benefits of the Energy Policy Act of 2005, renewable energy
initiatives and the American Recovery and Reinvestment Act of
2009 (ARRA);
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The current economic conditions and trends in the industries we
serve; and
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Our ability to achieve cost savings.
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These forward-looking statements are not guarantees of future
performance and involve or rely on a number of risks,
uncertainties, and assumptions that are difficult to predict or
beyond our control. We have based our forward-looking statements
on our managements beliefs and assumptions based on
information available to our management at the time the
statements are made. We caution you that actual outcomes and
results may differ materially from what is expressed, implied or
forecasted by our forward-looking statements and that any or all
of our forward-looking statements may turn out to be wrong.
Those statements can be affected by inaccurate assumptions and
by known or unknown risks and uncertainties, including the
following:
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Quarterly variations in our operating results;
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Adverse changes in economic and financial conditions, including
the recent volatility in the capital markets, and trends in
relevant markets;
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Delays, reductions in scope or cancellations of existing
projects, including as a result of capital constraints that may
impact our customers;
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Our ability to generate internal growth;
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Our dependence on fixed price contracts and the potential to
incur losses with respect to those contracts;
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Estimates relating to our use of percentage-of-completion
accounting;
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Our ability to effectively compete for new projects;
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Potential failure of the Energy Policy Act of 2005, renewable
energy initiatives or the ARRA to result in increased spending
on the electrical power transmission infrastructure;
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Cancellation provisions within our contracts and the risk that
contracts expire and are not renewed or are replaced on less
favorable terms;
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Our ability to attract skilled labor and retain key personnel
and qualified employees;
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The potential shortage of skilled employees;
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Our ability to realize our backlog;
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Estimates and assumptions in determining our financial results
and backlog;
|
57
|
|
|
|
|
Our ability to successfully identify, complete and integrate
acquisitions;
|
|
|
|
The adverse impact of goodwill, other intangible asset or
long-lived asset impairments;
|
|
|
|
The potential inability to realize a return on our capital
investments in our dark fiber infrastructure;
|
|
|
|
The inability of our customers to pay for services following a
bankruptcy or other financial difficulty;
|
|
|
|
Beliefs and assumptions about the collectability of receivables;
|
|
|
|
Liabilities for claims that are not insured;
|
|
|
|
The impact of our unionized workforce on our operations and on
our ability to complete future acquisitions;
|
|
|
|
Liabilities associated with union pension plans, including
underfunding liabilities;
|
|
|
|
Potential liabilities relating to occupational health and safety
matters;
|
|
|
|
Potential lack of available suppliers, subcontractors or
equipment manufacturers;
|
|
|
|
Our growth outpacing our infrastructure;
|
|
|
|
Unexpected costs or liabilities that may arise from lawsuits or
indemnity claims related to the services we perform;
|
|
|
|
Our ability to achieve anticipated synergies and other benefits
from our Merger with InfraSource or other acquisitions;
|
|
|
|
Our ability to obtain performance bonds;
|
|
|
|
Risks related to the implementation of an information technology
solution;
|
|
|
|
Our ability to continue to meet the requirements of the
Sarbanes-Oxley Act of 2002;
|
|
|
|
Potential exposure to environmental liabilities;
|
|
|
|
Risks associated with expanding our business in international
markets, including losses that may arise from currency
fluctuations;
|
|
|
|
Requirements relating to governmental regulation and changes
thereto, including state and federal telecommunication
regulations affecting our dark fiber licensing business and
additional regulation relating to existing or potential foreign
operations;
|
|
|
|
Rapid technological and structural changes that could reduce the
demand for the services we provide;
|
|
|
|
The cost of borrowing, availability of credit, debt covenant
compliance, interest rate fluctuations and other factors
affecting our financing, leasing and investment activities and
thereby our ability to grow our operations;
|
|
|
|
The potential conversion of our outstanding 3.75% Notes
into cash
and/or
common stock; and
|
|
|
|
The other risks and uncertainties as are described elsewhere
herein and under Item 1A. Risk Factors in this
report on
Form 10-K
and as may be detailed from time to time in our other public
filings with the SEC.
|
All of our forward-looking statements, whether written or oral,
are expressly qualified by these cautionary statements and any
other cautionary statements that may accompany such
forward-looking statements or that are otherwise included in
this report. In addition, we do not undertake and expressly
disclaim any obligation to update or revise any forward-looking
statements to reflect events or circumstances after the date of
this report or otherwise.
58
|
|
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. We are currently not exposed to any
significant market risks or interest rate risk from the use of
derivatives.
Credit Risk. We are subject to concentrations
of credit risk related to our cash and cash equivalents and
accounts receivable. Substantially all of our cash investments
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 this cash
in a diversified portfolio of what we believe to be high-quality
investments, which primarily include interest-bearing demand
deposits, money market mutual funds and investment grade
commercial paper with original maturities of three months or
less. Although we do not currently believe the principal amounts
of these investments are subject to any material risk of loss,
the recent volatility in the financial markets is likely to
significantly impact the interest income we receive from these
investments. In addition, as we grant credit under normal
payment terms, generally with collateral, we are subject to
potential credit risk related to our customers ability to
pay for services provided. This risk may be heightened as a
result of the current financial crisis and volatility of the
markets. However, we believe the concentration of credit risk
related to trade accounts receivable is limited because of the
diversity of our customers. We perform ongoing credit risk
assessments of our customers and financial institutions and
obtain collateral or other security from our customers when
appropriate.
Interest Rate. Our exposure to market rate
risk for changes in interest rates relates to our convertible
subordinated notes. The fair market value of our fixed rate
convertible subordinated notes is subject to interest rate risk
because of their fixed interest rate and market risk due to the
convertible feature of our convertible subordinated notes.
Generally, the fair market value of fixed interest rate debt
will increase as interest rates fall and decrease as interest
rates rise. The fair market value of our convertible
subordinated notes will also increase as the market price of our
stock increases and decrease as the market price falls. The
interest and market value changes affect the fair market value
of our convertible subordinated notes but do not impact their
carrying value. The fair market values of our convertible
subordinated notes are determined based upon quoted secondary
market prices on or before the dates specified were as follows
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
December 31, 2008
|
|
|
|
Principal
|
|
|
Fair Market
|
|
|
Principal
|
|
|
Fair Market
|
|
|
|
Outstanding
|
|
|
Value
|
|
|
Outstanding
|
|
|
Value
|
|
|
4.5% Notes
|
|
$
|
270.0
|
|
|
$
|
640.2
|
|
|
$
|
|
|
|
$
|
|
|
3.75% Notes
|
|
|
143.8
|
|
|
|
185.4
|
|
|
|
143.8
|
|
|
|
136.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
413.8
|
|
|
$
|
825.6
|
|
|
$
|
143.8
|
|
|
$
|
136.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a result of certain repurchases, redemptions and conversions,
which are described in further detail in Note 8 of our
consolidated financial statements, none of the 4.5% Notes
remained outstanding as of October 8, 2008. In addition,
the volatility of the credit markets is likely to significantly
impact our interest income related to our cash investments.
Currency Risk. The business of our Canadian
subsidiaries is subject to currency fluctuations. We do not
expect any such currency risk to be material.
59
|
|
ITEM 8.
|
Financial
Statements and Supplementary Data
|
INDEX TO
QUANTA SERVICES, INC.S CONSOLIDATED FINANCIAL
STATEMENTS
|
|
|
|
|
|
|
Page
|
|
|
|
|
61
|
|
|
|
|
62
|
|
|
|
|
63
|
|
|
|
|
64
|
|
|
|
|
65
|
|
|
|
|
66
|
|
|
|
|
67
|
|
60
REPORT OF
MANAGEMENT
Managements
Report on Financial Information and Procedures
The accompanying financial statements of Quanta Services, Inc.
and its subsidiaries were prepared by management. These
financial statements were prepared in accordance with accounting
principles generally accepted in the United States, applying
certain estimates and judgments as required.
Our management, including our Chief Executive Officer and Chief
Financial Officer, does not expect that our disclosure controls
or our internal control over financial reporting will prevent or
detect all errors and all fraud. A control system, no matter how
well designed and operated, can provide only reasonable, not
absolute, assurance that the control systems objectives
will be met. The design of a control system must reflect the
fact that there are resource constraints, and the benefits of
controls must be considered relative to their costs. Further,
because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that
misstatements due to error or fraud will not occur or that all
control issues and instances of fraud, if any, within the
company have been detected. These inherent limitations include
the realities that judgments in decision-making can be faulty
and that breakdowns can occur because of simple errors or
mistakes. Controls can also be circumvented by the individual
acts of some persons, by collusion of two or more people, or by
management override of the controls. The design of any system of
controls is based in part on certain assumptions about the
likelihood of future events, and there can be no assurance that
any design will succeed in achieving its stated goals under all
potential future conditions. Over time, controls may become
inadequate because of changes in conditions or deterioration in
the degree of compliance with policies or procedures.
Managements
Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting as defined in
Rule 13a-15(f)
under the Securities Exchange Act of 1934. Our internal control
over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial
reporting and the preparation of our consolidated financial
statements for external purposes in accordance with
U.S. generally accepted accounting principles. Internal
control over financial reporting includes those policies and
procedures that (i) pertain to the maintenance of records
that in reasonable detail accurately and fairly reflect the
transactions and dispositions of the assets of the company;
(ii) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial
statements in accordance with U.S. generally accepted
accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of
management and directors of the company; and (iii) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the
companys assets that could have a material effect on the
financial statements.
Under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief
Financial Officer, we have conducted an evaluation of the
effectiveness of our internal control over financial reporting
based upon the criteria established in Internal
Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway
Commission. Based on this evaluation, our management has
concluded that our internal control over financial reporting was
effective as of December 31, 2008 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, 2008
has been audited by PricewaterhouseCoopers LLP, an independent
registered public accounting firm, as stated in their report
which appears herein.
61
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Quanta Services,
Inc.:
In our opinion, the accompanying consolidated balance sheets and
the related consolidated statements of operations, of cash flows
and of stockholders equity, present fairly, in all
material respects, the financial position of Quanta Services,
Inc. and its subsidiaries at December 31, 2008 and 2007,
and the results of their operations and their cash flows for
each of the three years in the period ended December 31,
2008 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, 2008,
based on criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). The
Companys management is responsible for these financial
statements, for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness
of internal control over financial reporting, included in the
accompanying Managements Report on Internal Control Over
Financial Reporting. Our responsibility is to express opinions
on these financial statements and on the Companys internal
control over financial reporting based on our integrated audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are
free of material misstatement and whether effective internal
control over financial reporting was maintained in all material
respects. Our audits of the financial statements included
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. Our audit of internal control over financial
reporting included obtaining an understanding of internal
control over financial reporting, assessing the risk that a
material weakness exists, and testing and evaluating the design
and operating effectiveness of internal control based on the
assessed risk. Our audits also included performing such other
procedures as we considered necessary in the circumstances. We
believe that our audits provide a reasonable basis for our
opinions.
As discussed in Note 2 to the accompanying consolidated
financial statements, effective January 1, 2007, the
Company adopted Financial Accounting Standards Board (FASB)
Interpretation No. 48, Accounting for Uncertainty in
Income Taxes.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (i) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of
management and directors of the company; and (iii) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
PricewaterhouseCoopers LLP
Houston, Texas
March 2, 2009
62
QUANTA
SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
|
(In thousands, except share information)
|
|
|
ASSETS
|
Current Assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
407,081
|
|
|
$
|
437,901
|
|
Accounts receivable, net of allowances of $4,620 and $8,802
|
|
|
719,672
|
|
|
|
795,251
|
|
Costs and estimated earnings in excess of billings on
uncompleted contracts
|
|
|
72,424
|
|
|
|
54,379
|
|
Inventories
|
|
|
25,920
|
|
|
|
25,813
|
|
Prepaid expenses and other current assets
|
|
|
79,665
|
|
|
|
68,147
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
1,304,762
|
|
|
|
1,381,491
|
|
Property and equipment, net of accumulated depreciation of
$300,178 and $330,070
|
|
|
532,285
|
|
|
|
635,456
|
|
Other assets, net
|
|
|
42,992
|
|
|
|
34,023
|
|
Other intangible assets, net of accumulated amortization of
$20,915 and $57,215
|
|
|
152,695
|
|
|
|
140,717
|
|
Goodwill
|
|
|
1,355,098
|
|
|
|
1,363,100
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
3,387,832
|
|
|
$
|
3,554,787
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
Current maturities of long-term debt and notes payable
|
|
$
|
271,011
|
|
|
$
|
1,155
|
|
Accounts payable and accrued expenses
|
|
|
420,815
|
|
|
|
400,253
|
|
Billings in excess of costs and estimated earnings on
uncompleted contracts
|
|
|
65,603
|
|
|
|
50,390
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
757,429
|
|
|
|
451,798
|
|
Convertible subordinated notes
|
|
|
143,750
|
|
|
|
143,750
|
|
Deferred income taxes
|
|
|
101,416
|
|
|
|
83,422
|
|
Insurance and other non-current liabilities
|
|
|
200,094
|
|
|
|
217,851
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,202,689
|
|
|
|
896,821
|
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies
|
|
|
|
|
|
|
|
|
Stockholders Equity:
|
|
|
|
|
|
|
|
|
Common stock, $.00001 par value, 300,000,000 shares
authorized, 172,455,951 and 199,312,931 shares issued and
170,255,631 and 196,928,203 shares outstanding
|
|
|
2
|
|
|
|
2
|
|
Limited Vote Common Stock, $.00001 par value,
3,345,333 shares authorized, and 760,171 and
662,293 shares issued and outstanding
|
|
|
|
|
|
|
|
|
Additional paid-in capital
|
|
|
2,423,349
|
|
|
|
2,740,552
|
|
Accumulated deficit
|
|
|
(214,191
|
)
|
|
|
(47,450
|
)
|
Accumulated other comprehensive income
|
|
|
3,663
|
|
|
|
(2,956
|
)
|
Treasury stock, 2,200,320 and 2,389,034 common shares, at cost
|
|
|
(27,680
|
)
|
|
|
(32,182
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
2,185,143
|
|
|
|
2,657,966
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
3,387,832
|
|
|
$
|
3,554,787
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
63
QUANTA
SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
|
(In thousands, except per share information)
|
|
|
Revenues
|
|
$
|
2,109,632
|
|
|
$
|
2,656,036
|
|
|
$
|
3,780,213
|
|
Cost of services (including depreciation)
|
|
|
1,796,916
|
|
|
|
2,227,289
|
|
|
|
3,145,347
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
312,716
|
|
|
|
428,747
|
|
|
|
634,866
|
|
Selling, general and administrative expenses
|
|
|
181,478
|
|
|
|
240,508
|
|
|
|
309,399
|
|
Amortization of intangible assets
|
|
|
363
|
|
|
|
18,759
|
|
|
|
36,300
|
|
Goodwill impairment
|
|
|
56,812
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
74,063
|
|
|
|
169,480
|
|
|
|
289,167
|
|
Interest expense
|
|
|
(26,822
|
)
|
|
|
(21,515
|
)
|
|
|
(17,505
|
)
|
Interest income
|
|
|
13,924
|
|
|
|
19,977
|
|
|
|
9,765
|
|
Gain (loss) on early extinguishment of debt, net
|
|
|
1,598
|
|
|
|
(34
|
)
|
|
|
(2
|
)
|
Other income (expense), net
|
|
|
425
|
|
|
|
(546
|
)
|
|
|
342
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes
|
|
|
63,188
|
|
|
|
167,362
|
|
|
|
281,767
|
|
Provision for income taxes
|
|
|
46,955
|
|
|
|
34,222
|
|
|
|
115,026
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
16,233
|
|
|
|
133,140
|
|
|
|
166,741
|
|
Discontinued operation:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operation (net of income tax expense of
$688, $1,345 and none)
|
|
|
1,250
|
|
|
|
2,837
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
17,483
|
|
|
$
|
135,977
|
|
|
$
|
166,741
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
0.14
|
|
|
$
|
0.98
|
|
|
$
|
0.94
|
|
Income from discontinued operation
|
|
|
0.01
|
|
|
|
0.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
0.15
|
|
|
$
|
1.00
|
|
|
$
|
0.94
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average basic shares outstanding
|
|
|
117,027
|
|
|
|
135,793
|
|
|
|
176,790
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
0.14
|
|
|
$
|
0.87
|
|
|
$
|
0.88
|
|
Income from discontinued operation
|
|
|
0.01
|
|
|
|
0.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
0.15
|
|
|
$
|
0.89
|
|
|
$
|
0.88
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average diluted shares outstanding
|
|
|
117,863
|
|
|
|
167,260
|
|
|
|
202,363
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
64
QUANTA
SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Cash Flows from Operating Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
17,483
|
|
|
$
|
135,977
|
|
|
$
|
166,741
|
|
Adjustments to reconcile net income to net cash provided by
operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill impairment
|
|
|
56,812
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
49,404
|
|
|
|
55,900
|
|
|
|
77,654
|
|
Amortization of intangibles
|
|
|
363
|
|
|
|
18,759
|
|
|
|
36,300
|
|
Amortization of debt issuance costs
|
|
|
6,473
|
|
|
|
2,653
|
|
|
|
2,291
|
|
Amortization of deferred revenue
|
|
|
|
|
|
|
(2,932
|
)
|
|
|
(9,634
|
)
|
Loss (gain) on sale of property and equipment
|
|
|
(733
|
)
|
|
|
5,328
|
|
|
|
2,499
|
|
Gain on sale of discontinued operation
|
|
|
|
|
|
|
(2,348
|
)
|
|
|
|
|
Loss (gain) on early extinguishment of debt
|
|
|
(2,088
|
)
|
|
|
34
|
|
|
|
2
|
|
Provision for doubtful accounts
|
|
|
1,587
|
|
|
|
1,216
|
|
|
|
7,257
|
|
Provision for insurance receivable
|
|
|
|
|
|
|
|
|
|
|
3,375
|
|
Deferred income tax provision (benefit)
|
|
|
(1,666
|
)
|
|
|
5,597
|
|
|
|
7,909
|
|
Non-cash stock-based compensation
|
|
|
6,038
|
|
|
|
9,362
|
|
|
|
16,692
|
|
Tax impact of stock-based equity awards
|
|
|
(3,875
|
)
|
|
|
(6,275
|
)
|
|
|
(2,266
|
)
|
Changes in operating assets and liabilities, net of non-cash
transactions
|
|
|
|
|
|
|
|
|
|
|
|
|
(Increase) decrease in
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts and notes receivable
|
|
|
(70,350
|
)
|
|
|
(1,037
|
)
|
|
|
(77,919
|
)
|
Costs and estimated earnings in excess of billings on
uncompleted contracts
|
|
|
1,940
|
|
|
|
(10,212
|
)
|
|
|
23,473
|
|
Inventories
|
|
|
(3,051
|
)
|
|
|
6,715
|
|
|
|
309
|
|
Prepaid expenses and other current assets
|
|
|
(739
|
)
|
|
|
(15,517
|
)
|
|
|
77
|
|
Increase (decrease) in
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses and other non-current
liabilities
|
|
|
48,218
|
|
|
|
(14,879
|
)
|
|
|
(840
|
)
|
Billings in excess of costs and estimated earnings on
uncompleted contracts
|
|
|
14,706
|
|
|
|
24,500
|
|
|
|
(15,177
|
)
|
Other, net
|
|
|
118
|
|
|
|
6,399
|
|
|
|
3,757
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
120,640
|
|
|
|
219,240
|
|
|
|
242,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sale of property and equipment
|
|
|
9,972
|
|
|
|
27,498
|
|
|
|
15,407
|
|
Additions of property and equipment
|
|
|
(48,452
|
)
|
|
|
(127,931
|
)
|
|
|
(185,634
|
)
|
Cash paid for acquisitions, net of cash acquired
|
|
|
|
|
|
|
(20,137
|
)
|
|
|
(34,547
|
)
|
Cash paid for developed technology
|
|
|
|
|
|
|
|
|
|
|
(14,573
|
)
|
Purchases of short-term investments
|
|
|
511,655
|
|
|
|
309,055
|
|
|
|
|
|
Proceeds from the sale of short-term investments
|
|
|
(511,655
|
)
|
|
|
(309,055
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(38,480
|
)
|
|
|
(120,570
|
)
|
|
|
(219,347
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments under credit facility
|
|
|
(7,500
|
)
|
|
|
|
|
|
|
|
|
Proceeds from other long-term debt
|
|
|
4,478
|
|
|
|
6,532
|
|
|
|
1,791
|
|
Payments on other long-term debt
|
|
|
(5,249
|
)
|
|
|
(67,865
|
)
|
|
|
(1,651
|
)
|
Proceeds from convertible subordinated notes
|
|
|
143,750
|
|
|
|
|
|
|
|
|
|
Payments of convertible subordinated notes
|
|
|
(137,139
|
)
|
|
|
(33,294
|
)
|
|
|
(156
|
)
|
Debt issuance and amendment costs
|
|
|
(5,966
|
)
|
|
|
|
|
|
|
|
|
Issuances of stock
|
|
|
|
|
|
|
(875
|
)
|
|
|
|
|
Tax impact of stock-based equity awards
|
|
|
3,875
|
|
|
|
6,275
|
|
|
|
2,266
|
|
Exercise of stock options
|
|
|
1,011
|
|
|
|
10,288
|
|
|
|
5,987
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
(2,740
|
)
|
|
|
(78,939
|
)
|
|
|
8,237
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of foreign exchange rate changes on cash and cash
equivalents
|
|
|
|
|
|
|
3,663
|
|
|
|
(570
|
)
|
Net increase in cash and cash equivalents
|
|
|
79,420
|
|
|
|
23,394
|
|
|
|
30,820
|
|
Cash and cash equivalents, beginning of year
|
|
|
304,267
|
|
|
|
383,687
|
|
|
|
407,081
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year
|
|
$
|
383,687
|
|
|
$
|
407,081
|
|
|
$
|
437,901
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash (paid) received during the year for
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
(22,686
|
)
|
|
$
|
(19,467
|
)
|
|
$
|
(18,248
|
)
|
Income tax paid
|
|
|
(25,667
|
)
|
|
|
(61,052
|
)
|
|
|
(81,522
|
)
|
Income tax refunds
|
|
|
2,226
|
|
|
|
1,704
|
|
|
|
4,526
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
65
QUANTA
SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Limited Vote
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
Common Stock
|
|
|
Common Stock
|
|
|
Paid-In
|
|
|
Deferred
|
|
|
Comprehensive
|
|
|
Accumulated
|
|
|
Treasury
|
|
|
Stockholders
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Compensation
|
|
|
Income
|
|
|
Deficit
|
|
|
Stock
|
|
|
Equity
|
|
|
|
(In thousands, except share information)
|
|
|
Balance, December 31, 2005
|
|
|
117,153,038
|
|
|
$
|
1
|
|
|
|
1,011,780
|
|
|
$
|
|
|
|
$
|
1,096,794
|
|
|
$
|
(6,448
|
)
|
|
$
|
|
|
|
$
|
(369,122
|
)
|
|
$
|
(17,487
|
)
|
|
$
|
703,738
|
|
Conversion of Limited Vote Common Stock to common stock
|
|
|
95,975
|
|
|
|
|
|
|
|
(95,975
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adoption of SFAS 123(R)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,448
|
)
|
|
|
6,448
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock activity
|
|
|
235,040
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,038
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,123
|
)
|
|
|
915
|
|
Stock options exercised
|
|
|
134,077
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,011
|
|
Income tax benefit from long-term incentive plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,875
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,875
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,061
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,061
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,483
|
|
|
|
|
|
|
|
17,483
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2006
|
|
|
117,618,130
|
|
|
|
1
|
|
|
|
915,805
|
|
|
|
|
|
|
|
1,103,331
|
|
|
|
|
|
|
|
|
|
|
|
(351,639
|
)
|
|
|
(22,610
|
)
|
|
|
729,083
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,663
|
|
|
|
|
|
|
|
|
|
|
|
3,663
|
|
Adoption of FIN No. 48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,471
|
|
|
|
|
|
|
|
1,471
|
|
InfraSource acquisition
|
|
|
49,975,553
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
1,271,574
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,271,575
|
|
Other acquisitions
|
|
|
1,085,452
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,380
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,380
|
|
Conversion of Limited Vote Common Stock to common stock
|
|
|
155,634
|
|
|
|
|
|
|
|
(155,634
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock activity
|
|
|
348,775
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,362
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,070
|
)
|
|
|
4,292
|
|
Stock options exercised
|
|
|
1,072,087
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,288
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,288
|
|
Income tax benefit from long-term incentive plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,275
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,275
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
139
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
139
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
135,977
|
|
|
|
|
|
|
|
135,977
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2007
|
|
|
170,255,631
|
|
|
|
2
|
|
|
|
760,171
|
|
|
|
|
|
|
|
2,423,349
|
|
|
|
|
|
|
|
3,663
|
|
|
|
(214,191
|
)
|
|
|
(27,680
|
)
|
|
|
2,185,143
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,619
|
)
|
|
|
|
|
|
|
|
|
|
|
(6,619
|
)
|
Acquisitions
|
|
|
1,072,196
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,436
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,436
|
|
Conversion of 4.5% Convertible Subordinated Notes
|
|
|
24,229,781
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
269,822
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
269,822
|
|
Conversion of Limited Vote Common Stock to common stock
|
|
|
11,790
|
|
|
|
|
|
|
|
(11,790
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exchange of Limited Vote Common Stock for common stock
|
|
|
90,394
|
|
|
|
|
|
|
|
(86,088
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock activity
|
|
|
568,599
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,692
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,502
|
)
|
|
|
12,190
|
|
Stock options exercised
|
|
|
699,812
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,987
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,987
|
|
Income tax benefit from long-term incentive plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,266
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,266
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
166,741
|
|
|
|
|
|
|
|
166,741
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2008
|
|
|
196,928,203
|
|
|
$
|
2
|
|
|
|
662,293
|
|
|
$
|
|
|
|
$
|
2,740,552
|
|
|
$
|
|
|
|
$
|
(2,956
|
)
|
|
$
|
(47,450
|
)
|
|
$
|
(32,182
|
)
|
|
$
|
2,657,966
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
66
QUANTA
SERVICES, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
|
|
1.
|
BUSINESS
AND ORGANIZATION:
|
Quanta Services, Inc. (Quanta) is a leading national provider of
specialized contracting services. Beginning January 1,
2008, Quanta began reporting its results under two business
segments. The infrastructure services (Infrastructure Services)
segment provides specialized contracting services, offering
end-to-end network solutions to the electric power, gas,
telecommunications and cable television industries, including
the design, installation, repair and maintenance of network
infrastructure, as well as certain ancillary services.
Additionally, the dark fiber (Dark Fiber) segment designs,
procures, constructs and maintains
fiber-optic
telecommunications infrastructure in select markets and licenses
the right to use
point-to-point
fiber-optic
telecommunications facilities to its customers.
On August 30, 2007, Quanta acquired, through a merger
transaction (the Merger), all of the outstanding common stock of
InfraSource Services, Inc. (InfraSource). For accounting
purposes, the transaction was effective as of August 31,
2007, and results of InfraSources operations have been
included in the consolidated financial statements subsequent to
August 31, 2007. Accordingly, the consolidated financial
statements for the year ended December 31, 2007 only
include results from InfraSource for four months. Similar to
Quanta, InfraSource provided specialized infrastructure
contracting services to the electric power, gas and
telecommunications industries primarily in the United States.
The acquisition enhanced and expanded Quantas capabilities
in its existing service areas and added the Dark Fiber segment.
During 2007 and 2008, Quanta made six other acquisitions of
businesses which have been reflected in Quantas
consolidated financial statements as of their respective
acquisition dates. These acquisitions allow Quanta to further
expand its capabilities and scope of services in various
locations around the United States.
On August 31, 2007, Quanta sold the operating assets
associated with the business of Environmental Professional
Associates, Limited (EPA), a Quanta subsidiary. Accordingly,
Quanta has presented EPAs results of operations for the
2006 and 2007 periods as a discontinued operation in the
accompanying consolidated statements of operations.
In the course of its operations, Quanta is subject to certain
risk factors including, but not limited to, risks related to
significant fluctuations in quarterly results; economic
downturns, including the recent economic downturn and the
financial and credit crisis; project delays or cancellations;
internal growth and operating strategies; dependence on fixed
price contracts; use of percentage-of-completion accounting;
competition; impact of renewable energy initiatives, the Energy
Policy Act of 2005 and the American Recovery and Reinvestment
Act of 2009; replacement of canceled or completed contracts;
availability of qualified employees; failure to realize backlog;
use of estimates and assumptions in determining financial
results and backlog; identification, completion and integration
of acquisitions; recoverability of goodwill; capital
expenditures in dark fiber licensing; collectability of
receivables; potential self-insured liabilities; unionized
workforce; liabilities associated with multi-employer pension
plans; occupational health and safety matters; lack of available
suppliers, subcontractors or equipment manufacturers; growth
outpacing infrastructure; lawsuits and indemnity claims related
to projects; synergies related to the integration of
InfraSource; ability to provide surety bonds; dependence on key
personnel; implementation of an information technology solution;
the requirements of the Sarbanes-Oxley Act of 2002; potential
exposure to environmental liabilities; operations in
international markets; work in the government arena; rapid
technological and structural changes in the industries Quanta
serves; access to capital; convertibility of Quantas
convertible subordinated notes; and provisions in corporate
governing documents that could make an acquisition of Quanta
more difficult.
67
|
|
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES:
|
Principles
of Consolidation
The consolidated financial statements of Quanta include the
accounts of Quanta and its wholly owned subsidiaries. All
significant intercompany accounts and transactions have been
eliminated in consolidation. Unless the context requires
otherwise, references to Quanta include Quanta and its
consolidated subsidiaries.
Reclassifications
Certain reclassifications have been made in prior years
financial statements to conform to classifications used in the
current year.
Use of
Estimates and Assumptions
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States
requires the use of estimates and assumptions by management in
determining the reported amounts of assets and liabilities,
disclosures of contingent assets and liabilities known to exist
as of the date the financial statements are published and the
reported amount of revenues and expenses recognized during the
periods presented. Quanta reviews all significant estimates
affecting its consolidated financial statements on a recurring
basis and records the effect of any necessary adjustments prior
to their publication. Judgments and estimates are based on
Quantas beliefs and assumptions derived from information
available at the time such judgments and estimates are made.
Uncertainties with respect to such estimates and assumptions are
inherent in the preparation of financial statements. Estimates
are primarily used in Quantas assessment of the allowance
for doubtful accounts, valuation of inventory, useful lives of
assets, fair value assumptions in analyzing goodwill, other
intangibles and long-lived asset impairments, purchase price
allocations, self-insured claims liabilities, revenue
recognition for construction contracts and dark fiber licensing,
share-based compensation, provision for income taxes and
calculation of uncertain tax positions.
Cash
and Cash Equivalents
Quanta had cash and cash equivalents of $407.1 million and
$437.9 million as of December 31, 2007 and 2008. Cash
consisting of interest-bearing demand deposits is carried at
cost, which approximates fair value. Quanta considers all highly
liquid investments purchased with an original maturity of three
months or less to be cash equivalents, which are carried at fair
value. At December 31, 2008, cash equivalents were
$399.1 million which consisted primarily of money market
mutual funds and investment grade commercial paper. Cash
equivalents falls within the scope of Statement of Financial
Accounting Standards (SFAS) No. 157, Fair Value
Measurements. See the Fair Value of Financial
Instruments disclosures below regarding cash equivalents
that are within the scope of this standard. As of
December 31, 2007 and 2008, cash held in domestic bank
accounts was approximately $405.4 million and
$433.7 million and cash held in foreign bank accounts was
approximately $1.7 million and $4.2 million.
Short-Term
Investments
Quanta held no short-term investments as of December 31,
2007 or 2008; however, during 2006 and the first quarter of
2007, Quanta invested from time to time in variable rate demand
notes (VRDNs), which were classified as short-term investments,
available for sale when held. The income from VRDNs was
tax-exempt to Quanta.
Current
and Long-Term Accounts and Notes Receivable and Allowance for
Doubtful Accounts
Quanta provides an allowance for doubtful accounts when
collection of an account or note receivable is considered
doubtful, and receivables are written off against the allowance
when deemed uncollectible. Inherent in the assessment of the
allowance for doubtful accounts are certain judgments and
estimates including, among others, the customers access to
capital, the customers willingness or ability to pay,
general economic and market conditions and the ongoing
relationship with the customer. Under certain circumstances such
as
68
foreclosures or negotiated settlements, Quanta may take title to
the underlying assets in lieu of cash in settlement of
receivables. Material changes in Quantas customers
business or cash flows, which may be further impacted by the
current financial crisis and volatility of the markets, could
affect its ability to collect amounts due from them. As of
December 31, 2008, Quanta had total allowances for doubtful
accounts of approximately $8.8 million. Should customers
experience financial difficulties or file for bankruptcy, or
should anticipated recoveries relating to receivables in
existing bankruptcies or other workout situations fail to
materialize, Quanta could experience reduced cash flows and
losses in excess of current allowances provided.
The balances billed but not paid by customers pursuant to
retainage provisions in certain contracts will be due upon
completion of the contracts and acceptance by the customer.
Based on Quantas experience with similar contracts in
recent years, the majority of the retainage balances at each
balance sheet date will be collected within the subsequent
fiscal year. Current retainage balances as of December 31,
2007 and 2008 were approximately $60.2 million and
$101.1 million and are included in accounts receivable.
Retainage balances with settlement dates beyond the next twelve
months are included in other assets, net and as of
December 31, 2007 and 2008 were $2.1 million and
$6.0 million.
Within accounts receivable, Quanta recognizes unbilled
receivables in circumstances such as when: revenues have been
earned and recorded but the amount cannot be billed under the
terms of the contract until a later date; costs have been
incurred but are yet to be billed under cost-reimbursement type
contracts; or amounts arise from routine lags in billing (for
example, work completed one month but not billed until the next
month). These balances do not include revenues accrued for work
performed under fixed-price contracts as these amounts are
recorded as costs and estimated earnings in excess of billings
on uncompleted contracts. At December 31, 2007 and 2008,
the balances of unbilled receivables included in accounts
receivable were approximately $132.3 million and
$122.9 million.
As of December 31, 2007, other assets, net included
accounts and notes receivable due from a customer relating to
the construction of independent power plants. During 2006, the
underlying assets which had secured these notes receivable were
sold pursuant to liquidation proceedings and the net proceeds
were being held by a trustee. Quanta recorded allowances for a
significant portion of these notes receivable in prior periods.
As of December 31, 2007, the collection of amounts owed to
Quanta were subject to further legal proceedings; however, in
March 2008, the parties reached a settlement resulting in the
payment of the net receivable amount and the release of any
future claims against Quanta. The remaining note receivable
balance was written off against the related allowance of
approximately $43.0 million in March 2008, without any
significant impact to Quantas results of operations for
the year ended December 31, 2008.
Inventories
Inventories consist of parts and supplies held for use in the
ordinary course of business and materials not yet installed and
are valued by Quanta at the lower of cost or market as
determined by using the
first-in,
first-out (FIFO) or by specific identification methods.
Property
and Equipment
Property and equipment are stated at cost, and depreciation is
computed using the straight-line method, net of estimated
salvage values, over the estimated useful lives of the assets.
Leasehold improvements are capitalized and amortized over the
lesser of the life of the lease or the estimated useful life of
the asset. Depreciation and amortization expense related to
property and equipment was approximately $49.4 million,
$55.9 million and $77.7 million for the years ended
December 31, 2006, 2007 and 2008, respectively.
Expenditures for repairs and maintenance are charged to expense
when incurred. Expenditures for major renewals and betterments,
which extend the useful lives of existing equipment, are
capitalized and depreciated over the adjusted remaining useful
life of the assets. Upon retirement or disposition of property
and equipment, the cost and related accumulated depreciation are
removed from the accounts and any resulting gain or loss is
reflected in selling, general and administrative expenses.
69
Management reviews long-lived assets for impairment in
accordance with SFAS No. 144, Accounting for
Impairment or Disposal of Long-Lived Assets, whenever
events or changes in circumstances indicate that the carrying
amount may not be realizable. If an evaluation is required, fair
value would be determined by estimating the future undiscounted
cash flows associated with the asset and comparing it to the
assets carrying amount to determine if an impairment of
such asset is necessary. The effect of any impairment would be
to expense the difference between the fair value of such asset
and its carrying value in the period incurred.
Capitalized
Software
In accordance with Statement of Position (SOP)
98-1,
Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use, we capitalize costs associated
with internally developed
and/or
purchased software systems for new products and enhancements to
existing products that have reached the application development
stage and meet recoverability tests. Capitalized costs include
external direct costs of materials and services utilized in
developing or obtaining internal-use software, payroll and
payroll-related expenses for employees who are directly
associated with and devote time to the internal-use software
project and interest costs incurred, if material, while
developing internal-use software. Capitalization of such costs
begins when the preliminary project stage is complete and ceases
no later than the point at which the project is substantially
complete and ready for its intended purpose. Those capitalized
costs are amortized on a straight-line basis over the economic
useful life of the asset, beginning when the asset is ready for
its intended use. Capitalized costs are included in property and
equipment on the consolidated balance sheets.
Other
Assets, Net
Other assets, net consist primarily of debt issuance costs,
non-current inventory, refundable security deposits for leased
properties and insurance claims in excess of deductibles that
are due from Quantas insurers.
Debt
Issuance Costs
As of December 31, 2007 and 2008, capitalized debt issuance
costs related to Quantas credit facility and convertible
subordinated notes were included in other assets, net and are
being amortized into interest expense on a straight-line basis
over the terms of the respective agreements giving rise to the
debt issuance costs, which we believe approximated the effective
tax rate method. As of December 31, 2007 and 2008,
capitalized debt issuance costs were $15.8 million, with
accumulated amortization of $9.3 million and
$11.6 million. For the years ended December 31, 2006,
2007 and 2008, amortization expense was $3.2 million,
$2.7 million and $2.3 million, respectively.
Quanta incurred $4.0 million in debt issuance costs in the
second quarter of 2006 related to its issuance of its 3.75%
convertible subordinated notes (3.75% Notes). These costs
were capitalized and are being amortized over seven years until
April 30, 2013, the date of the note holders first
put option. During the second quarter of 2006, Quanta also
capitalized $2.0 million in connection with the amendment
and restatement of its credit facility. Upon the amendment and
restatement of Quantas credit facility in 2006, the
obligations under the prior facility were terminated and related
unamortized debt issuance costs in the amount of approximately
$2.6 million were expensed in 2006 and included in interest
expense. In addition, during the second quarter of 2006, Quanta
repurchased a portion of its 4.0% convertible subordinated notes
(4.0% Notes), and as a result, Quanta expensed
$0.7 million in unamortized debt issuance costs as interest
expense. In the third quarter of 2007, Quanta incurred
$0.9 million in costs associated with certain amendments to
the credit facility. These costs were capitalized and, along
with costs incurred in connection with the amendment and
restatement of the credit facility in the second quarter of
2006, are being amortized until September 19, 2012, the
amended maturity date.
Goodwill
and Other Intangibles
In accordance with SFAS No. 142, Goodwill and
Other Intangible Assets, goodwill is subject to an annual
assessment for impairment using a two-step fair value-based test
with the first step performed annually
70
at year-end, or more frequently if events or circumstances exist
which indicate that goodwill may be impaired. For instance, a
decrease in market capitalization below book value, significant
change in business climate or loss of a significant customer,
among other things, may trigger the need for interim impairment
testing. The first step involves comparing the fair value of
each of Quantas reporting units with its carrying value,
including goodwill. Quanta determines fair value using a
weighted combination of the discounted cash flow, market
multiple and market capitalization valuation approaches with
heavier weighting on the discounted cash flow method, as in
managements opinion, this method currently results in the
most accurate calculation of a reporting units fair value.
Significant estimates used in the above methodologies include
estimates of future cash flows, future short-term and long-term
growth rates, weighted average cost of capital and estimates of
market multiples for each of the reporting units. If the
carrying amount of the reporting unit exceeds its fair value,
the second step is performed. The second step compares the
carrying amount of the reporting units goodwill to the
calculated fair value of the goodwill. If the calculated fair
value of goodwill is less than the carrying amount, an
impairment loss would be recorded as a reduction to goodwill
with a corresponding charge to operating expense.
SFAS No. 142 does not allow increases in the carrying
value of reporting units that may result from Quantas
impairment test, therefore Quanta may record goodwill
impairments in the future, even when the aggregate fair value of
Quantas reporting units and Quanta as a whole may increase.
Through December 31, 2008, Quantas management
followed the guidance outlined in SFAS No. 141,
Business Combinations, to identify the existence of
identifiable intangible assets. Quantas intangible assets
include customer relationships, backlog, non-compete agreements
and patented rights and developed technology. The value of
customer relationships is estimated using the
value-in-use
concept utilizing the income approach, specifically the excess
earnings method. The excess earnings analysis consists of
discounting to present value the projected cash flows
attributable to the customer relationships, with consideration
given to customer contract renewals, the importance or lack
thereof of existing customer relationships to Quantas
business plan, income taxes and required rates of return. Quanta
values backlog based upon the contractual nature of the backlog
within each service line, using the income approach to discount
back to present value the cash flows attributable to the backlog.
Quanta amortizes intangible assets based upon the estimated
consumption of the economic benefits of each intangible asset or
on a straight-line basis if the pattern of economic benefits
consumption cannot be reliably estimated. Intangible assets
subject to amortization are reviewed for impairment in
accordance with SFAS No. 144 and are tested for
recoverability whenever events or changes in circumstances
indicate that the carrying amount may not be recoverable. An
impairment loss must be recognized if the carrying amount of an
intangible asset is not recoverable and its carrying amount
exceeds its fair value.
Revenue
Recognition
Infrastructure Services Quanta designs,
installs and maintains networks for the electric power, gas,
telecommunications and cable television industries, as well as
provides various ancillary services to commercial, industrial
and governmental entities. These services may be provided
pursuant to master service agreements, repair and maintenance
contracts and fixed price and non-fixed price installation
contracts. Pricing under these contracts may be competitive unit
price, cost-plus/hourly (or time and materials basis) or fixed
price (or lump sum basis), and the final terms and prices of
these contracts are frequently negotiated with the customer.
Under unit-based contracts, the utilization of an output-based
measurement is appropriate for revenue recognition. Under these
contracts, Quanta recognizes revenue when units are completed
based on pricing established between Quanta and the customer for
each unit of delivery, which best reflects the pattern in which
the obligation to the customer is fulfilled. Under
cost-plus/hourly and time and materials type contracts, Quanta
recognizes revenue on an input-basis, as labor hours are
incurred and services are performed.
Revenues from fixed price contracts are recognized using the
percentage-of-completion method, measured by the percentage of
costs incurred to date to total estimated costs for each
contract. These contracts provide for a fixed amount of revenues
for the entire project. Such contracts provide that the customer
accept completion of progress to date and compensate Quanta for
services rendered, measured in terms of units installed, hours
expended or some other measure of progress. Contract costs
include all direct material, labor
71
and subcontract costs and those indirect costs related to
contract performance, such as indirect labor, supplies, tools,
repairs and depreciation costs. Much of the materials associated
with Quantas work are owner-furnished and are therefore
not included in contract revenues and costs. The cost estimation
process is based on the professional knowledge and experience of
Quantas engineers, project managers and financial
professionals. Changes in job performance, job conditions and
final contract settlements are factors that influence
managements assessment of the total estimated costs to
complete those contracts and therefore, Quantas profit
recognition. Changes in these factors may result in revisions to
costs and income, and their effects are recognized in the period
in which the revisions are determined. Provisions for the total
estimated losses on uncompleted contracts are made in the period
in which such losses are determined to be probable and the
amount can be reasonably estimated. At December 31, 2008,
approximately $35.7 million had been included as contract
price adjustments from change orders and/or claims on certain
contracts which were in the process of being negotiated in the
normal course of business.
Quanta may incur costs related 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 a cost of contract
performance in the period incurred if it is not probable that
the costs will be recovered or will recognize revenue if it is
probable that the contract price will be adjusted and can be
reliably estimated.
The current asset Costs and estimated earnings in excess
of billings on uncompleted contracts represents revenues
recognized in excess of amounts billed for fixed price
contracts. The current liability Billings in excess of
costs and estimated earnings on uncompleted contracts
represents billings in excess of revenues recognized for fixed
price contracts.
Dark Fiber Quanta has fiber-optic facility
licensing agreements with various customers, pursuant to which
it recognizes revenues, including any initial fees or advance
billings, ratably over the expected length of the agreements,
including probable renewal periods. As of December 31, 2007
and December 31, 2008, initial fees and advanced billings
on these licensing agreements not yet recorded in revenue were
$23.2 million and $34.6 million and are recognized as
deferred revenue, with $15.6 million and $25.1 million
considered to be long-term and included in other non-current
liabilities.
Dark
Fiber Licensing
The Dark Fiber segment constructs and licenses the right to use
fiber-optic telecommunications facilities to its customers
pursuant to licensing agreements, typically with terms from five
to twenty-five years, inclusive of certain renewal options.
Under those agreements, customers are provided the right to use
a portion of the capacity of a fiber-optic facility, with the
facility owned and maintained by Quanta. Minimum future
licensing revenues expected to be recognized by Quanta pursuant
to these agreements at December 31, 2008 are as follows (in
thousands):
|
|
|
|
|
|
|
Minimum
|
|
|
|
Future
|
|
|
|
Licensing
|
|
|
|
Revenues
|
|
|
Year Ending December 31
|
|
|
|
|
2009
|
|
$
|
41,856
|
|
2010
|
|
|
36,261
|
|
2011
|
|
|
30,652
|
|
2012
|
|
|
23,536
|
|
2013
|
|
|
14,294
|
|
Thereafter
|
|
|
52,608
|
|
|
|
|
|
|
Fixed non-cancelable minimum licensing revenues
|
|
$
|
199,207
|
|
|
|
|
|
|
72
Income
Taxes
Quanta follows the liability method of accounting for income
taxes in accordance with SFAS No. 109,
Accounting for Income Taxes. Under this method,
deferred tax assets and liabilities are recorded for future tax
consequences of temporary differences between the financial
reporting and tax bases of assets and liabilities, and are
measured using the enacted tax rates and laws that are expected
to be in effect when the underlying assets or liabilities are
recovered or settled.
Quanta regularly evaluates valuation allowances established for
deferred tax assets for which future realization is uncertain.
The estimation of required valuation allowances includes
estimates of future taxable income. The ultimate realization of
deferred tax assets is dependent upon the generation of future
taxable income during the periods in which those temporary
differences become deductible. Quanta considers projected future
taxable income and tax planning strategies in making this
assessment. If actual future taxable income differs from these
estimates, Quanta may not realize deferred tax assets to the
extent estimated.
On January 1, 2007, Quanta adopted Financial Accounting
Standards Board (FASB) Interpretation No. 48,
Accounting for Uncertainty in Income Taxes an
Interpretation of FASB Statement No. 109
(FIN No. 48). FIN No. 48 prescribes a
comprehensive model for how companies should recognize, measure,
present and disclose in their financial statements uncertain tax
positions taken or to be taken on a tax return. Quanta records
reserves for expected tax consequences of such uncertain
positions assuming that the taxing authorities have full
knowledge of the position and all relevant facts.
The 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 and statements of operations.
Collective
Bargaining Agreements
Certain of Quantas subsidiaries are party to collective
bargaining agreements with unions representing certain of their
employees. The agreements require such subsidiaries to pay
specified wages and provide certain benefits to their union
employees. These agreements expire at various times and have
typically been renegotiated and renewed on terms that are
similar to the ones contained in the expiring agreements.
Under certain collective bargaining agreements, the applicable
Quanta subsidiary is required to make contributions to
multi-employer pension plans. Were the subsidiary to cease
participation in one or more plans or the plans were to
otherwise become underfunded, a liability could potentially be
assessed related to any underfunding of these plans. The amount
of any such assessment, were such an assessment to be made in
the future, is not subject to reasonable estimation.
Fair
Value of Financial Instruments
The carrying values of accounts receivable, accounts payable and
accrued expenses approximate fair value due to the short-term
nature of those instruments. SFAS No. 157 requires
categorization of qualifying financial assets and liabilities
into three broad levels based on the priority of the inputs used
to determine the 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). All of
Quantas cash equivalents that are within the scope of
SFAS No. 157 are categorized as Level 1 assets at
December 31, 2008, as all values are based on unadjusted
quoted prices for identical assets in an active market that
Quanta has the ability to access.
Quantas convertible subordinated notes are not required to
be carried at fair value, although their fair market value must
be disclosed in accordance with SFAS No. 107,
Disclosures about Fair Value of Financial
Instruments. The fair market value of Quantas
convertible subordinated notes is subject to interest rate risk
because of their fixed interest rates and market risk due to the
convertible feature of the convertible subordinated notes.
Generally, the fair market value of fixed interest rate debt
will increase as interest rates fall and decrease as interest
rates rise. The fair market value of Quantas convertible
subordinated notes will also increase as the market price of our
stock increases and decrease as the market price falls. The
interest and
73
market value changes affect the fair market value of our
convertible subordinated notes but do not impact their carrying
value. The fair market values of Quantas convertible
subordinated notes are determined based upon quoted secondary
market prices on or before the dates specified and were as
follows (in millions):
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
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December 31, 2008
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|
|
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Principal
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Fair
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Principal
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|
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Fair
|
|
|
|
Outstanding
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|
|
Market Value
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Outstanding
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|
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Market Value
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4.5% Notes
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$
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270.0
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|
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$
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640.2
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$
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$
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3.75% Notes
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143.8
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185.4
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143.8
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136.6
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Total
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$
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413.8
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$
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825.6
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$
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143.8
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$
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136.6
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As a result of certain repurchases, redemptions and conversions,
which are described in further detail in Note 8, none of
the 4.5% convertible subordinated notes, remained outstanding as
of October 8, 2008.
Stock-Based
Compensation
Effective January 1, 2006, Quanta adopted
SFAS No. 123 (revised 2004), Share-Based
Payment (SFAS No. 123(R)), using the modified
prospective method of adoption, which requires recognition of
compensation expense for all stock-based compensation beginning
on the effective date. Under this method of accounting,
compensation cost for stock-based compensation awards is based
on the fair value of the awards granted, net of estimated
forfeitures, at the date of grant. Quanta calculates the fair
value of stock options using the Black-Sholes option pricing
model. The fair value of restricted stock awards is determined
based on the number of shares granted and the closing price of
Quantas common stock on the date of grant. Forfeitures are
estimated based upon historical activity. The resulting
compensation expense from discretionary awards is recognized on
a straight-line basis over the requisite service period, which
is generally the vesting period, while compensation expense from
performance based awards is recognized using the graded vesting
method over the requisite service period.
SFAS No. 123(R) requires the cash flows resulting from
the tax deductions in excess of the compensation cost recognized
during the applicable period to be classified as financing cash
flows.
Functional
Currency and Translation of Financial Statements
The U.S. dollar is the functional currency for the majority
of Quantas operations. However, Quanta has foreign
operating subsidiaries in Canada, for which Quanta considers the
Canadian dollar to be the functional currency. Generally, the
currency in which the subsidiary transacts a majority of its
transactions, including billings, financing, payroll and other
expenditures would be considered the functional currency, but
any dependency upon the parent company and the nature of the
subsidiarys operations must also be considered. In
preparing the consolidated financial statements, Quanta
translates the financial statements of the foreign operating
subsidiaries from their functional currency into United States
dollars. Statements of operations and cash flows are translated
at average monthly rates, while balance sheets are translated at
the month-end exchange rates. The translation of the balance
sheets at the month-end exchange rates results in translation
gains or losses. Under the relevant accounting guidance, the
treatment of these translation gains or losses is dependent upon
managements determination of the functional currency of
each subsidiary, involving consideration of all relevant
economic facts and circumstances affecting the subsidiary. If
transactions are denominated in the entitys functional
currency, the translation gains and losses are included as a
separate component of stockholders equity under the
caption Accumulated other comprehensive income. If
transactions are not denominated in the entitys functional
currency, the translation gains and losses are included within
the statement of operations.
Comprehensive
Income
Comprehensive income includes all changes in equity during a
period except those resulting from investments by and
distributions to stockholders. As described above, Quanta
records other comprehensive income for the foreign currency
translation adjustment related to its foreign operations.
74
Derivatives
Quanta accounts for derivative transactions in accordance with
SFAS No. 133, Accounting for Derivatives and
Hedging Activities, as amended by SFAS Nos. 137, 138
and 149 and as interpreted by various Derivatives Implementation
Group Issues. Quanta does not enter into derivative transactions
for speculative purposes; however, for accounting purposes,
certain transactions may not meet the criteria for hedge
accounting. Accordingly, changes in fair value related to
transactions that do not meet the criteria for hedge accounting
must be recorded in the consolidated results of operations. As
of December 31, 2008, Quanta was not a party to any
material derivative contracts.
Litigation
Costs
Quanta records reserves when it is probable that a liability has
been incurred and the amount of loss can be reasonably
estimated. Costs incurred for litigation are expensed as
incurred.
New
Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157.
SFAS No. 157 defines fair value, establishes methods
used to measure fair value and expands disclosure requirements
about fair value measurements. SFAS No. 157 is
effective for financial statements issued for fiscal years
beginning after November 15, 2007, and interim periods
within those fiscal periods, as it relates to financial assets
and liabilities, as well as for any non-financial assets and
liabilities that are carried at fair value.
SFAS No. 157 also requires certain tabular disclosures
related to the application of SFAS No. 144 and
SFAS No. 142. On November 14, 2007, the FASB
provided a one year deferral for the implementation of
SFAS No. 157 for non-financial assets and liabilities.
SFAS No. 157 excludes from its scope
SFAS No. 123(R) and its related interpretive
accounting pronouncements that address share-based payment
transactions. Quanta adopted SFAS No. 157 on
January 1, 2008 as it applies to its financial assets and
liabilities, and based on the November 14, 2007 deferral of
SFAS No. 157 for non-financial assets and liabilities,
Quanta will begin following the guidance of
SFAS No. 157 with respect to its non-financial assets
and liabilities in the quarter ended March 31, 2009. At
December 31, 2008, Quanta had no material financial assets
and liabilities on its balance sheet carried at fair value other
than certain cash and cash equivalents balances which are
disclosed above as Level 1 assets, and therefore the
partial adoption of SFAS No. 157 did not have a
material impact on Quantas consolidated financial
position, results of operations or cash flows. Additionally,
Quanta does not currently have any material non-financial assets
or liabilities that are carried at fair value on a recurring
basis; however, Quanta does have non-financial assets that are
evaluated against measures of fair value on a non-recurring or
as-needed basis, including goodwill, other intangibles and
long-term assets held and used. Based on the financial and
non-financial assets and liabilities on its balance sheet as of
December 31, 2008, Quanta does not expect the adoption of
SFAS No. 157 to have a material impact on its
consolidated financial position, results of operations or cash
flows. In October 2008, the FASB issued FASB Staff Position FSP
FAS 157-3
Determining the Fair Value of a Financial Asset When the
Market for That Asset Is Not Active. FSP
FAS 157-3
provides clarifying guidance with respect to the application of
SFAS No. 157 in determining the fair value of a
financial asset when the market for that asset is not active.
FSP
FAS 157-3
was effective upon its issuance. The application of FSP
FAS 157-3
did not have a material impact on Quantas consolidated
financial position, results of operations or cash flows as of
and for the year ended December 31, 2008 and is not
expected to have a material impact on Quantas consolidated
financial position, results of operations or cash flows in the
near-term.
On January 1, 2008, Quanta adopted SFAS No. 159,
The Fair Value Option for Financial Assets and Financial
Liabilities, including an amendment of FASB No. 115.
SFAS No. 159 permits entities to choose to measure at
fair value many financial instruments and certain other items
that were not previously required to be measured at fair value.
Unrealized gains and losses on items for which the fair value
option has been elected are reported in earnings.
SFAS No. 159 does not affect any existing accounting
literature that requires certain assets and liabilities to be
carried at fair value. The adoption of SFAS No. 159
did not have a material impact on Quantas consolidated
financial position, results of operations or cash flows as of
and for the year ended December 31, 2008 and is not
expected to have a material impact on Quantas consolidated
financial position, results of operations or cash flows in the
near-term.
75
On January 1, 2008, Quanta adopted EITF Issue
No. 06-11,
Accounting for Income Tax Benefits of Dividends on
Share-Based Payment Awards.
EITF 06-11
requires that a realized income tax benefit from dividends or
dividend equivalent units paid on unvested restricted shares and
restricted share units be reflected as an increase in
contributed surplus and as an addition to the companys
excess tax benefit pool, as defined under
SFAS No. 123(R). Because Quanta did not declare any
dividends during 2008 and does not currently anticipate
declaring dividends in the near future, the adoption of
EITF 06-11
did not have any impact during the year ended December 31,
2008, and is not expected to have a material impact in the near
term, on Quantas consolidated financial position, results
of operations or cash flows.
In December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in Consolidated Financial
Statements an amendment of ARB No. 51.
SFAS No. 160 addresses the accounting and reporting
framework for minority interests by a parent company.
SFAS No. 160 is to be effective for fiscal years, and
interim periods within those fiscal years, beginning on or after
December 15, 2008. Accordingly, Quanta adopted
SFAS No. 160 on January 1, 2009, with no material
impact to Quantas consolidated financial position, results
of operations or cash flows on the date of adoption. As Quanta
does not currently have any material subsidiaries with
non-controlling interests, the adoption of
SFAS No. 160 is not anticipated to have a material
impact on its consolidated financial position, results of
operations or cash flows in the near term.
In December 2007, the FASB issued SFAS No. 141(R),
Business Combinations. SFAS No. 141(R) is
effective for fiscal years beginning after December 15,
2008, and accordingly, Quanta adopted SFAS No. 141(R)
on January 1, 2009. Earlier application was prohibited, and
assets and liabilities that arose from business combinations
occurring prior to the adoption of SFAS No. 141(R)
cannot be adjusted upon the adoption of
SFAS No. 141(R). SFAS No. 141(R) requires
the acquiring entity in a business combination to recognize all
(and only) the assets acquired and liabilities assumed in the
business combination; establishes the acquisition date as the
measurement date to determine the fair value for all assets
acquired and liabilities assumed; and requires the acquirer to
disclose to investors and other users all of the information
needed to evaluate and understand the nature and financial
effect of the business combination. As it relates to recognizing
all (and only) the assets acquired and liabilities assumed in a
business combination, costs an acquirer expects but is not
obligated to incur in the future to exit an activity of an
acquiree or to terminate or relocate an acquirees
employees are not liabilities at the acquisition date but must
be expensed in accordance with other applicable generally
accepted accounting principles. If the initial accounting for a
business combination is incomplete by the end of the reporting
period in which the combination occurs, the acquirer must report
in its financial statements provisional amounts for the items
for which the accounting is incomplete. During the measurement
period, which must not exceed one year from the acquisition
date, the acquirer will retrospectively adjust the provisional
amounts recognized at the acquisition date to reflect new
information obtained about facts and circumstances that existed
as of the acquisition date that, if known, would have affected
the measurement of the amounts recognized as of that date. The
acquirer will be required to expense all acquisition-related
costs in the periods such costs are incurred, other than costs
to issue debt or equity securities in connection with the
acquisition. SFAS No. 141(R) is not expected to have a
material impact on Quantas consolidated financial
position, results of operations or cash flows at the date of
adoption, but Quanta expects that it may have a material impact
on its consolidated financial position, results of operations or
cash flows as a result of acquisitions in future periods.
In December 2007, the SEC published Staff Accounting Bulletin
(SAB) No. 110 (SAB 110). SAB 110 expresses the
views of the SEC staff regarding the use of a
simplified method, as discussed in
SAB No. 107 (SAB 107), in developing an estimate
of the expected term of plain vanilla share options
in accordance with SFAS No. 123(R). In particular, the
SEC staff indicated in SAB 107 that it will accept a
companys election to use the simplified method, regardless
of whether the company has sufficient information to make more
refined estimates of the expected term. However, the SEC staff
stated in SAB 107 that it would not expect a company to use
the simplified method for share option grants after
December 31, 2007. In SAB 110, the SEC staff states
that they would continue to accept, under certain circumstances,
the use of the simplified method beyond December 31, 2007.
Because Quanta did not issue any stock options in 2008,
SAB 110 had no impact on Quantas consolidated
financial position, results of operations or cash flows in 2008.
Furthermore, because Quanta currently does not anticipate
issuing stock options in the near future, SAB 110 is not
anticipated to
76
have a material impact on its consolidated financial position,
results of operations or cash flows in the near term.
In March 2008, the FASB issued SFAS No. 161,
Disclosures about Derivative Instruments and Hedging
Activities An Amendment of FASB No. 133.
SFAS No. 161 requires enhanced disclosures to enable
investors to better understand how a reporting entitys
derivative instruments and hedging activities impact the
entitys financial position, financial performance and cash
flows. SFAS No. 161 is effective for financial
statements issued after November 15, 2008, including
interim financial statements. Quanta adopted
SFAS No. 161 on January 1, 2009, with no material
impact on Quantas consolidated financial position, results
of operations or cash flows on the date of adoption. As Quanta
has not entered into any material derivatives or hedging
activities and does not currently anticipate doing so, the
adoption of SFAS No. 161 is not anticipated to have a
material impact on Quantas consolidated financial
position, results of operations, cash flows or disclosures.
In April 2008, the FASB issued
FSP 142-3,
Determination of the Useful Life of Intangible
Assets.
FSP 142-3
amends the factors that should be considered in developing
renewal or extension assumptions used to determine the useful
life of a recognized intangible asset under
SFAS No. 142. The intent of
FSP 142-3
is to improve the consistency between the useful life of an
intangible asset and the period of expected cash flows used to
measure its fair value and to enhance existing disclosure
requirements relating to intangible assets.
FSP 142-3
is effective for fiscal years beginning after December 15,
2008 and should be applied prospectively to intangible assets
acquired after the effective date. Early adoption is prohibited.
Accordingly, Quanta adopted
FSP 142-3
on January 1, 2009.
FSP 142-3
did not have an impact on Quantas consolidated financial
position, results of operations or cash flows at the date of
adoption, but Quanta expects it may have a material impact on
its consolidated financial position, results of operations or
cash flows in future periods.
In May 2008, the FASB issued SFAS No. 162, The
Hierarchy of Generally Accepted Accounting Principles.
SFAS No. 162 identifies the sources of accounting
principles and the framework for selecting the principles to be
used in the preparation of financial statements of
non-governmental entities that are presented in conformity with
generally accepted accounting principles in the United States.
SFAS No. 162 will be effective 60 days following
the SECs approval of the Public Company Accounting
Oversight Board amendments to AU Section 411, The
Meaning of Present Fairly in Conformity With Generally Accepted
Accounting Principles. Quanta will adopt
SFAS No. 162 once it is effective, but has not yet
determined the impact, if any, on its consolidated financial
statements.
In May 2008, the FASB issued FASB Staff Position (FSP) FSP APB
14-1,
Accounting for Convertible Debt Instruments That May Be
Settled in Cash upon Conversion (Including Partial Cash
Settlement). FSP APB
14-1
requires issuers of such instruments to separately account for
the liability and equity components in a manner that will
reflect the entitys non-convertible debt borrowing rate
and interest cost. The value of the equity component is
recognized with an offsetting discount to the face value of the
debt, which will be amortized as non-cash interest expense over
the expected life of the debt. This FSP is effective for
financial statements issued for fiscal years beginning after
December 15, 2008 and interim periods within those fiscal
years, and is applied retrospectively to all periods presented.
Accordingly, Quanta adopted FSP APB
14-1 on
January 1, 2009 and will apply FSP APB
14-1
retrospectively to all periods presented by recording a
cumulative effect of the change in accounting principle as of
January 1, 2007 for approximately $29.6 million and
non-cash interest expense of approximately $17.8 million
($11.3 million after-tax) and $14.5 million
($9.2 million after-tax) for the years ended
December 31, 2007 and 2008. In addition, Quanta will record
additional non-cash interest expense annually thereafter until
Quantas 3.75% convertible subordinated notes are
redeemable at the holders option in April 2013, with
approximately $4.3 million ($2.7 million after-tax) in
2009.
In June 2008, the FASB issued FSP
EITF 03-6-1,
Determining Whether Instruments Granted in Share-Based
Payment Transactions are Participating Securities. FSP
EITF 03-6-1 states
that unvested share-based payment awards that contain
non-forfeitable rights to dividends or dividend equivalents
(whether paid or unpaid) are participating securities under the
definition of SFAS No. 128, Earnings per
Share and should be included in the computation of both
basic and diluted earnings per share. FSP
EITF 03-6-1
is effective for
77
financial statements issued for fiscal years beginning after
December 15, 2008, and interim periods within those years.
Accordingly, Quanta adopted FSP
EITF 03-6-1
on January 1, 2009. All prior period earnings per share
data presented will be adjusted retrospectively to conform to
the provisions of FSP
EITF 03-6-1.
Early application was not permitted. All of Quantas
restricted stock grants have non-forfeitable rights to dividends
and are considered participating securities under FSP
EITF 03-06-1.
Through December 31, 2008, any unvested restricted stock
grants are accounted for under the treasury stock method. Under
this method unvested restricted common shares were not included
in the calculation of weighted average basic shares outstanding
and were included in the calculation of weighted average diluted
shares outstanding to the extent the grant price was less than
the average share price for the respective period. Beginning in
the first quarter of 2009, under FSP
EITF 03-6-1,
we will retrospectively restate earnings per share data for all
prior and future periods presented to include all participating
unvested restricted common shares in the calculation of weighted
average basic and dilutive shares outstanding. The impact of the
retrospective application of FSP
EITF 03-6-1
on earnings per share is anticipated to be immaterial.
In June 2008, the FASB ratified EITF Issue
07-5,
Determining Whether an Instrument (or Embedded Feature) Is
Indexed to an Entitys Own Stock
(EITF 07-5).
The primary objective of
EITF 07-5
is to provide guidance for determining whether an equity-linked
financial instrument or embedded feature within a contract is
indexed to an entitys own stock, which is a key criterion
of the scope exception to paragraph 11 (a) of
SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. This criterion is also
important in evaluating whether
EITF 00-19,
Accounting for Derivative Financial Instruments Indexed
to, and Potentially Settled in, a Companys Own Stock
applies to certain financial instruments that are not
derivatives under SFAS No. 133. An equity-linked
financial instrument or embedded feature within a contract that
is not considered indexed to an entitys own stock could be
required to be classified as an asset or liability and
marked-to-market through earnings.
EITF 07-5
specifies a two-step approach in evaluating whether an
equity-linked financial instrument or embedded feature within a
contract is indexed to its own stock. The first step involves
evaluating the instruments contingent exercise provisions,
if any, and the second step involves evaluating the
instruments settlement provisions.
EITF 07-5
is effective for financial statements issued for fiscal years
beginning after December 15, 2008, and must be applied to
all instruments outstanding as of the effective date.
Accordingly, Quanta adopted
EITF 07-5
on January 1, 2009, with no material impact to
Quantas consolidated financial position, results of
operations or cash flows on the date of adoption. Quanta also
does not anticipate the adoption of
EITF 07-5
to have a material impact on its future consolidated financial
position, results of operations and cash flows.
In November 2008, the FASB ratified EITF Issue
08-6,
Equity Method Investment Accounting Considerations
(EITF 08-06).
EITF 08-6
requires that the initial measurement of an equity method
investment be at cost in accordance with
SFAS No. 141(R). It also requires that an equity
method investor recognize other-than-temporary impairments of an
equity method investment in accordance with paragraph 19(h)
of APB Opinion 18. Additionally, an equity method investor shall
not separately test an investees underlying
indefinite-lived intangible assets for impairment, and an equity
method investor shall account for a share issuance by an
investee as if the investor had sold a proportionate share of
its investment. Any gain or loss to the investor resulting from
an investees share issuance shall be recognized in
earnings, subject to certain exceptions.
EITF 08-6
is effective on a prospective basis in fiscal years beginning on
or after December 15, 2008, and interim periods within
those fiscal years. Accordingly, Quanta adopted
EITF 08-6
on January 1, 2009, with no material impact to
Quantas consolidated financial position, results of
operations or cash flows on the date of adoption. Quanta does
not anticipate the adoption of
EITF 08-6
to have a material impact on its consolidated financial
position, results of operations and cash flows in the near term.
In November 2008, the FASB ratified EITF Issue
08-7,
Accounting for Defensible Intangible Assets.
EITF 08-7
requires that a defensible intangible asset should be accounted
for as a separate unit of account rather than as part of the
cost of an acquirers existing intangible assets and that
the useful life assigned to such defensible intangible asset
should reflect the entitys consumption of the expected
benefits related to the asset.
EITF 08-7
is effective on a prospective basis in fiscal years beginning on
or after December 15, 2008. Accordingly, Quanta adopted
EITF 08-7
on January 1, 2009, with no impact on its consolidated
financial position, results of operations or cash flows at the
date of adoption. Quanta anticipates that the adoption of
78
EITF 08-7
may have a material impact on its consolidated financial
position, results of operations or cash flows in the future when
it is applied to acquisitions which occur in future periods.
In November 2008, the FASB ratified EITF Issue
08-8,
Accounting for an Instrument (or an Embedded Feature) with
a Settlement Amount That is Based on the Stock of an
Entitys Consolidated Subsidiary.
EITF 08-8
provides guidance regarding the accounting for a financial
instrument or embedded feature when it is indexed to a
subsidiary considered to be a substantive entity in that such
instrument or feature is not precluded from being considered
indexed to the entitys own stock in the consolidated
financial statements of the parent. Additionally, an
equity-classified instrument or feature within the scope of
EITF 08-8
shall be presented as a component of noncontrolling interest in
the consolidated financial statements, whether the instrument
was entered into by the parent or subsidiary.
EITF 08-8
is effective in fiscal years beginning on or after
December 15, 2008. Accordingly, Quanta adopted
EITF 08-8
on January 1, 2009, with no impact to its consolidated
financial position on the date of adoption because it had no
such instruments or embedded features at December 31, 2008.
Quanta also does not expect the adoption of
EITF 08-8
to have a material impact on its consolidated financial
position, results of operations or cash flows in the near term.
2008
Acquisitions
In April 2008, Quanta acquired a telecommunication and cable
construction company for a purchase price of approximately
$38.6 million, consisting of approximately
$24.6 million in cash and 593,470 shares of Quanta
common stock valued at approximately $14.0 million at the
date of acquisition on a discounted basis as a result of the
restricted nature of the shares. The acquisition allows Quanta
to further expand its telecommunications and cable capabilities
in the southwestern United States. The estimated fair value of
the tangible assets was $20.9 million and consisted of
current assets of $14.2 million, property and equipment of
$6.6 million and other non-current assets of
$0.1 million. Net tangible assets acquired were
$14.4 million after considering the assumed liabilities of
$6.5 million. The excess of the purchase price over net
tangible assets acquired was recorded as goodwill in the amount
of $18.3 million and intangible assets in the amount of
$5.9 million, consisting of customer relationships, backlog
and a non-compete agreement. This allocation is based on the
significant use of estimates and on information that was
available to management at the time these condensed consolidated
financial statements were prepared.
In July 2008, Quanta acquired a helicopter-assisted transmission
line installation, maintenance and repair services company for a
purchase price of approximately $6.1 million, consisting of
approximately $3.8 million in cash and 82,862 shares
of Quanta common stock valued at approximately $2.3 million
at the date of acquisition on a discounted basis as a result of
the restricted nature of the shares. The acquisition allows
Quanta to augment its existing transmission resources and better
positions Quanta to meet the evolving needs of its customers,
especially in environmentally sensitive areas. The estimated
fair value of the tangible assets acquired was
$3.6 million, consisting of current assets of
$0.7 million and property and equipment of
$2.9 million. Net tangible assets acquired were
$3.5 million after considering the assumed liabilities of
$0.1 million. The excess of the purchase price over net
tangible assets acquired was recorded as goodwill in the amount
of $2.0 million and intangible assets in the amount of
$0.6 million, consisting of non-compete agreements. This
allocation is based on the significant use of estimates and on
information that was available to management at the time these
condensed consolidated financial statements were prepared.
In November 2008, Quanta acquired two affiliated professional
telecommunications engineering companies for a purchase price of
approximately $9.4 million, consisting of approximately
$6.2 million in cash and 281,896 shares of Quanta
common stock valued at approximately $3.2 million at the
date of acquisition on a discounted basis as a result of the
restricted nature of the shares. The acquisition allows Quanta
to further enhance its telecommunications and cable services in
the southeast region of the United States. The estimated fair
value of the tangible assets acquired was $2.7 million,
consisting of current assets of $2.2 million and property
and equipment of $0.5 million. Net tangible assets acquired
were $1.8 million after considering the assumed liabilities
of $0.9 million. The excess of the purchase price over net
tangible assets acquired was recorded as goodwill in the amount
of $4.3 million and intangible assets in the amount of
$3.3 million,
79
consisting of customer relationships, backlog and non-compete
agreements. This allocation is based on the significant use of
estimates and on information that was available to management at
the time these condensed consolidated financial statements were
prepared.
InfraSource
Acquisition
On August 30, 2007, Quanta acquired through the Merger all
of the outstanding common stock of InfraSource. In connection
with the acquisition, Quanta issued to InfraSources
stockholders 1.223 shares of Quanta common stock for each
outstanding share of InfraSource common stock, resulting in the
issuance of a total of 49,975,553 shares of common stock
for an aggregate purchase price of approximately
$1.3 billion. Quanta funded the repayment of approximately
$60.5 million of InfraSources outstanding borrowings
under its credit agreement through Quantas available cash
and cash on hand at InfraSource at the time of closing.
The following summarizes the allocation of the purchase price
and estimated transaction costs related to the InfraSource
acquisition. This allocation is based on the significant use of
estimates and on information that was available to management at
the time these condensed consolidated financial statements were
prepared.
The following table summarizes the estimated fair values (in
thousands):
|
|
|
|
|
|
|
August 31,
|
|
|
|
2007
|
|
|
Current assets
|
|
$
|
288,300
|
|
Non-current assets
|
|
|
9,277
|
|
Property and equipment
|
|
|
209,724
|
|
Intangible assets
|
|
|
158,840
|
|
Goodwill
|
|
|
960,974
|
|
|
|
|
|
|
Total assets acquired
|
|
|
1,627,115
|
|
|
|
|
|
|
Current liabilities
|
|
|
197,260
|
|
Long-term liabilities
|
|
|
155,336
|
|
|
|
|
|
|
Total liabilities assumed
|
|
|
352,596
|
|
|
|
|
|
|
Net assets acquired
|
|
$
|
1,274,519
|
|
|
|
|
|
|
Additionally, Quanta incurred approximately $12.1 million
of costs related to the Merger which have been included in
goodwill but are not in the above purchase price allocation.
The amounts assigned to various intangible assets at
August 31, 2007 related to the InfraSource acquisition are
customer relationships of $95.3 million, backlog of
$50.5 million and non-compete agreements of
$13.0 million. The customer relationships are being
amortized on a straight-line basis over 15.0 years, backlog
is being amortized based on the estimated pattern of the
consumption of the economic benefit over an original weighted
average period of 1.3 years and the non-compete agreements
are being amortized on a straight-line basis over the lives of
the underlying contracts over the original weighted average
period of 2.0 years.
Goodwill represents the excess of the purchase price over the
fair value of the acquired net assets. Quanta has and continues
to anticipate it will realize meaningful operational and cost
synergies, such as the elimination of duplicate corporate
functions, enhancement of the combined service offerings,
expansion of the geographic reach and resource base of the
combined company, improvement in the utilization of personnel
and fixed assets, as well as acceleration of revenue growth
through enhanced cross-selling and marketing opportunities.
Quanta believes these opportunities contribute to the
recognition of the substantial goodwill.
The following unaudited supplemental pro forma results of
operations have been provided for illustrative purposes only and
do not purport to be indicative of the actual results that would
have been achieved by the combined company for the periods
presented or that may be achieved by the combined company in the
future. Future results may vary significantly from the results
reflected in the following pro forma financial information
80
because of future events and transactions, as well as other
factors. The following pro forma results of operations have been
provided for the years ended December 31, 2006 and 2007 as
though the Merger had been completed as of the beginning of each
period presented (in thousands except per share amounts).
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2006
|
|
2007
|
|
Revenues
|
|
$
|
3,101,937
|
|
|
$
|
3,262,382
|
|
Gross profit
|
|
$
|
465,892
|
|
|
$
|
521,024
|
|
Selling, general and administrative expenses
|
|
$
|
280,632
|
|
|
$
|
321,883
|
|
Amortization of intangible assets
|
|
$
|
40,794
|
|
|
$
|
43,243
|
|
Income from continuing operations
|
|
$
|
26,070
|
|
|
$
|
126,871
|
|
Net income
|
|
$
|
27,595
|
|
|
$
|
129,683
|
|
Earnings per share from continuing operations:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.16
|
|
|
$
|
0.75
|
|
Fully diluted
|
|
$
|
0.16
|
|
|
$
|
0.70
|
|
The pro forma combined results of operations have been prepared
by adjusting the historical results of Quanta to include the
historical results of InfraSource, the reduction in interest
expense and interest income as a result of the repayment of
InfraSources outstanding indebtedness on the acquisition
date and certain reclassifications to conform InfraSources
presentation to Quantas accounting policies. The pro forma
results of operations do not include any cost savings that may
result from the Merger or any estimated costs that have been or
will be incurred by Quanta to integrate the businesses other
than those incurred in 2007 subsequent to the acquisition. As
noted above, the pro forma results of operations do not purport
to be indicative of the actual results that would have been
achieved by the combined company for the periods presented or
that may be achieved by the combined company in the future. For
example, Quanta recorded tax benefits in the first and third
quarters of 2007 of $15.3 million and $17.9 million
primarily due to a decrease in reserves for uncertain tax
positions resulting from the settlement of a multi-year IRS
audit. Additionally, InfraSource incurred $13.4 million in
merger-related costs prior to the Merger that have not been
eliminated in the 2007 pro forma results of operations above.
Items such as these, coupled with other risk factors that could
have affected the combined company and its operations, make it
difficult to use the pro forma results of operations to project
future results of operations.
Quanta completed three other acquisitions during the year ended
December 31, 2007 and three acquisitions during the year
ended December 31, 2008. The pro forma impact of these
other acquisitions has not been included due to the fact that
they are immaterial to Quantas financial statements
individually and in the aggregate.
Other
2007 Acquisitions
In January 2007, Quanta acquired a foundation drilling company
for a purchase price of $32.3 million, consisting of
$20.4 million in cash and 693,784 shares of Quanta
common stock valued at $11.9 million at the date of
acquisition on a discounted basis as a result of the restricted
nature of the shares. The acquisition allows Quanta to have
in-house capabilities to construct drilled pier foundations for
electric transmission towers and wireless telecommunication
towers. The estimated fair value of the tangible assets was
$11.3 million and consisted of current assets of
$7.3 million and property and equipment of
$4.0 million. Net tangible assets acquired were
$5.4 million after considering liabilities of
$5.9 million. The excess of the purchase price over net
tangible assets acquired was recorded as goodwill in the amount
of $20.7 million and intangible assets in the amount of
$6.2 million, consisting of customer relationships, backlog
and a non-compete agreement.
In May 2007, Quanta acquired a telecommunications company for a
purchase price of $4.5 million, consisting of
$3.0 million in cash and 54,560 shares of Quanta
common stock valued at $1.5 million at the date of
acquisition on a discounted basis as a result of the restricted
nature of the shares. The acquisition allows Quanta to further
expand its telecommunications business in the western United
States. The estimated
81
fair value of the tangible assets was $1.8 million and
consisted of current assets of $1.5 million and property
and equipment of $0.3 million. Net tangible assets acquired
were $1.5 million after considering liabilities of
$0.3 million. The excess of the purchase price over net
tangible assets acquired was recorded as goodwill in the amount
of $1.4 million and intangible assets in the amount of
$1.6 million, consisting of customer relationships, backlog
and a non-compete agreement.
In October 2007, Quanta acquired a foundation drilling company
for a purchase price of $24.6 million, consisting of
$15.6 million in cash and 337,108 shares of Quanta
common stock valued at $9.0 million at the date of
acquisition on a discounted basis as a result of the restricted
nature of the shares. The acquisition allows Quanta to further
expand its foundation drilling business in connection with the
construction of electric transmission infrastructure in the
United States. The estimated fair value of the tangible assets
was $9.6 million and consisted of current assets of
$4.6 million and property and equipment of
$5.0 million. Net tangible assets acquired were
$8.5 million after considering liabilities of
$1.1 million. The excess of the purchase price over net
tangible assets acquired was recorded as goodwill in the amount
of $12.8 million and intangible assets in the amount of
$3.3 million, consisting of customer relationships, backlog
and a non-compete agreement.
|
|
4.
|
GOODWILL
AND INTANGIBLE ASSETS:
|
A summary of changes in Quantas goodwill is as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
Balance at beginning of year
|
|
$
|
387,307
|
|
|
$
|
330,495
|
|
|
$
|
1,355,098
|
|
Goodwill acquired during the year
|
|
|
|
|
|
|
1,024,603
|
|
|
|
24,633
|
|
Purchase price adjustments related to prior year
|
|
|
|
|
|
|
|
|
|
|
(16,631
|
)
|
Impairment
|
|
|
(56,812
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
330,495
|
|
|
$
|
1,355,098
|
|
|
$
|
1,363,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During 2006, as part of our annual test for goodwill impairment,
goodwill of $56.8 million was written off as a non-cash
operating expense. The goodwill impairment is associated with a
decrease in the expected future demand for the services of one
of our businesses, which has historically served the cable
television industry.
During the years ended December 31, 2007 and 2008, Quanta
recorded approximately $170.0 million and $9.7 million
in other intangible assets associated with acquisitions.
Additionally, in May 2008, Quanta acquired the rights to certain
developed technology, along with pending and issued patent
protections to this technology, for approximately
$14.6 million. This developed technology will enhance
Quantas energized services capabilities and is being
amortized on a straight-line basis over an estimated economic
life of approximately 13 years. The acquired technology is
included in patented rights and developed technology in the
below table.
82
Intangible assets are comprised of (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
Intangible assets:
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
$
|
104,834
|
|
|
$
|
111,379
|
|
Backlog
|
|
|
53,242
|
|
|
|
54,139
|
|
Non-compete agreements
|
|
|
14,030
|
|
|
|
16,336
|
|
Patented rights and developed technology
|
|
|
1,504
|
|
|
|
16,078
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets
|
|
|
173,610
|
|
|
|
197,932
|
|
|
|
|
|
|
|
|
|
|
Accumulated amortization:
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
|
(4,054
|
)
|
|
|
(11,381
|
)
|
Backlog
|
|
|
(14,274
|
)
|
|
|
(38,109
|
)
|
Non-compete agreements
|
|
|
(1,644
|
)
|
|
|
(6,000
|
)
|
Patented rights and developed technology
|
|
|
(943
|
)
|
|
|
(1,725
|
)
|
|
|
|
|
|
|
|
|
|
Total accumulated amortization
|
|
|
(20,915
|
)
|
|
|
(57,215
|
)
|
|
|
|
|
|
|
|
|
|
Intangible assets, net
|
|
$
|
152,695
|
|
|
$
|
140,717
|
|
|
|
|
|
|
|
|
|
|
Expenses for the amortization of intangible assets were
$0.4 million, $18.8 million and $36.3 million for
the years ended December 31, 2006, 2007 and 2008. The
remaining weighted average amortization period for all
intangible assets as of December 31, 2008 is
11.3 years, while the remaining weighted average
amortization periods for customer relationships, backlog,
non-compete agreements and the patented rights and developed
technology are 13.7 years, 2.1 years, 2.8 years
and 11.7 years, respectively. The estimated future
aggregate amortization expense of intangible assets as of
December 31, 2008 is set forth below (in thousands):
|
|
|
|
|
For the Fiscal Year Ended December 31,
|
|
|
|
|
2009
|
|
$
|
19,621
|
|
2010
|
|
|
14,147
|
|
2011
|
|
|
13,003
|
|
2012
|
|
|
13,802
|
|
2013
|
|
|
8,770
|
|
Thereafter
|
|
|
71,374
|
|
|
|
|
|
|
Total
|
|
$
|
140,717
|
|
|
|
|
|
|
|
|
5.
|
DISCONTINUED
OPERATION:
|
On August 31, 2007, Quanta sold the operating assets
associated with the business of EPA, a Quanta subsidiary, for
approximately $6.0 million in cash. Quanta has presented
EPAs results of operations for the 2006 and 2007 periods
as a discontinued operation in the accompanying consolidated
statements of operations. Quanta does not allocate corporate
debt or interest expense to discontinued operations. As a result
of the sale, a pre-tax gain of approximately $3.7 million
was recorded in the year ended December 31, 2007 and
included as income from discontinued operation in the
consolidated statement of operations in such period.
The amounts of revenues and pre-tax income (including the
pre-tax gain of $3.7 million in the year ended
December 31, 2007) related to EPA and included in
income from discontinued operation are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2006
|
|
2007
|
|
2008
|
|
Revenues
|
|
$
|
21,406
|
|
|
$
|
14,695
|
|
|
$
|
|
|
Income before income tax provision
|
|
$
|
1,938
|
|
|
$
|
4,182
|
|
|
$
|
|
|
83
The assets, liabilities and cash flows associated with EPA have
historically been immaterial to Quantas balance sheet and
cash flows.
|
|
6.
|
PER SHARE
INFORMATION:
|
Basic earnings per share is computed using the weighted average
number of common shares outstanding during the period, and
diluted earnings per share is computed using the weighted
average number of common shares outstanding during the period
adjusted for all potentially dilutive common stock equivalents,
except in cases where the effect of the common stock equivalent
would be antidilutive. The amounts used to compute the basic and
diluted earnings per share for the years ended 2006, 2007 and
2008 are illustrated below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
Income for basic earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
From continuing operations
|
|
$
|
16,233
|
|
|
$
|
133,140
|
|
|
$
|
166,741
|
|
From discontinued operation
|
|
|
1,250
|
|
|
|
2,837
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
17,483
|
|
|
$
|
135,977
|
|
|
$
|
166,741
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding for basic earnings per share
|
|
|
117,027
|
|
|
|
135,793
|
|
|
|
176,790
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
From continuing operations
|
|
$
|
0.14
|
|
|
$
|
0.98
|
|
|
$
|
0.94
|
|
From discontinued operation
|
|
|
0.01
|
|
|
|
0.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
0.15
|
|
|
$
|
1.00
|
|
|
$
|
0.94
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income for diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
16,233
|
|
|
$
|
133,140
|
|
|
$
|
166,741
|
|
Effect of convertible subordinated notes under the
if-converted method interest expense
addback, net of taxes
|
|
|
|
|
|
|
12,795
|
|
|
|
10,590
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations for diluted earnings per share
|
|
|
16,233
|
|
|
|
145,935
|
|
|
|
177,331
|
|
Income from discontinued operation
|
|
|
1,250
|
|
|
|
2,837
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income for diluted earnings per share
|
|
$
|
17,483
|
|
|
$
|
148,772
|
|
|
$
|
177,331
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Calculation of weighted average shares for diluted earnings
per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding for basic earnings per share
|
|
|
117,027
|
|
|
|
135,793
|
|
|
|
176,790
|
|
Effect of dilutive stock options and restricted stock
|
|
|
836
|
|
|
|
816
|
|
|
|
558
|
|
Effect of convertible subordinated notes under the
if-converted method weighted convertible
shares issuable
|
|
|
|
|
|
|
30,651
|
|
|
|
25,015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding for diluted earnings per
share
|
|
|
117,863
|
|
|
|
167,260
|
|
|
|
202,363
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
From continuing operations
|
|
$
|
0.14
|
|
|
$
|
0.87
|
|
|
$
|
0.88
|
|
From discontinued operation
|
|
|
0.01
|
|
|
|
0.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
0.15
|
|
|
$
|
0.89
|
|
|
$
|
0.88
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
84
For the years ended December 31, 2006, 2007 and 2008, stock
options and restricted stock of approximately 0.2 million,
0.5 million and 1.4 million shares, respectively, were
excluded from the computation of diluted earnings per share
because the grant prices of these common stock equivalents were
greater than the average market price of Quantas common
stock. For the year ended December 31, 2006, the effect of
assuming conversion of Quantas convertible subordinated
notes would be antidilutive, and accordingly were excluded from
the calculation of diluted earnings per share.
|
|
7.
|
DETAIL OF
CERTAIN BALANCE SHEET ACCOUNTS:
|
Activity in Quantas current and long-term allowance for
doubtful accounts consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
Balance at beginning of year
|
|
$
|
48,372
|
|
|
$
|
47,573
|
|
Acquired through acquisitions
|
|
|
1,276
|
|
|
|
|
|
Charged to expense
|
|
|
1,216
|
|
|
|
7,257
|
|
Deductions for uncollectible receivables written off, net of
recoveries
|
|
|
(3,291
|
)
|
|
|
(46,028
|
)
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
47,573
|
|
|
$
|
8,802
|
|
|
|
|
|
|
|
|
|
|
Contracts in progress are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
Costs incurred on contracts in progress
|
|
$
|
1,006,935
|
|
|
$
|
1,363,821
|
|
Estimated earnings, net of estimated losses
|
|
|
159,667
|
|
|
|
265,929
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,166,602
|
|
|
|
1,629,750
|
|
Less Billings to date
|
|
|
(1,159,781
|
)
|
|
|
(1,625,761
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6,821
|
|
|
$
|
3,989
|
|
|
|
|
|
|
|
|
|
|
Costs and estimated earnings in excess of billings on
uncompleted contracts
|
|
$
|
72,424
|
|
|
$
|
54,379
|
|
Less Billings in excess of costs and estimated
earnings on uncompleted contracts
|
|
|
(65,603
|
)
|
|
|
(50,390
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6,821
|
|
|
$
|
3,989
|
|
|
|
|
|
|
|
|
|
|
Property and equipment consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Useful
|
|
|
December 31,
|
|
|
|
Lives in Years
|
|
|
2007
|
|
|
2008
|
|
|
Land
|
|
|
|
|
|
$
|
9,028
|
|
|
$
|
9,628
|
|
Buildings and leasehold improvements
|
|
|
5-30
|
|
|
|
29,984
|
|
|
|
30,497
|
|
Operating equipment and vehicles
|
|
|
5-25
|
|
|
|
617,654
|
|
|
|
648,162
|
|
Dark fiber and related assets
|
|
|
5-20
|
|
|
|
99,697
|
|
|
|
179,058
|
|
Office equipment, furniture and fixtures
|
|
|
3-10
|
|
|
|
34,306
|
|
|
|
47,216
|
|
Construction work in progress
|
|
|
|
|
|
|
41,794
|
|
|
|
50,965
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
832,463
|
|
|
|
965,526
|
|
Less Accumulated depreciation and amortization
|
|
|
|
|
|
|
(300,178
|
)
|
|
|
(330,070
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
|
|
|
$
|
532,285
|
|
|
$
|
635,456
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
85
Accounts payable and accrued expenses consists of the following
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
Accounts payable, trade
|
|
$
|
203,774
|
|
|
$
|
179,594
|
|
Accrued compensation and related expenses
|
|
|
93,509
|
|
|
|
87,511
|
|
Accrued insurance
|
|
|
57,325
|
|
|
|
56,270
|
|
Accrued loss on contracts
|
|
|
17,553
|
|
|
|
20,708
|
|
Deferred revenues
|
|
|
15,021
|
|
|
|
20,425
|
|
Accrued interest and fees
|
|
|
4,097
|
|
|
|
1,051
|
|
Federal and state taxes payable, including contingencies
|
|
|
5,049
|
|
|
|
10,633
|
|
Other accrued expenses
|
|
|
24,487
|
|
|
|
24,061
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
420,815
|
|
|
$
|
400,253
|
|
|
|
|
|
|
|
|
|
|
Quantas debt obligations consist of the following (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
4.5% Notes
|
|
$
|
269,979
|
|
|
$
|
|
|
3.75% Notes
|
|
|
143,750
|
|
|
|
143,750
|
|
Notes payable to various financial institutions, interest
ranging from 0.0% to 8.0%, secured by certain equipment and
other assets
|
|
|
1,032
|
|
|
|
1,155
|
|
|
|
|
|
|
|
|
|
|
|
|
|
414,761
|
|
|
|
144,905
|
|
Less Current maturities
|
|
|
(271,011
|
)
|
|
|
(1,155
|
)
|
|
|
|
|
|
|
|
|
|
Total long-term debt obligations
|
|
$
|
143,750
|
|
|
$
|
143,750
|
|
|
|
|
|
|
|
|
|
|
Credit
Facility
Quanta has a credit facility with various lenders that provides
for a $475.0 million senior secured revolving credit
facility maturing on September 19, 2012. Subject to the
conditions specified in the credit facility, borrowings under
the credit facility are to be used for working capital, capital
expenditures and other general corporate purposes. The entire
unused portion of the credit facility is available for the
issuance of letters of credit.
As of December 31, 2008, Quanta had approximately
$160.2 million of letters of credit issued under the credit
facility and no outstanding revolving loans. The remaining
$314.8 million was available for revolving loans or issuing
new letters of credit. Amounts borrowed under the credit
facility bear interest, at Quantas option, at a rate equal
to either (a) the Eurodollar Rate (as defined in the credit
facility) plus 0.875% to 1.75%, as determined by the ratio of
Quantas total funded debt to consolidated EBITDA (as
defined in the credit facility), or (b) the base rate (as
described below) plus 0.00% to 0.75%, as determined by the ratio
of Quantas total funded debt to consolidated EBITDA.
Letters of credit issued under the credit facility are subject
to a letter of credit fee of 0.875% to 1.75%, based on the ratio
of Quantas total funded debt to consolidated EBITDA.
Quanta is also subject to a commitment fee of 0.15% to 0.35%,
based on the ratio of its total funded debt to consolidated
EBITDA, on any unused availability under the credit facility.
The base rate equals the higher of (i) the Federal Funds
Rate (as defined in the credit facility) plus
1/2
of 1% or (ii) the banks prime rate.
The credit facility contains certain covenants, including
covenants with respect to maximum funded debt to consolidated
EBITDA, maximum senior debt to consolidated EBITDA and minimum
interest coverage, in each case as specified in the credit
facility. For purposes of calculating the maximum funded debt to
86
consolidated EBITDA ratio and the maximum senior debt to
consolidated EBITDA ratio, Quantas maximum funded debt and
maximum senior debt are reduced by all cash and cash equivalents
(as defined in the credit facility) held by Quanta in excess of
$25.0 million. As of December 31, 2008, Quanta was in
compliance with all of its covenants. The credit facility limits
certain acquisitions, mergers and consolidations, capital
expenditures, asset sales and prepayments of indebtedness and,
subject to certain exceptions, prohibits liens on material
assets. The credit facility also limits the payment of dividends
and stock repurchase programs in any fiscal year except those
payments or other distributions payable solely in capital stock.
The credit facility provides for customary events of default and
carries cross-default provisions with all of Quantas
existing subordinated notes, its continuing indemnity and
security agreement with its sureties and all of its other debt
instruments exceeding $15.0 million in borrowings. If an
event of default (as defined in the credit facility) occurs and
is continuing, on the terms and subject to the conditions set
forth in the credit facility, amounts outstanding under the
credit facility may be accelerated and may become or be declared
immediately due and payable.
The credit facility is secured by a pledge of all of the capital
stock of Quantas U.S. subsidiaries, 65% of the
capital stock of its foreign subsidiaries and substantially all
of its assets are pledged related to the credit facility.
Quantas U.S. subsidiaries guarantee the repayment of
all amounts due under the credit facility. Quantas
obligations under the credit facility constitute designated
senior indebtedness under its 3.75% Notes.
4.0% Convertible
Subordinated Notes
During the first half of 2007, Quanta had outstanding
$33.3 million aggregate principal amount of 4.0%
convertible subordinated notes (4.0% Notes), which matured
on July 1, 2007. The outstanding principal balance of the
4.0% Notes plus accrued interest were repaid on
July 2, 2007, the first business day after the maturity
date.
4.5% Convertible
Subordinated Notes
At December 31, 2008, none of Quantas 4.5%
convertible subordinated notes due 2023 (4.5% Notes) were
outstanding. The 4.5% Notes were originally issued in
October 2003 for an aggregate principal amount of
$270.0 million and required semi-annual interest payments
on April 1 and October 1 until maturity. The resale of the
4.5% Notes and the shares issuable upon their conversion
was registered for the benefit of the holders on a shelf
registration statement filed with the SEC.
The indenture under which the 4.5% Notes were issued
provided the holders of the notes the right to require Quanta to
repurchase in cash, on October 1, 2008, all or some of
their notes at the principal amount thereof plus accrued and
unpaid interest. As a result of this repurchase right, Quanta
reclassified approximately $270.0 million outstanding
aggregate principal amount of the 4.5% Notes as a current
obligation in October 2007.
The indenture also provided that, beginning October 8,
2008, Quanta had the right to redeem for cash some or all of the
4.5% Notes at the principal amount thereof plus accrued and
unpaid interest. On August 27, 2008, Quanta notified the
registered holders of the 4.5% Notes that it would redeem
the notes on October 8, 2008. Upon notification of the
redemption and until October 6, 2008, the holders of the
4.5% Notes had the right to convert all or a portion of the
principal amount of their notes to shares of Quantas
common stock at a conversion rate of 89.7989 shares of
common stock for each $1,000 principal amount of notes
converted, which equates to a conversion price of $11.14 per
share.
During 2008, the holders of $269.8 million aggregate
principal amount of the 4.5% Notes elected to convert their
notes, resulting in the issuance of 24,229,781 shares of
Quantas common stock, substantially all of which followed
the redemption notice. Quanta also repurchased $106,000
aggregate principal amount of the 4.5% Notes on
October 1, 2008 pursuant to the holders election and
redeemed for cash $49,000 aggregate principal amount of the
notes, plus accrued and unpaid interest, on October 8,
2008. As a result of all of these transactions, none of the
4.5% Notes remained outstanding as of October 8, 2008.
87
3.75% Convertible
Subordinated Notes
At December 31, 2008, Quanta had outstanding
$143.8 million aggregate principal amount of
3.75% Notes. The resale of the notes and the shares
issuable upon conversion thereof was registered for the benefit
of the holders on a shelf registration statement filed with the
SEC. The 3.75% Notes mature on April 30, 2026 and bear
interest at the annual rate of 3.75%, payable semi-annually on
April 30 and October 30, until maturity.
The 3.75% Notes are convertible into Quantas common
stock, based on an initial conversion rate of
44.6229 shares of Quantas common stock per $1,000
principal amount of 3.75% Notes (which is equal to an
initial conversion price of approximately $22.41 per share),
subject to adjustment as a result of certain events. The
3.75% Notes are convertible by the holder (i) during
any fiscal quarter if the closing price of Quantas common
stock is greater than 130% of the conversion price for at least
20 trading days in the period of 30 consecutive trading days
ending on the last trading day of the immediately preceding
fiscal quarter, (ii) upon Quanta calling the
3.75% Notes for redemption, (iii) upon the occurrence
of specified distributions to holders of Quantas common
stock or specified corporate transactions or (iv) at any
time on or after March 1, 2026 until the business day
immediately preceding the maturity date of the 3.75% Notes.
The 3.75% Notes are not presently convertible, although
they have been convertible in certain prior quarters as a result
of the satisfaction of the market price condition described in
clause (i) above. If the 3.75% Notes become
convertible under any of these circumstances, Quanta has the
option to deliver cash, shares of Quantas common stock or
a combination thereof, with the amount of cash determined in
accordance with the terms of the indenture under which the notes
were issued. Conversions that may occur in the future could
result in the recording of losses on extinguishment of debt if
the conversions are settled in cash for an amount in excess of
the principal amount. The holders of the 3.75% Notes who
convert their notes in connection with certain change in control
transactions, as defined in the indenture, may be entitled to a
make whole premium in the form of an increase in the conversion
rate. In the event of a change in control, in lieu of paying
holders a make whole premium, if applicable, Quanta may elect,
in some circumstances, to adjust the conversion rate and related
conversion obligations so that the 3.75% Notes are
convertible into shares of the acquiring or surviving company.
Beginning on April 30, 2010 until April 30, 2013,
Quanta may redeem for cash all or part of the 3.75% Notes
at a price equal to 100% of the principal amount plus accrued
and unpaid interest, if the closing price of Quantas
common stock is equal to or greater than 130% of the conversion
price then in effect for the 3.75% Notes for at least 20
trading days in the 30 consecutive trading day period ending on
the trading day immediately prior to the date of mailing of the
notice of redemption. In addition, Quanta may redeem for cash
all or part of the 3.75% Notes at any time on or after
April 30, 2010 at certain redemption prices, plus accrued
and unpaid interest. Beginning with the six-month interest
period commencing on April 30, 2010, and for each six-month
interest period thereafter, Quanta will be required to pay
contingent interest on any outstanding 3.75% Notes during
the applicable interest period if the average trading price of
the 3.75% Notes reaches a specified threshold. The
contingent interest payable within any applicable interest
period will equal an annual rate of 0.25% of the average trading
price of the 3.75% Notes during a five trading day
reference period.
The holders of the 3.75% Notes may require Quanta to
repurchase all or a part of the notes in cash on each of
April 30, 2013, April 30, 2016 and April 30,
2021, and in the event of a change in control of Quanta, as
defined in the indenture, at a purchase price equal to 100% of
the principal amount of the 3.75% Notes plus accrued and
unpaid interest. The 3.75% Notes carry cross-default
provisions with Quantas other debt instruments exceeding
$20.0 million in borrowings, which includes Quantas
existing credit facility.
88