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EX-10.27 - EX-10.27 - QUANTA SERVICES INCd295903dex1027.htm
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EX-10.24 - EX-10.24 - QUANTA SERVICES INCd295903dex1024.htm
Table of Contents
Index to Financial Statements

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-K

(Mark One)

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2016

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 001-13831

Quanta Services, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware   74-2851603

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

2800 Post Oak Boulevard, Suite 2600

Houston, Texas 77056

(Address of principal executive offices, including zip code)

(713) 629-7600

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

 

Title of Each Class

 

Name of Exchange on Which Registered

Common Stock, $0.00001 par value   New York Stock Exchange

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  ☒    No  ☐

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  ☐    No  ☒

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  ☒    No  ☐

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).    Yes  ☒    No  ☐

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ☐

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer      Accelerated filer  
Non-accelerated filer   ☐  (Do not check if smaller reporting company)    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  ☐    No  ☒

As of June 30, 2016 (the last business day of the Registrant’s most recently completed second fiscal quarter), the aggregate market value of the Common Stock of the Registrant held by non-affiliates of the Registrant, based on the last sale price of the Common Stock reported by the New York Stock Exchange on such date, was approximately $3.3 billion.

As of February 21, 2017, the number of outstanding shares of Common Stock of the Registrant was 145,133,163. As of the same date, 3,500,000 exchangeable shares of a Canadian subsidiary of the Registrant associated with one share of Series F Preferred Stock of the Registrant were outstanding, 449,929 exchangeable shares of a Canadian subsidiary of the Registrant associated with one share of Series G Preferred Stock of the Registrant were outstanding and an additional 2,144,620 exchangeable shares of certain other Canadian subsidiaries of the Registrant were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant’s Definitive Proxy Statement for the 2017 Annual Meeting of Stockholders are incorporated by reference into Part III of this Form 10-K.

 


Table of Contents
Index to Financial Statements

QUANTA SERVICES, INC.

ANNUAL REPORT ON FORM 10-K

For the Year Ended December 31, 2016

INDEX

 

          Page
Number
 
PART I  

ITEM 1.

   Business      2  

ITEM 1A.

   Risk Factors      9  

ITEM 1B.

   Unresolved Staff Comments      31  

ITEM 2.

   Properties      31  

ITEM 3.

   Legal Proceedings      31  

ITEM 4.

   Mine Safety Disclosures      31  
PART II  

ITEM 5.

   Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities      32  

ITEM 6.

   Selected Financial Data      35  

ITEM 7.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations      37  

ITEM 7A.

   Quantitative and Qualitative Disclosures About Market Risk      83  

ITEM 8.

   Financial Statements and Supplementary Data      85  

ITEM 9.

   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure      147  

ITEM 9A.

   Controls and Procedures      147  

ITEM 9B.

   Other Information      148  
PART III  

ITEM 10.

   Directors, Executive Officers and Corporate Governance      149  

ITEM 11.

   Executive Compensation      149  

ITEM 12.

   Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters      149  

ITEM 13.

   Certain Relationships and Related Transactions, and Director Independence      149  

ITEM 14.

   Principal Accounting Fees and Services      149  
PART IV  

ITEM 15.

   Exhibits and Financial Statement Schedules      150  

ITEM 16.

   Form 10-K Summary      155  

 

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Index to Financial Statements

PART I

 

ITEM 1. Business

General

Quanta Services, Inc. (Quanta) is a leading provider of specialty contracting services, offering infrastructure solutions primarily to the electric power and oil and gas industries in the United States, Canada and Australia and select other international markets. The services we provide include the design, installation, upgrade, repair and maintenance of infrastructure within each of the industries we serve, such as electric power transmission and distribution networks, substation facilities, renewable energy facilities, pipeline transmission and distribution systems and facilities, and related infrastructure.

We report our results under two reportable segments: (1) Electric Power Infrastructure Services and (2) Oil and Gas Infrastructure Services. This structure is generally focused on broad end-user markets for our services. Our consolidated revenues for the year ended December 31, 2016 were approximately $7.65 billion, of which 63% was attributable to the Electric Power Infrastructure Services segment and 37% to the Oil and Gas Infrastructure Services segment.

We have established a presence throughout the United States, Canada and Australia with a workforce of approximately 28,100 employees as of December 31, 2016, which enables us to quickly and reliably serve a diversified customer base. We believe our reputation for responsiveness and performance, geographic reach, comprehensive service offering, safety leadership and financial strength have resulted in strong relationships with numerous customers, which include many of the leading companies in the industries we serve. Our ability to deploy services to customers throughout the United States, Canada and Australia as a result of our broad geographic presence and significant scope and scale of services is particularly important to our customers who operate networks that span multiple states or regions. We believe these same factors also position us to continue to take advantage of other international opportunities.

Representative customers include:

 

•    Ameren Corporation

  

•    ITC Holdings Corp.

•    American Electric Power Company, Inc.

  

•    Maurepas Pipeline, LLC

•    ATCO Electric

  

•    Nalcor Energy

•    CenterPoint Energy, Inc.

  

•    NextEra Energy, Inc.

•    Con Edison Development, Inc.

  

•    PG&E Corporation

•    Duke Energy Corporation

  

•    Puget Sound Energy, Inc.

•    Enbridge, Inc.

  

•    San Diego Gas & Electric Company

•    Entergy Corporation

  

•    Spectra Energy Corp.

•    Exelon Corporation

  

•    Southern California Edison Company

•    Eversource Energy

  

•    Tallgrass Energy Partners, LP

•    FirstEnergy Corporation

  

•    TransCanada Corporation

We were organized as a corporation in the state of Delaware in 1997, and since that time, we have grown organically and through strategic acquisitions. This growth has expanded our geographic presence and scope of services and developed new capabilities to meet our customers’ evolving needs.

We believe that our business strategies, along with our competitive and financial strengths, are key elements in differentiating us from our competition and position us to capitalize on future capital spending by our

 

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customers. We offer comprehensive and diverse solutions on a broad geographic scale and have a solid base of long-standing customer relationships in each of the industries we serve. We also have an experienced management team, both at the executive level and within our operating units, and various proprietary technologies that enhance our service offerings. Our strategies of expanding the portfolio of services we provide to our existing and potential customer base, increasing our geographic and technological capabilities, promoting best practices and cross-selling our services to our customers, as well as continuing to maintain our financial strength, place us in the position to capitalize on opportunities and trends in the industries we serve and to expand our operations globally to select international markets. We continue to evaluate potential acquisitions of companies with strong management teams and good reputations and believe that our financial strength and experienced management team are attractive to potential acquisition targets.

On August 4, 2015, we completed the sale of our fiber optic licensing operations to Crown Castle International Corp. for a purchase price of approximately $1 billion in cash, resulting in after-tax net proceeds of approximately $848 million. In the third quarter of 2015, we recognized a net of tax gain of approximately $171 million. We have presented the results of operations, financial position, cash flows and disclosures of the fiber optic licensing operations as discontinued operations for all periods in our consolidated financial statements.

Reportable Segments

The following is an overview of the types of services provided by each of our reportable segments.

Electric Power Infrastructure Services Segment

The Electric Power Infrastructure Services segment provides comprehensive network solutions to customers in the electric power industry. Services performed by the Electric Power Infrastructure Services segment generally include the design, installation, upgrade, repair and maintenance of electric power transmission and distribution infrastructure and substation facilities along with other engineering and technical services. This segment also provides emergency restoration services, including the repair of infrastructure damaged by inclement weather, the energized installation, maintenance and upgrade of electric power infrastructure utilizing unique bare hand and hot stick methods and our proprietary robotic arm technologies, and the installation of “smart grid” technologies on electric power networks. In addition, this segment designs, installs and maintains renewable energy generation facilities, consisting of solar, wind and certain types of natural gas generation facilities, and related switchyards and transmission infrastructure. To a lesser extent, this segment provides services such as the construction of electric power generation facilities, the design, the installation, maintenance and repair of commercial and industrial wiring, installation of traffic networks and cable and control systems for light rail lines and ancillary telecommunication infrastructure services.

Oil and Gas Infrastructure Services Segment

The Oil and Gas Infrastructure Services segment provides comprehensive network solutions to customers involved in the development and transportation of natural gas, oil and other pipeline products. Services performed by the Oil and Gas Infrastructure Services segment generally include the design, installation, repair and maintenance of pipeline transmission and distribution systems, gathering systems, production systems, storage systems and compressor and pump stations, as well as related trenching, directional boring and mechanized welding services. In addition, this segment’s services include pipeline protection, integrity testing, rehabilitation and replacement, and fabrication of pipeline support systems and related structures and facilities. We also serve the offshore and inland water energy markets, primarily providing services to oil and gas exploration platforms, including mechanical installation (or “hook-ups”), electrical and instrumentation, pre-commissioning and commissioning, coatings, fabrication and marine asset repair. To a lesser extent, this segment designs, installs and maintains fueling systems, as well as water and sewer infrastructure.

 

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Financial Information about Geographic Areas

We operate primarily in the United States; however, we derived $1.59 billion, $1.54 billion and $1.89 billion of our revenues from foreign operations during the years ended December 31, 2016, 2015 and 2014, respectively. Of our foreign revenues, approximately 75%, 85% and 82% were earned in Canada during the years ended December 31, 2016, 2015 and 2014, respectively. In addition, we held property and equipment in the amount of $320.7 million and $317.6 million in foreign countries, primarily Canada, as of December 31, 2016 and 2015.

Our business, financial condition and results of operations in foreign countries may be adversely impacted by monetary and fiscal policies, currency fluctuations, regulatory requirements and other political, social and economic developments or instability. Refer to Item 1A. Risk Factors, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations and Item 7A. Quantitative and Qualitative Disclosures about Market Risk for additional information and discussion regarding the potential impact of currency rate fluctuations.

Customers, Strategic Alliances and Preferred Provider Relationships

Our customers include electric power and oil and gas companies, as well as commercial, industrial and governmental entities. We have a large and diverse customer base, including many of the leading companies in the industries we serve. Our 10 largest customers accounted for approximately 32% of our consolidated revenues during the year ended December 31, 2016. Our largest customer accounted for approximately 4% of our consolidated revenues for the year ended December 31, 2016.

Although we have a centralized marketing and business development strategy, management at each of our operating units is responsible for developing and maintaining successful long-term relationships with customers. Our operating unit management teams build upon existing customer relationships to secure additional projects and increase revenues from our current customer base. Many of these customer relationships originated decades ago and are maintained through a partnering approach with account management that includes project evaluation and consulting, quality performance, performance measurement and direct customer contact. Additionally, operating unit management focuses on pursuing growth opportunities with prospective new customers. We encourage operating unit management to cross-sell services of our other operating units to their customers and to coordinate with our other operating units to pursue projects, especially those that are larger and more complicated. Our business development group supports the operating units’ activities by promoting and marketing our services for existing and prospective large national accounts, as well as projects that would require services from multiple operating units.

We are a preferred vendor for many of our customers. As a preferred vendor, we have met minimum standards for a specific category of service, maintained a high level of performance and agreed to certain payment terms and negotiated rates. We strive to maintain preferred vendor status as we believe it provides us an advantage in the award of future work for the applicable customer.

Many of our strategic relationships with customers take the form of strategic alliance or long-term maintenance agreements. Strategic alliance agreements generally state an intention to work together over a period of time and/or on specific types of projects, and many provide us with preferential bidding procedures. Strategic alliances and long-term maintenance agreements are typically agreements for an initial term of approximately two to four years and may include renewal options to extend the initial term.

Backlog

Backlog is not a term recognized under United States generally accepted accounting principles (US GAAP); however, it is a common measurement used in our industry. Our methodology for determining backlog may not be comparable to the methodologies used by other companies.

 

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Our backlog represents the amount of consolidated revenues that we expect to realize from future work under construction contracts, long-term maintenance contracts and master service agreements (MSAs). These estimates include revenues from the remaining portion of firm orders not yet completed and on which work has not yet begun, as well as revenues from change orders, renewal options, and funded and unfunded portions of government contracts to the extent that they are reasonably expected to occur. For purposes of calculating backlog, we include 100% of estimated revenues attributable to consolidated joint ventures and variable interest entities (VIEs). The following table presents our total backlog by reportable segment as of December 31, 2016 and 2015, along with an estimate of the backlog amounts expected to be realized within 12 months of each balance sheet date (in thousands):

 

     Backlog as of
December 31, 2016
     Backlog as of
December 31, 2015
 
     12 Month      Total      12 Month      Total  

Electric Power Infrastructure Services

   $ 3,369,373      $ 6,657,431      $ 3,307,837      $ 6,312,947  

Oil and Gas Infrastructure Services

     2,483,963        3,092,341        1,900,845        3,073,950  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 5,853,336      $ 9,749,772      $ 5,208,682      $ 9,386,897  
  

 

 

    

 

 

    

 

 

    

 

 

 

Revenue estimates included in our backlog can be subject to change as a result of project accelerations, cancellations or delays due to various factors, including but not limited to commercial issues, regulatory requirements and adverse weather. These factors can also cause revenue amounts to be realized in periods and at levels different than originally projected. Generally, our customers are not contractually committed to specific volumes of services under our MSAs, and most of our contracts may be terminated, typically upon 30 to 90 days’ notice, even if we are not in default under the contract. We determine the estimated amount of backlog for work under MSAs by using recurring historical trends inherent in current MSAs, factoring in seasonal demand and projected customer needs based upon ongoing communications with the customer. In addition, many of our MSAs are subject to renewal options. As of December 31, 2016 and 2015, MSAs accounted for approximately 42% and 45% of our estimated 12 month backlog and approximately 53% and 50% of total backlog. There can be no assurance as to our customers’ actual requirements or that our estimates are accurate.

Competition

The markets in which we operate are highly competitive. We compete with other contractors in most of the geographic markets in which we operate, and several of our competitors are large companies that have significant financial, technical and marketing resources. In addition, there are relatively few barriers to entry into some of the industries in which we operate and, as a result, any organization that has adequate financial resources and access to technical expertise may become a competitor. A significant portion of our revenues is currently derived from unit price or fixed price agreements, and price is often an important factor in the award of such agreements. Accordingly, we could be underbid by our competitors in an effort by them to procure such business. We believe that as demand for our services increases, customers often 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. In addition, competition may lessen as industry resources, such as labor supplies, approach capacity. There can be no assurance, however, that our competitors will not develop the expertise, experience and resources to provide services that are superior in both price and quality to our services, or that we will be able to maintain or enhance our competitive position. We also face competition from the in-house service organizations of our existing or prospective customers, including electric power, oil and gas and engineering companies, which employ personnel who perform some of the same types of services as those provided by us. Although these companies currently outsource a significant portion of these services, in particular services relating to larger energy transmission infrastructure projects, there can be no assurance that they will continue to do so in the future or that they will not acquire additional in-house capabilities.

 

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Employees

As of December 31, 2016, we had approximately 28,100 employees, consisting of approximately 5,200 salaried employees, including executive officers, professional and administrative staff, project managers and engineers, job superintendents and clerical personnel, and approximately 22,900 hourly employees, the number of which fluctuates depending upon the number and size of the projects that are ongoing and planned at any particular time. Approximately 58% of our hourly employees at December 31, 2016 were covered by collective bargaining agreements, which require the payment of specified wages to our union employees, the observance of certain workplace rules and the payment of certain amounts to multiemployer pension plans and employee benefit trusts rather than us sponsoring or administering the benefit programs provided on behalf of our 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 renewals, 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 also 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 employee’s contribution up to 3% of that employee’s salary and 50% of each employee’s contribution between 3% and 6% of such employee’s salary, up to the maximum amount permitted by law.

Our industry is experiencing a shortage of journeyman linemen in certain geographic areas. In response to the shortage and to attract qualified employees, we utilize various International Brotherhood of Electrical Workers (IBEW) and National Electrical Contractors Association (NECA) training programs and support the joint IBEW/NECA Apprenticeship Program which trains qualified electrical workers. Certain of our Canadian operations also support the Canadian Union Skilled Workers (CUSW)’s apprenticeship programs for training construction and maintenance electricians and powerline technicians. 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. As we continue to expand our comprehensive engineering, procurement and construction offerings, the cost of materials may become a proportionately larger component of our consolidated cost of services. We do not anticipate experiencing any significant difficulties in procuring such materials as we purchase such materials from a variety of sources.

Training, Quality Assurance and Safety

Performance of our services requires the use of equipment and exposure to hazardous conditions. Although we are committed to a policy of operating safely and prudently, we have been and will continue to be subject to claims by employees, customers and third parties for property damage and personal injury. In response to these inherent hazards and as part of our commitment to employee safety, our operating units have established safety programs, policies and procedures requiring that employees complete prescribed training and service programs prior to starting work. Additionally, we have implemented an enterprise-wide Automated External Defibrillator (AED) program, which provides AEDs to all of our crews and training to enhance life safety response measures. Our operating units performing more sophisticated and technical jobs utilize, when applicable, training programs

 

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provided by the IBEW/NECA Apprenticeship Program, the training programs sponsored by the four trade unions administered by the Pipe Line Contractors Association (PLCA), the apprenticeship training programs sponsored by the CUSW 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 144 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. Similarly, the CUSW offers apprenticeship training for construction and maintenance electricians that requires five terms of 1,700 hours each, combining classroom and on-the-job training, as well as training for powerline technicians that also involves classroom and jobsite training over a four-year period. In addition, the Laborers International Union of North America, the International Brotherhood of Teamsters, the United Association of Plumbers and Pipefitters and the International Union of Operating Engineers have training programs specifically designed for developing and improving the skills of their members who work in the pipeline construction industry. Our operating units also share best practices for training and educational programs and safety policies.

During 2016, we expanded the capabilities of our training facility to include training for beginning linemen, lead and cable splicing and directional drilling in addition to our existing energized electric power and pipeline training. This facility helps us facilitate classroom and on-the-job training programs and allows us to train employees in a controlled environment without the challenges of limited structure access and utility constraints.

Regulation

Our operations are subject to various federal, state, local and international laws and regulations including:

 

    licensing, permitting and inspection requirements applicable to contractors, electricians and engineers;

 

    regulations relating to worker safety and environmental protection;

 

    permitting and inspection requirements applicable to construction projects;

 

    wage and hour regulations;

 

    regulations relating to transportation of equipment and materials, including licensing and permitting requirements;

 

    building and electrical codes; and

 

    special bidding, procurement and other requirements on government projects.

We believe that we 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, as well as give rise to termination or cancellation rights under our contracts or disqualify us from future bidding opportunities.

Environmental Matters and Climate Change Impacts

We are committed to the protection of the environment and train our employees to perform their duties accordingly. We are subject to numerous federal, state, local and international environmental laws and regulations governing our operations, including the handling, transportation and disposal of non-hazardous and hazardous substances and wastes, as well as emissions and discharges into the environment, including discharges to air, surface water, groundwater and soil. We also are subject to laws and regulations that impose liability and cleanup responsibility for releases of hazardous substances into the environment. Under certain of these laws and regulations, liability can be imposed for cleanup of previously owned or operated properties or currently owned properties at which hazardous substances or wastes were discharged or disposed of by a former owner or

 

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operator, regardless of whether we directly caused the contamination or violated any law at the time of discharge or disposal. The presence of contamination from such substances or wastes could also interfere with ongoing operations or adversely affect our ability to sell or lease the property or use property as collateral for financing. In addition, we could be held liable for significant penalties and damages under certain environmental laws and regulations or be subject to a revocation of certain licenses or permits, which could materially and adversely affect our business, results of operations and cash flows. Our contracts with customers may also impose liability on us for environmental issues that arise through the performance of our services.

From time to time, we may incur costs and obligations for correcting environmental noncompliance matters and for remediation at or relating to certain of our properties. We believe that we are in substantial compliance with our environmental obligations and that any such obligations will not have a material adverse effect on our business or financial performance.

The potential impact of climate change on our operations is highly uncertain. Climate change may result in, among other things, changes in rainfall patterns, storm patterns and intensity and temperature levels. As discussed elsewhere in this Annual Report on Form 10-K, including in Item 1A. Risk Factors, our operating results are significantly influenced by weather, and significant changes in historical weather patterns could significantly impact our future operating results. For example, if climate change results in drier weather and more accommodating temperatures over a greater period of time, we may be able to increase our productivity, which could positively impact our revenues and gross margins. Further, if climate change results in an increase in severe weather, such as hurricanes and ice storms, we could experience a greater amount of higher-margin emergency restoration service work, which generally has a positive impact on our gross margins. Conversely, if climate change results in a greater amount of rainfall, snow, ice or other less accommodating weather conditions, we could experience reduced productivity, which could negatively impact our revenues and gross margins. Climate change could also have a negative impact on the demand for fossil fuels, which in turn could negatively impact demand for certain of our services.

Risk Management and Insurance

We are insured for employer’s liability, workers’ compensation, auto liability and general liability claims. Under these programs, the deductible for employer’s liability is $1.0 million per occurrence, the deductible for workers’ compensation is $5.0 million per occurrence, and the deductibles for auto liability and general liability are $10.0 million per occurrence. We are generally self-insured for all claims that do not exceed the amount of the applicable deductible. In connection with our casualty insurance programs, we are required to issue letters of credit to secure our self-insured obligations. We also have employee health care benefit plans for most employees not subject to collective bargaining agreements, of which the primary plan is subject to a deductible of $0.4 million per claimant per year.

Losses under all of these insurance programs are accrued based upon our estimate of the ultimate liability for claims reported and an estimate of claims incurred but not reported, with assistance from third-party actuaries. These insurance liabilities are difficult to assess and estimate due to unknown factors, including the severity of an injury, the extent of damage, the determination of our liability in proportion to other parties and the number of incidents not reported. The accruals are based upon known facts and historical trends, and management believes such accruals are adequate.

We renew our insurance policies on an annual basis, and therefore deductibles and levels of insurance coverage may change in future periods. In addition, insurers may cancel our coverage or determine to exclude certain items from coverage, or we may elect not to obtain certain types or incremental levels of insurance if we believe that the cost to obtain such coverage exceeds the additional benefits obtained. In any such event, our overall risk exposure would increase, which could negatively affect our results of operations, financial condition and cash flows.

 

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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, receipt of required regulatory approvals, permits and rights of way, project timing and schedules, and holidays. Please read the section entitled Seasonality; Fluctuations of Results; Economic Conditions included in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Website Access and Other Information

Our website address is www.quantaservices.com. Interested parties may obtain free electronic copies of our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and any amendments to these reports through our website under the heading Investors & Media/Financial Info/SEC Filings or through the website of the Securities and Exchange Commission (the SEC) at www.sec.gov. These reports are available on our website as soon as reasonably practicable after we electronically file them with, or furnish them to, the SEC. In addition, our Corporate Governance Guidelines, Code of Ethics and Business Conduct and the charters of each of our Audit Committee, Compensation Committee, Governance and Nominating Committee and Investment Committee are posted on our website under the heading Investors & Media/Governance. We intend to disclose on our website any amendments or waivers to our Code of Ethics and Business Conduct that are required to be disclosed pursuant to Item 5.05 of Form 8-K. Free copies of these items may be obtained from our website. We will make available to any stockholder, without charge, copies of our Annual Report on Form 10-K as filed with the SEC. For copies of this or any other Quanta publication, stockholders may submit a request in writing to Quanta Services, Inc., Attn: Corporate Secretary, 2800 Post Oak Blvd., Suite 2600, Houston, TX 77056, or by phone at 713-629-7600.

Investors and others should note that we announce material financial information and make other public disclosures of information regarding Quanta through SEC filings, press releases, public conference calls, and our website. We also utilize social media to communicate this information, and it is possible that the information we post on social media could be deemed material. Accordingly, we encourage investors, the media and others interested in our company to follow Quanta, and review the information we post, on the social media channels listed on our website in the Investors & Media section.

This Annual Report on Form 10-K, our website and our social media channels contain information provided by other sources that we believe are reliable. We cannot provide assurance that the information obtained from other sources is accurate or complete. No information on our website or our social media channels is incorporated by reference herein.

 

ITEM 1A. Risk Factors

Our business is subject to a variety of risks and uncertainties, including, but not limited to, the risks and uncertainties described below. The matters described below are not the only risks and uncertainties facing our company. 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, results of operations and cash flows could be negatively affected, and we may not be able to achieve our goals or expectations. This Annual Report on Form 10-K also includes statements reflecting assumptions, expectations, projections, intentions or beliefs about future events that are intended as “forward-looking statements” under the Private Securities Litigation Reform Act of 1995 and should be read in conjunction with the section entitled Uncertainty of Forward-Looking Statements and Information included in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Our operating results may vary significantly from quarter to quarter.

Our business can be highly cyclical and subject to seasonal and other variations that can result in significant differences in operating results from quarter to quarter. For example, we typically experience lower gross and

 

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operating margins during winter months due to lower demand for our services and more difficult operating conditions in the Northern hemisphere. Additionally, our quarterly results may be materially and/or adversely affected by:

 

    the timing and volume of work we perform;

 

    permitting, regulatory or customer-caused delays on projects;

 

    adverse weather conditions;

 

    variations in the size, scope and margins of projects we perform and the mix of our customers, contracts and business during any particular quarter;

 

    increases in construction and design costs;

 

    fluctuations in regional, national or global economic and market conditions and demand for our services;

 

    pricing pressures resulting from competition;

 

    the budgetary spending patterns of customers and federal, state and local governments;

 

    disruptions in our customers’ strategic plans which could occur as a result of emerging technologies;

 

    the magnitude of work performed under change orders and the timing of their recognition;

 

    disputes with customers relating to payment terms under our contracts and change orders, and our ability to successfully negotiate and obtain payment or reimbursement under our contracts and change orders;

 

    the outcome or resolution of pending or threatened litigation, claims or other legal proceedings;

 

    liabilities associated with multiemployer pension plans in which our employees participate or withdrawals therefrom;

 

    significant fluctuations in foreign currency exchange rates;

 

    changes in accounting pronouncements that require us to account for items differently than historical

pronouncements have;

 

    losses experienced in our operations not otherwise covered by insurance;

 

    payment risk associated with the financial condition of our customers, including those customers affected by the volatility of natural gas and oil prices;

 

    the termination or expiration of existing agreements;

 

    changes in bonding and lien requirements applicable to existing and new agreements;

 

    implementation of various information systems, which could temporarily disrupt day-to-day operations;

 

    the recognition of tax benefits related to uncertain tax positions;

 

    the timing and magnitude of costs we incur to support growth internally or through acquisitions or otherwise;

 

    the timing and integration of acquisitions and the magnitude of the related acquisition and integration costs; and

 

    the timing and significance of potential additional impairments of long-lived assets, equity or other investments, goodwill or other intangible assets.

 

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Accordingly, our operating results in any particular quarter may not be indicative of the results that can be expected for any other quarter or for the entire year.

Negative economic and market conditions, including continued low oil and natural gas prices, may adversely impact our customers’ future spending as well as payment for our services and, as a result, our operations and growth.

Stagnant or declining economic conditions have adversely impacted the demand for our services in the past and resulted in the delay, reduction or cancellation of certain projects and may adversely affect us in the future. In addition, economic and market conditions specifically affecting any of the industries we serve could adversely affect our business, financial condition, results of operations and cash flows. A number of factors, including financing conditions and potential bankruptcies in the industries we serve or a prolonged economic downturn or recession, could adversely affect our customers and their ability or willingness to fund capital expenditures in the future or pay for past services. Consolidation, competition, capital constraints or negative economic conditions in the electric power and oil and gas industries may also result in reduced spending by, or the loss of, one or more of our customers.

Our Oil and Gas Infrastructure Services segment is exposed to risks associated with the oil and gas industry. These risks, which are not subject to our control, include the volatility and cyclical nature of natural gas and oil prices and the resulting effect on demand for the services we provide, and a slowdown in the development or discovery of natural gas and/or oil reserves. Specifically, lower natural gas and oil prices have resulted, and could continue to result, in decreased spending by some of our customers in our Oil and Gas Infrastructure Services segment. Despite some recovery and stability in natural gas and oil prices since early 2016, capital spending by exploration and production companies and midstream companies has generally declined in the last few years. Any future decline in prices, or perceived risk thereof, may place downward pressure on capital programs. As a result, our customers may reduce or delay capital spending on larger pipeline projects, gas gathering and compressor systems and related infrastructure, resulting in less demand for our services. If the profitability of our Oil and Gas Infrastructure Services segment were to decline, our overall financial position, results of operations and cash flows could also be adversely affected. Additionally, declines in natural gas and oil prices, and the resulting decline in the development of resource plays and oil and natural gas production, can negatively impact our Electric Power Infrastructure Services segment. For example, the low price of oil has had an adverse impact on the Canadian economy, which has impacted demand for some of our electric power services in Canada.

Further, many of our customers finance their projects through the incurrence of debt or the issuance of equity. During depressed markets, our customers may be unable to access capital markets or otherwise obtain financing for budgeted capital expenditures. A reduction in cash flow or the lack of availability of debt or equity financing for our customers could result in a reduction in our customers’ spending for our services and may also impact the ability of our customers to pay amounts owed to us, which could have a material adverse effect on our business, financial condition, results of operations, cash flows and our ability to grow.

A variety of issues outside of our control, can affect the timing of and our performance on projects, which may result in additional costs to us, reductions or delays in revenues or the payment of liquidated damages.

Our business is dependent in part upon projects that can be cyclical in nature and are subject to risks of delay. The timing of or failure to obtain contracts, delays in awards of, start dates for or completion of projects and the cancellations of projects can result in significant periodic fluctuations in our business and results of operations.

Many projects involve challenging engineering, permitting, procurement and construction phases that may occur over extended time periods, sometimes over several years. We may encounter difficulties as a result of delays in design, engineering information or materials provided by the customer or a third party, delays or difficulties in equipment and material delivery, schedule changes, delays due to our or our customers’ failure to

 

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timely obtain permits or rights of way or meet other regulatory requirements or permitting conditions, weather-related delays and other factors, many of which are beyond our control, that can negatively impact our ability to complete the project and in accordance with the original delivery schedule. A failure by us to properly manage and invest in our equipment fleet could also negatively impact project performance and our financial condition, results of operations and cash flows.

Larger projects, in particular, present additional performance risks due to the larger and more complex work involved. Furthermore, the bidding processes for larger projects can also be longer and more complex, often taking six to nine months. Regulatory and permitting delays on larger projects tend to be more challenging and cause more uncertainty as to project timing.

In addition, we contract with third-party suppliers and subcontractors to assist us with the completion of contracts. Any delay or failure by suppliers or by subcontractors in the completion of their 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 electric power, natural gas or oil transmission lines, solar or wind projects, 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 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 our schedules or performance requirements could also result in additional costs or penalties, including liquidated damages, and such amounts could exceed expected project profit. 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.

Our customers may change or delay various elements of a project before or after its commencement, or the design, engineering information, equipment or materials that are to be provided by the customer or other parties may be preliminarily deficient or delivered later than required by the project schedule, 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 the above-mentioned delays and additional costs, including as a result of customer-requested change orders or failure by the customer to timely meet its obligations. Litigation or arbitration with respect to payment terms under contracts and change orders is generally lengthy and costly and may adversely affect our relationship with our customers or potential customers, and it is often difficult to predict when and for how much the claims will be resolved. A failure to obtain adequate extensions or compensation for these matters could require us to record a reduction to amounts of revenues 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 our business, financial condition, results of operations and cash flows.

Our failure to adequately recover on contract change orders or claims brought by us against customers related to payment terms and costs could materially and adversely affect our financial position, results of operations and cash flows.

We have in the past brought, and may in the future bring, claims against our customers related to, among other things, the payment terms of our contracts and change orders relating to our contracts. These types of claims occur due to, among other things, customer-caused delays or changes in project scope, both of which may result in additional cost, which may or may not be recovered until the claim is resolved. In some instances, these claims can be the subject of lengthy legal proceedings, and it is difficult to accurately predict when they will be fully resolved. A failure to promptly recover on these types of claims could have a negative impact on our financial condition, results of operations and cash flows.

 

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Regulatory and environmental requirements affecting any of the industries we serve may lead to less demand for our services.

Because the vast majority of our revenue is derived from a few industries, the regulatory and environmental requirements affecting those industries have a material effect on our business, and increased regulatory and environmental requirements in those industries could adversely affect our business, financial condition, results of operations and cash flows. Customers in the industries we serve also face heightened regulatory and environmental requirements and stringent permitting processes that impact their projects, which can result in delays, reductions and cancellations of some of their projects. These regulatory factors have resulted in decreased demand for our services in the past, and they may continue to do so in the future, potentially impacting our business, financial condition, results of operations, cash flows and our ability to grow.

Our business is labor intensive, and we may be unable to attract and retain qualified employees.

Our ability to maintain our productivity and profitability is limited by our ability to employ, train and retain the necessary skilled personnel. We may not 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, who are integral to the provision of transmission and distribution services under our Electric Power Infrastructure Services segment. The commencement of new, large-scale infrastructure projects or increased demand for infrastructure improvements, as well as the aging electric utility workforce, may also further reduce the pool of skilled workers available to us. In addition, in our Oil and Gas Infrastructure Services segment, there is limited availability of experienced supervisors and foremen that can oversee larger diameter pipe projects. A shortage in the supply of these skilled personnel creates competitive hiring markets and may result in increased labor expenses. Additionally, if we are unable to hire employees with the requisite skills, we may also be forced to incur significant training expenses. Labor shortages or increased labor costs could impair our ability to maintain our business or grow our revenues or profitability.

Our use of fixed price contracts could adversely affect our business, financial condition, results of operations and cash flows.

We currently generate some of our revenues under fixed price contracts. We also expect to generate a greater portion of our revenues under this type of contract in the future as larger projects, such as electric power and pipeline transmission build-outs and utility-scale solar facilities, become a more significant aspect of our business. We assume risks related to revenue, cost and profitability on fixed-priced contracts. Actual revenues and project costs can vary, sometimes substantially, from our original projections due to changes in a variety of factors including:

 

    unforeseen circumstances not included in our cost estimates or covered by our contract for which we cannot obtain adequate compensation, including concealed or unknown environmental or geological conditions;

 

    changes in the cost of equipment, commodities, materials or labor;

 

    unanticipated costs or claims due to customer-caused delays, customer failure to provide required materials or equipment, errors in engineering, specifications or designs, project modifications, or contract termination or suspension and our inability to obtain reimbursement for such costs or recover on such claims;

 

    weather conditions;

 

    failure to perform and delays in performance by our project owners or their contractors or our suppliers or subcontractors;

 

    delays and additional costs associated with obtaining required permits or approvals;

 

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    delays and additional costs attributable to challenges and protests of the siting or specifications of certain projects;

 

    quality issues, including those requiring rework or replacement;

 

    changes in laws or regulations; and

 

    general economic conditions and the economic conditions affecting the industries we serve.

These factors, along with other risks inherent in performing fixed price contracts may cause actual revenues and gross profits for a project to differ from what we originally estimated and could result in reduced profitability or losses on projects. Depending upon the size of a particular project, these variations could have a significant impact on our business, financial condition, results of operations and cash flows. Additionally, we may be required to pay liquidated damages under certain of our contracts if we fail to meet schedule or performance requirements, which could harm our reputation and have a material adverse impact on our business, financial condition, results of operations and cash flows.

Our use of percentage-of-completion accounting could result in a reduction or elimination of previously reported profits.

As discussed in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies and in the notes to our consolidated financial statements included in Item 8. Financial Statements and Supplementary Data, some of our revenues are recognized using the percentage-of-completion method of accounting, utilizing the cost-to-cost method. This accounting method is generally accepted for fixed price contracts and is used because management considers expended costs to be the best available measure of progress on these contracts. The percentage-of-completion accounting practice we use results in the recognition of 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 losses are determined to be probable and can be reasonably estimated, and contract profit estimates are adjusted based on an ongoing review of contract profitability. Further, a substantial portion of our contracts contain cost and performance incentives. Penalties are recorded when known or finalized, which generally occurs during the latter stages of the contract. 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 revenues may be exposed to potential risk if a project is terminated or canceled, if our customers encounter financial difficulties or if we encounter disputes with our customers.

Our contracts often require us to satisfy or achieve certain milestones in order to receive payment for the work performed, or in the case of cost-reimbursable contracts, provide support for billings in advance of receiving payment. As a result, we may incur significant costs or perform significant amounts of work prior to receipt of payment. If any of our customers do not proceed with the completion of projects or default on their payment obligations, or if we encounter disputes with our customers with respect to the adequacy of billing support, we may face difficulties in collecting payment of amounts due to us for the costs previously incurred. In addition, many of our customers for large projects are project-specific entities that do not have significant assets other than their interests in the project and may encounter financial difficulties relating to their businesses. It may be difficult to collect amounts owed to us by these customers. If we are unable to collect amounts owed to us, this would have an adverse effect on our future financial condition, results of operations and cash flows.

We have in the past brought, and may in the future bring, claims against our customers related to, among other things, the payment terms of our contracts and change orders relating to our contracts. These types of

 

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claims occur due to, among other things, customer-caused delays or changes in project scope, both of which may result in additional cost, which may or may not be recovered until the claim is resolved. In some instances, these claims can be the subject of lengthy legal proceedings, and it is difficult to accurately predict when they will be fully resolved. A failure to promptly recover on these types of claims could have a negative impact on our financial condition, results of operations and cash flows. Additionally, any such claims may harm our future relationships with our customers.

Our operating results can be negatively affected by weather conditions and the nature of our work environment.

We perform substantially all of our services outdoors. As a result, adverse weather conditions, such as extreme heat or cold, rainfall, snowfall, wind, storms or early thaw, may affect our productivity or may temporarily prevent us from performing services. The effect of weather delays on projects that are under fixed price arrangements may be greater if we are unable to adjust the project schedule for such delays. Furthermore, our work is performed under a variety of conditions, including but not limited to, difficult terrain, difficult site conditions and large urban centers where delivery of materials and availability of labor may be impacted and sites which may have been exposed to harsh and hazardous conditions. A reduction in our productivity and efficiency in any given period or our inability to meet guaranteed schedules may adversely affect our financial condition, results of operations and cash flows.

We may be unsuccessful at generating internal growth.

Our ability to generate internal growth will be affected by, among other factors, our ability to:

 

    expand the range of services we offer to customers to address their evolving infrastructure needs;

 

    attract new customers;

 

    increase the number of projects performed for existing customers;

 

    hire and retain qualified employees;

 

    expand geographically, including internationally; and

 

    address the challenges presented by stringent regulatory, environmental and permitting requirements and difficult economic or market conditions that may affect us or our customers.

In addition, our customers may cancel, delay or reduce the number or size of projects available to us for a variety of reasons, including capital constraints or inability to meet regulatory requirements. Many of the factors affecting our ability to generate internal growth are beyond our control, and we cannot be certain that our strategies for achieving internal growth will be successful.

Our business is highly competitive, and competitive pressures can affect our business, financial condition, results of operations and cash flows.

The specialty contracting business is served by numerous small, owner-operated private companies, some public companies and several large regional companies. Relatively few barriers prevent entry into some areas of our business, and as a result, any organization that has adequate financial resources and access to technical expertise may become one of our competitors.

In addition, some of our competitors have significant financial, technical and marketing resources. We cannot be certain that our competitors do not have or 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 the specialty contracting business or maintain our current customer base. Certain of our competitors may have lower overhead cost structures, and

 

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therefore may be able to provide the required services at lower rates than us. We also face competition from in-house service organizations of our existing or prospective customers. Electric power and oil and gas service providers are capable of performing, or acquiring businesses that perform, some of the same types of services we provide, and we cannot be certain that our existing or prospective customers will continue to outsource these services in the future.

Furthermore, a substantial portion of our revenues is directly or indirectly dependent on winning new contracts. The timing of when project awards will be made is unpredictable and often involves complex and lengthy negotiations and bidding processes. These processes can be impacted by a wide variety of factors, including price, governmental approvals, financing contingencies, commodity prices, environmental conditions and overall market and economic conditions. The competitive environment we operate in can also affect the timing of contract awards and the commencement or progress of work under awarded contracts. For example, based on rapidly changing competition dynamics, we have experienced, and may in the future experience, more competitive pricing in certain markets, such as the smaller scale transmission and distribution electric power market. Our bids also may not be successful due to, among other things, a potential customer’s perception of our ability to perform the work or the technological advantages held by our competitors. Additionally, changing competitive pressures can present difficulties in matching workforce size with available contract awards. As a result, the competitive environment we operate in could have a material adverse effect on our business, financial condition, results of operations and cash flows and could cause our results of operations and cash flows to fluctuate significantly from quarter to quarter.

Changes in government spending and legislative actions and initiatives relating to renewable energy and electric power may adversely affect demand for our services.

Demand for our services may not result from renewable energy initiatives. While many states currently have mandates in place that require specified percentages of power to be generated from renewable sources, those mandates could be reduced or made optional, thereby reducing, delaying or eliminating renewable energy development. Additionally, renewable energy is generally more expensive to produce than energy from traditional sources and may require additional power generation sources as backup. The locations of renewable energy projects are often remote and are not viable unless new or expanded transmission infrastructure to transport the power to demand centers is economically feasible. Furthermore, funding for renewable energy initiatives is uncertain and in the past has been constrained by tight credit markets. These factors could result in fewer renewable energy projects than anticipated and a delay in the construction of these projects and related infrastructure, which could negatively impact our business.

Other current and potential legislative or regulatory initiatives may not result in increased demand for our services. Examples include legislation or regulations that require utilities to meet reliability standards, ease siting and right-of-way issues for the construction of transmission lines, and encourage installation of new electric power transmission and renewable energy generation facilities. It is not certain whether existing legislation will create sufficient incentives for new projects, when or if proposed legislative initiatives will be enacted or whether any potentially beneficial provisions will be included in the final legislation.

There are also a number of legislative and regulatory proposals and global, non-binding agreements that address greenhouse gas emissions, which are in various phases of discussion or implementation. The outcome of these pending federal and state proposals and possible future legislative and regulatory proposals resulting from any global agreement could negatively affect the operations of our customers through costs of compliance or restraints on projects, which could reduce their demand for our services.

Our business is subject to operational hazards, and we are self-insured against certain potential liabilities.

Our business is subject to significant operational hazards due to the nature of services provided by our workforce and the conditions in which they operate. These hazards include those involving electricity, fires, natural gas explosions, mechanical failures and weather-related incidents. Our offshore operations are subject to

 

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additional risks, including blowouts, collisions, vessels sinking or capsizing and damage from severe weather conditions. These hazards could cause personal injury and severe damage to property, equipment and the environment and could lead to suspension of operations and/or legal liabilities. We also often operate in densely populated urban areas, which could increase the impact of any of these hazards or other accidents we experience. If we are not fully insured or indemnified against such liabilities or a counterparty fails to meet its indemnification obligations to us, it could materially and adversely affect our business, financial condition, results of operations and cash flows. Further, any such liabilities or accidents could adversely affect our safety record, which could impact our ability to bid on certain work.

We are insured for employer’s liability, workers’ compensation, auto liability and general liability claims, but such insurance is subject to deductibles and limits and may be canceled or may not cover all of our losses. Under these programs, the deductible for employer’s liability is $1.0 million per occurrence, the deductible for workers’ compensation is $5.0 million per occurrence, and the deductibles for auto liability and general liability are $10.0 million per occurrence. We are generally self-insured for all claims that do not exceed the amount of the applicable deductible. In connection with our casualty insurance programs, we are required to issue letters of credit to secure our self-insured obligations. We also have employee health care benefit plans for most employees not subject to collective bargaining agreements, of which the primary plan is subject to a deductible of $0.4 million per claimant per year. Our insurance policies include various coverage requirements, including the requirement to give appropriate notice. If we fail to comply with these requirements, our coverage could be denied.

Losses under all of these insurance programs are accrued based upon our estimate of the ultimate liability for claims reported and an estimate of claims incurred but not reported, with assistance from third-party actuaries. These insurance liabilities are difficult to assess and estimate due to unknown factors, including the severity of an injury, the extent of damage, the determination of our liability in proportion to other parties and the number of incidents not reported. The accruals are based upon known facts and historical trends, and management believes such accruals are adequate. If we were to experience insurance claims or costs significantly above our estimates, our business, financial condition, results of operations and cash flows could be materially and adversely affected.

During the ordinary course of our business, we may become subject to lawsuits or indemnity claims, which could materially and adversely affect our business and results of operations.

We have in the past been, and may in the future be, named as a defendant in lawsuits, claims and other legal proceedings that arise in the ordinary course of our business. These actions may seek, among other things, compensation for alleged personal injury, workers’ compensation, employment discrimination and other employment-related damages, breach of contract, property damage, environmental liabilities, multiemployer pension plan withdrawal liabilities, punitive damages, and civil penalties or other losses or injunctive or declaratory relief. In addition, we generally indemnify our customers for claims related to the services we provide and actions we take under our contracts, and, in some instances, we may be allocated risk through our contract terms for actions by our customers or other third parties. Because our services in certain instances may be integral to the operation and performance of our customers’ infrastructure, we have been and may become subject to lawsuits or claims for any failure of the systems that we work on, even if our services are not the cause of such failures, and we could be subject to civil and criminal liabilities to the extent that our services contributed to any property damage, personal injury or system failure. Insurance coverage may not be available or may be insufficient for these lawsuits, claims or legal proceedings. The outcome of any of these lawsuits, claims or legal proceedings could result in significant costs and diversion of management’s attention from our business. Payments of significant amounts, even if reserved, could adversely affect our business, reputation, financial condition, results of operations and cash flows. For details on our existing litigation and claims, refer to Note 15 of the Notes to Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data.

 

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Unavailability or cancellation of third party insurance coverage would increase our overall risk exposure as well as disrupt our operations.

We maintain insurance coverage from third party insurers as part of our overall risk management strategy and because some of our contracts require us to maintain specific insurance coverage limits. There can be no assurance that our insurance coverages will be sufficient or effective under all circumstances or against all claims and liabilities which we may be subject. Additionally, we renew our insurance policies on an annual basis, and therefore deductibles and levels of coverage may change in future periods. There can be no assurance that any of our existing insurance coverage will be renewed upon the expiration of the coverage period or that future coverage will be affordable at the required limits. In addition, our third party insurers could fail, suddenly cancel our coverage or otherwise be unable to provide us with adequate insurance coverage. If any of these events occur, our overall risk exposure would increase and our operations could be disrupted. For example, we have significant operations in California and other locations which have a higher risk of wildfires. Should our insurers determine to exclude coverage for wildfires in the future, we could be exposed to significant liabilities and a potential disruption of our operations. If our risk exposure increases as a result of adverse changes in our insurance coverage, we could be subject to increased claims and liabilities that could negatively affect our business, financial condition, results of operations and cash flows.

Many of our contracts may be canceled or suspended on short notice or may not be renewed upon completion or expiration, and we may be unsuccessful in replacing our contracts in such events, which may adversely affect our financial condition, results of operations and cash flows.

We could experience a decrease in our revenues, net income and liquidity if any of the following occur:

 

    our customers cancel or suspend a significant number of contracts or contracts having significant value;

 

    we fail to renew a significant number of our existing contracts;

 

    we complete a significant number of non-recurring projects and cannot replace them with similar projects; or

 

    we fail to reduce operating and overhead expenses consistent with any decrease in our revenues.

Many of our customers may cancel or suspend our contracts on short notice, typically 30 to 90 days, even if we are not in default under the contract. Certain of our customers assign work to us on a project-by-project basis under master service agreements. Under these agreements, our customers generally have no obligation to assign a specific amount of work to us. Our operations could decline significantly if the anticipated volume of work is not assigned to us, which will be more likely if customer spending decreases due to, for example, unfavorable economic conditions. Many of our contracts, including our master service agreements, are opened to public bid at the expiration of their terms. There can be no assurance that we will be the successful bidder on our existing contracts that are subject to re-bid in the future.

The nature of our business exposes us to potential liability for warranty claims and faulty engineering, which may reduce our profitability.

Under our contracts with customers, we typically provide warranties for the services and materials we provide, guaranteeing the work performed against, among other things, defects in workmanship. The majority of our contracts have a warranty period of 18 to 24 months, although some are longer. As much of the work we perform is inspected by our customers for any defects in construction prior to acceptance of the project, the warranty claims that we have historically received have not been substantial. Additionally, materials used in construction are often provided by the customer or are warranted against defects by the supplier. However, certain projects may have longer warranty periods and include facility performance warranties that may be broader than the warranties we generally provide. In these circumstances, if warranty claims occur, we are generally required to re-perform the services and/or repair or replace the warranted item and any other facilities

 

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impacted thereby, at our sole expense, and we could also be responsible for other damages if we are not able to adequately satisfy our warranty obligations. In addition, we may be required under contractual arrangements with our customers to warrant any defects or failures in materials we provide. While we generally require the materials suppliers to provide us warranties that are consistent with those we provide to our customers, if any of these suppliers default on their warranty obligations to us, we may incur costs to repair or replace the defective materials. Costs incurred as a result of warranty claims could adversely affect our business, financial condition, results of operations and cash flows.

Furthermore, because our projects are often technically complex, our failure to make judgments and recommendations in accordance with applicable professional standards, including engineering standards, could result in damages. Our business involves professional judgments regarding the planning, design, development, construction, operations and management of electric power transmission and pipeline infrastructure. While we do not generally accept liability for consequential damages, and although we have adopted a range of insurance, risk management and risk avoidance programs designed to reduce potential liabilities, a significantly adverse or catastrophic event at one of our project sites or completed projects resulting from the services we have performed could result in significant professional or product liability or other claims against us as well as reputational harm, especially if public safety is impacted. These liabilities could exceed our insurance limits or could impact our ability to obtain insurance in the future. In addition, customers, subcontractors or suppliers who have agreed to indemnify us against any such liabilities or losses might refuse or be unable to pay us. An uninsured claim, either in part or in whole, if successful and of a material magnitude, could have a substantial impact on our business, financial condition, results of operations and cash flows.

The loss of one or a few customers could have a material adverse effect on us.

A few customers have in the past and may in the future account for a significant portion of our revenues in any one year or over a period of several consecutive years. Although we have long-standing relationships with many of our significant customers, our customers may unilaterally reduce or discontinue their contracts with us at any time. The loss of business from a significant customer could have a material adverse effect on our business, financial condition, results of operations and cash flows.

Backlog may not be realized or may not result in profits.

Backlog is not a term recognized under US GAAP; however, it is a common measurement used in our industry. Our methodology for determining backlog may not be comparable to the methodologies used by other companies. For a discussion of how we calculate backlog for our business, please see Backlog in Item 1. Business.

Furthermore, backlog is difficult to determine with certainty. Customers often have no obligation under our contracts to assign or release work to us, and many contracts may be terminated on short notice. Reductions in backlog due to cancellation or reduction in scope of one or more contracts or projects by a customer or for other reasons could significantly reduce the revenues and profit we actually receive from contracts included in backlog. In the event of a project cancellation or reduction in scope, we may be reimbursed for certain costs but would not have a contractual right to the total revenues reflected in our backlog. The backlog we obtain in connection with companies we acquire may not be as large as we believed and may not result in the revenues or profits we expected at the time of acquisition. In addition, projects that are delayed may remain in backlog for extended periods of time. All of these uncertainties are heightened by negative economic conditions and their impact on our customers’ spending, as well as the effects of regulatory requirements and weather conditions. Consequently, our estimates of backlog may not be accurate, and we may not be able to realize our estimated backlog.

Our financial results are based upon estimates and assumptions that may differ from actual results.

In preparing our consolidated financial statements in conformity with US GAAP, several estimates and assumptions are used by management to report the assets, liabilities, revenues and expenses recognized during

 

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the periods presented and to determine the contingent assets and liabilities known to exist as of the date of the financial statements. These estimates and assumptions are necessary because certain information used in the preparation of our financial statements is dependent on future events, cannot be calculated with a high degree of precision from available data or cannot be readily calculated based on generally accepted methodologies. In some cases, these estimates are particularly difficult to determine, and we must exercise significant judgment. Estimates are used primarily in our assessment of the allowance for doubtful accounts, valuation of inventory, useful lives of assets, fair value assumptions in analyzing goodwill, other intangibles and long-lived asset impairments, equity and other investments, loan receivables, purchase price allocations, liabilities for self-insured and other claims and guarantees, multiemployer pension plan withdrawal liabilities, revenue recognition for construction contracts inclusive of contractual change orders and claims, share-based compensation, operating results of reportable segments, provision (benefit) for income taxes and the calculation of uncertain tax positions. 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.

Our inability to successfully execute our acquisition strategy may have an adverse impact on our growth strategy.

Our business strategy includes expanding our presence in the industries we serve through strategic acquisitions of companies that complement or enhance our business. The number of acquisition targets that meet our criteria may be limited. We may also face competition for acquisition opportunities, and other potential acquirers may offer more favorable terms or have greater financial resources available for potential acquisitions. This competition may further limit our acquisition opportunities and our ability to grow through acquisitions or could raise the prices of acquisitions and make them less accretive, or possibly not accretive, to us. Failure to consummate future acquisitions could negatively affect our growth strategies. Additionally, the acquisitions we complete may involve significant cash expenditures, the incurrence or assumption of debt or burdensome regulatory requirements, and any acquisition may ultimately have a negative impact on our business, financial condition, results of operations and cash flows.

We may be unsuccessful at integrating businesses that either we have acquired or that we may acquire in the future, which may reduce the anticipated benefit from acquired businesses.

As a part of our business strategy, we have acquired, and may seek to acquire in the future, companies that complement or enhance our business. The success of this strategy will depend on our ability to realize the anticipated benefits from the acquired businesses, such as the expansion of our existing operations, elimination of redundant costs and capitalizing on cross-selling opportunities. To realize these benefits, however, we must successfully integrate the operations of the acquired businesses with our existing operations. Integrating our acquired companies involves a number of special risks, including:

 

    failure of acquired companies to achieve the results we expect;

 

    diversion of our management’s attention from operational and other matters;

 

    difficulties integrating the operations and personnel of acquired companies;

 

    additional financial reporting and accounting challenges associated with integrating acquired companies;

 

    inability to retain key personnel of acquired companies;

 

    risks associated with unanticipated events or liabilities;

 

    loss of business due to customer overlap, change from local or private ownership or other factors;

 

    risks and liabilities arising from the prior operations of acquired companies, such as performance, operational, safety, workforce or tax issues, some of which we may not have discovered during our due diligence and may not be covered by indemnification obligations; and

 

    potential disruptions of our business.

 

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We cannot be sure that we will be able to successfully complete the integration process without substantial costs, delays, disruptions or other operational or financial problems. If we do not implement proper overall business controls, our decentralized operating strategy could result in inconsistent operating and financial practices at the companies we acquire. Additionally, failure to successfully integrate acquired businesses could adversely impact our business, financial condition, results of operations and cash flows.

Our results of operations could be adversely affected as a result of asset 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 other intangible assets of the business we acquire. Goodwill and other intangible assets that have indefinite useful lives cannot be amortized, but instead must be tested at least annually for impairment, while intangible assets that have finite useful lives are amortized over their useful lives. The accounting literature provides specific guidance for testing goodwill and other non-amortized intangible assets for impairment. Refer to Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies for a detailed discussion. Management is required to make certain estimates and assumptions when allocating goodwill to reporting units and determining the fair value of a reporting unit’s 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 market capitalization declines below book value, this may be considered an impairment indicator.

As part of our 2015 annual test for goodwill impairment, we recorded a non-cash impairment charge of $39.8 million related to goodwill and $12.1 million related to customer relationships, trade names and non-compete agreement intangible assets. The extended low commodity price environment significantly impacted certain reporting units within our Oil and Gas Infrastructure Services Division. Specifically, lower levels of expected activity in the U.S. Gulf of Mexico and, to a lesser extent, with respect to certain directional drilling operations in Australia resulted in impairments of goodwill and intangible assets. Any future impairments, including impairments of goodwill, intangible assets or investments, could have a material adverse effect on our financial condition and results of operations for the period in which the impairment is recognized.

We also recorded asset impairments primarily related to certain international renewable energy services operations of $8.0 million in 2016 and $6.6 million in 2015. The 2016 impairment was primarily due to a pending disposition of certain international renewable energy services operations, and the 2015 impairment was based on the estimated future undiscounted cash flows for the asset group as compared to their carrying value.

In addition, we enter into various types of investment arrangements in the normal course of business, each having unique terms and conditions. These investments may include equity interests we hold in business entities, including general or limited partnerships, contractual joint ventures or other forms of equity or profit participation. These investments may also include our participation in different finance structures such as the extension of loans to project specific entities, the acquisition of convertible notes issued by project specific entities or other strategic financing arrangements. Our equity method investments are carried at original cost and are included in other assets, net in our consolidated balance sheet and are adjusted for our proportionate share of the investees’ income, losses and distributions. Equity investments are reviewed for impairment by assessing whether there has been a decline in the fair value of the investment below the carrying value and whether that decline is considered to be other than temporary. In making this determination, factors such as the ability to recover the carrying amount of the investment and the inability of the investee to sustain future earnings capacity are evaluated in determining whether an impairment has occurred and should be recognized.

 

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We extend credit to customers for purchases of our services and may enter into longer-term deferred payment arrangements or provide other financing or investment arrangements with certain of our customers, which subjects us to potential credit or investment risk that could, if realized, adversely affect our financial condition, results of operations and cash flows.

We grant credit, generally without collateral, to our customers, which include electric power utilities, oil and gas companies, governmental entities, general contractors, and builders, owners and managers of renewable energy facilities and commercial and industrial properties located primarily in the United States, Canada and Australia. We may also agree to allow our customers to defer payment on projects until certain milestones have been met or until the projects are substantially completed, and customers typically withhold some portion of amounts due to us as retainage. In addition, we may provide other forms of financing to our customers or make investments in our customers’ projects, typically in situations where we also provide services in connection with the projects. Our payment arrangements subject us to potential credit risk related to changes in business and economic factors affecting our customers, including material changes in our customers’ revenues or cash flows. These changes may also reduce the value of any financing or equity investment arrangements we have with our customers. Many of our customers have been negatively impacted by uncertain economic conditions in recent years, and some may experience financial difficulties (including bankruptcies) that could impact our ability to collect amounts owed to us or impair the value of our investments in them.

If we are unable to collect amounts owed to us, our cash flows would be reduced, and we could experience losses if those amounts exceeded current allowances. We would also recognize losses with respect to any investments that are impaired as a result of our customers’ financial difficulties. The risk of loss may increase for projects where we provide services and make a financing or equity investment. Losses experienced could materially and adversely affect our financial condition, results of operations and cash flows.

The loss of key personnel could disrupt our business.

We depend on the continued efforts of our executive officers and senior management, including the management at each of our operating units. Although we typically enter into employment agreements with terms of one to three years with 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 or that key employees of our future acquisition targets will be willing to enter into such agreements. The loss of key personnel, or the inability to hire and retain qualified employees, could negatively impact our ability to manage our business.

We may be required to contribute cash to meet our underfunded obligations in certain multiemployer pension plans.

Our collective bargaining agreements generally require us to participate with other companies in multiemployer pension plans. To the extent those plans are underfunded, the Employee Retirement Income Security Act of 1974, as amended by the Multiemployer Pension Plan Amendments Act of 1980, may subject us to substantial liabilities under those plans if we withdraw from them or they are terminated or experience a mass withdrawal. For example, we are involved in several litigation matters associated with our withdrawal from the Central States, Southeast and Southwest Areas Pension Plan (the Central States Plan). The ultimate liability associated with these matters will depend on various factors, including interpretations of the terms of the collective bargaining agreements under which the subsidiaries participated and whether exemptions from withdrawal liability applicable to construction industry employers will be available. For additional information on the Central States Plan matters, please see Collective Bargaining Agreements in Note 15 of the Notes to Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data.

In addition, the Pension Protection Act of 2006 added special funding and operational rules generally applicable to plan years beginning after 2007 for multiemployer plans that are classified as “endangered,” “seriously endangered” or “critical” status based on multiple factors (including, for example, the plan’s funded

 

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percentage, cash flow position and whether it is projected to experience a minimum funding deficiency). Plans in these classifications must adopt measures to improve their funded status through a funding improvement or rehabilitation plan, as applicable, which may require additional contributions from employers (which may take the form of a surcharge on benefit contributions) and/or modifications to retiree benefits. Certain plans to which we contribute or may contribute in the future are in “endangered,” “seriously endangered” or “critical” status. The amount of additional funds, if any, that we may be obligated to contribute to these plans in the future cannot be estimated due to uncertainty of the future levels of work that require the specific use of union employees covered by these plans, as well as the future contribution levels and possible surcharges on contributions applicable to these plans.

Our unionized workforce and related obligations could adversely affect our operations.

As of December 31, 2016, approximately 58% of our hourly employees were covered by collective bargaining agreements. Although the majority of the collective bargaining agreements prohibit strikes and work stoppages, certain of our unionized employees have participated in strikes and work stoppages in the past, and we cannot be certain that strikes or work stoppages will not occur in the future. Strikes or work stoppages can adversely impact relationships with our customers and could cause us to lose business and decrease our revenue.

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 multiemployer pension plans to which an acquired company historically contributed or presently contributes.

Approximately 42% of our hourly employees are not unionized. 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 non-union labor crews become unionized, which could negatively affect our business, financial condition, results of operations and cash flows.

We may incur liabilities or suffer negative financial or reputational impacts relating to occupational health and safety matters.

Our operations are inherently dangerous and subject to extensive laws and regulations relating to the maintenance of safe conditions in the workplace. While we have invested, and will continue to invest, substantial resources in our occupational health and safety programs, our industry involves a high degree of operational risk and there can be no assurance that we will avoid significant liability exposure. Although we have taken what we believe are appropriate precautions, we have suffered fatalities in the past and may suffer additional fatalities in the future. 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. In addition, if our safety record were to substantially deteriorate over time or we were to suffer substantial penalties or criminal prosecution for violation of health and safety regulations, our customers could cancel our contracts and elect to procure future services from other providers. Unsafe work sites also have the potential to increase employee turnover, increase the costs of projects for our clients, and raise our operating costs. Any of the foregoing could result in financial loss, which could have a material adverse impact on our business, financial condition, results of operations and cash flows.

Risks associated with operating in international markets could restrict our ability to expand globally and harm our business and prospects.

Although our international operations are presently conducted primarily in Canada and Australia, we also perform work in other foreign countries and expect that the number of countries in which we operate and the

 

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amount of work we perform in foreign countries could increase over the next few years. Economic conditions, including those resulting from wars, civil unrest, acts of terrorism and other conflicts or volatility in global markets, may adversely affect our customers, their demand for our services and their ability to pay for our services. In addition, our international operations include business and transactions for which we are paid in local currency. Payments to us in currencies other than the U.S. dollar may exceed our local currency needs, leading to the accumulation of excess local currency, which, in certain instances, may be subject to temporary blocking, costly taxes or tariffs, or other difficulties if we attempt to convert those amounts to U.S. dollars.

There are also numerous other risks inherent in conducting business internationally, including, but not limited to, potential instability in international markets, changes in applicable regulatory requirements, foreign currency fluctuations, political, economic and social conditions in foreign countries, expropriation or nationalization of our assets, foreign legal systems and cultural practices dissimilar from those we are familiar with, and complex U.S. and foreign tax regulations and other laws and international treaties. These risks could restrict our ability to provide services to international customers, operate our international business profitably or fund our strategic objectives, and our overall business, financial condition, results of operations and cash flows could be negatively impacted by our foreign activities.

Compliance with and changes in tax laws could adversely affect our performance.

We are subject to extensive tax liabilities imposed by multiple jurisdictions, including income taxes, indirect taxes (excise/duty, sales/use, gross receipts, and value-added taxes), payroll taxes, franchise taxes, withholding taxes, and ad valorem taxes. New tax laws, treaties and regulations and changes in existing tax laws, treaties and regulations are continuously being enacted or proposed, and could result in a higher tax rate on our earnings, which could have a material impact on our earnings and cash flows from operations. In addition, significant judgment is required in determining our worldwide provision for income taxes. In the ordinary course of our business, there are many transactions and calculations where the ultimate tax determination is uncertain. We are regularly under audit by tax authorities, and our tax estimates and tax positions could be materially affected by many factors including the final outcome of tax audits and related litigation, the introduction of new tax accounting standards, legislation, regulations and related interpretations, our global mix of earnings, the realizability of deferred tax assets and changes in uncertain tax positions. A significant increase in our tax rate could have a material adverse effect on our profitability and liquidity.

We could be adversely affected by our failure to comply with the laws applicable to our foreign activities, including the U.S. Foreign Corrupt Practices Act and other similar worldwide anti-bribery laws.

The U.S. Foreign Corrupt Practices Act (FCPA) and similar anti-bribery laws in other jurisdictions prohibit U.S.-based companies and their intermediaries from making improper payments to non-U.S. officials for the purpose of obtaining or retaining business. We pursue opportunities in certain parts of the world that experience government corruption, and in certain circumstances, compliance with anti-bribery laws may conflict with local customs and practices. Our policies mandate compliance with all applicable anti-bribery laws. Further, we require our partners, subcontractors, agents and others who work for us or on our behalf to comply with the FCPA and other anti-bribery laws. Although we have policies and procedures designed to ensure that we, our employees, our agents and others who work with us in foreign countries comply with the FCPA and other anti-bribery laws, there is no assurance that such policies or procedures will protect us against liability under the FCPA or other laws for actions taken by our agents, employees and intermediaries. If we are found to be liable for FCPA violations (either due to our own acts or inadvertence, or due to the acts or inadvertence of others), we could be subject to severe criminal or civil penalties or other sanctions, which could have a material adverse effect on our reputation, business, financial condition, results of operations, and cash flows. In addition, detecting, investigating and resolving actual or alleged FCPA violations is expensive and could consume significant time and attention of our senior management.

On March 10, 2014, the SEC notified us of an inquiry into certain aspects of our activities in certain foreign jurisdictions and requested that we take necessary steps to preserve and retain categories of relevant documents,

 

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including those pertaining to our FCPA compliance program. The SEC did not allege any violations of law by Quanta or our employees. On October 27, 2016, the SEC notified us that it had concluded its investigation and, based on the information received, did not intend to pursue further action in connection with this inquiry.

Our participation in joint ventures exposes us to liability and/or harm to our reputation for failures of our partners.

As part of our business, we have entered into joint venture arrangements and may enter into additional joint venture arrangements in the future. The purpose of these joint ventures is typically to combine skills and resources to allow for the bidding and performance of particular projects. Success on these jointly performed projects depends in large part on whether our joint venture partners, over whom we may have little or no control, satisfy their contractual obligations. Differences in opinions or views between us and our joint venture partners can result in delayed decision-making or failure to agree on material issues that could adversely affect the business and operations of our joint ventures. Additionally, the failure by a joint venture partner to comply with applicable laws, regulations or client requirements could negatively impact our business.

We and our joint venture partners are generally jointly and severally liable for all liabilities and obligations of our joint ventures. If a joint venture partner fails to perform or is financially unable to bear its portion of required capital contributions or other obligations, including liabilities stemming from claims or lawsuits, we could be required to make additional investments, provide additional services or pay more than our proportionate share of a liability to make up for our partner’s shortfall. Further, if we are unable to adequately address our partner’s performance issues, the customer may terminate the project, which could result in legal liability to us, harm our reputation and reduce our profit or increase our loss on a project.

We are in the process of implementing information technology (IT) solutions, which could temporarily disrupt day-to-day operations at certain operating units.

We continue to implement comprehensive IT solutions that we believe will allow for the interface between functions such as accounting and finance, human resources, operations, and fleet management. Continued development and implementation of the IT solutions will require substantial financial and personnel resources. While the IT solutions are intended to improve and enhance our information systems, implementation of new information systems at each operating unit exposes us to the risks of start-up of the new system and integration of that system with our existing systems and processes, including possible disruption of our financial reporting. There is no guarantee that we will realize economic or other intended benefits from continued development and implementation of the IT solutions. Additionally, the IT solutions may not be developed or implemented as timely or as accurately as planned. Failure to properly implement the IT solutions could result in substantial disruptions to our business, including coordinating and processing our normal business activities, testing and recording of certain data necessary to provide oversight over our disclosure controls and procedures and effective internal controls over our financial reporting, and other unforeseen problems.

Our failure to adequately protect critical data, sensitive information and technology systems could materially affect our business, financial condition, results of operations and cash flows or result in harm to our reputation.

We use technology in substantially all aspects of our business operations. We rely heavily on computer, information, and communications technology and related systems to manage our operations and other business processes and to protect sensitive company information. Furthermore, in connection with our business we collect and retain personally identifiable and other sensitive information of our customers, stockholders and employees, all of which expect that we will adequately protect such information.

Cyber-attacks and physical security risks, such as storms or other natural phenomena, IT solution failures, network disruptions, theft and other breaches of data security, could disrupt our operations by causing, among

 

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other things, delays in the processing of transactions or the reporting of financial results or the unintentional disclosure of company information (including confidential or proprietary information). Cyber-attacks or acts of terrorism against us, our customers and/or our vendors or other breaches of our data security could also cause service disruption or loss of control of our customers’ energy infrastructure systems, which could subject us to significant liabilities and cause damage to our reputation. Additionally, a significant theft, loss, misappropriation, or inadvertent release of customer, stockholder or employee data by cyber-attack or otherwise could adversely impact our reputation and could result in significant costs, fines and litigation.

While management has taken steps to address these concerns by implementing network security and internal control measures, there can be no assurance that the above events will not occur, and such events could have a material adverse effect on our business, financial condition, results of operations and cash flows.

Our dependence on suppliers, subcontractors and equipment manufacturers could expose us to risk of loss in our operations.

On certain projects, we rely on suppliers to obtain the necessary materials and subcontractors to perform portions of our services. We also rely on equipment manufacturers to provide us with the equipment required to conduct our operations. 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 may be heightened as a result of market and economic conditions. To the extent we cannot engage subcontractors or acquire equipment or materials, our operations could be negatively impacted. Additionally, successful completion of our contracts may depend on whether our subcontractors successfully fulfill their contractual obligations. If our subcontractors fail to perform their contractual obligations as a result of financial or other difficulties, or if our subcontractors fail to meet the expected completion dates or quality standards, we may be required to incur additional costs or provide additional services in order to make up such shortfall.

An increase in the prices of certain materials used in our business could adversely affect our business.

For certain contracts, we are exposed to market risk of increases in certain commodity prices of materials, such as copper and steel, which are used as components of supplies or materials utilized in all of our operations. We are also exposed to increases in energy prices, particularly as they relate to gasoline prices for our rolling-stock fleet of approximately forty thousand units. While we believe we can increase our prices to adjust for some price increases in commodities, there can be no assurance that price increases of commodities, if they were to occur, would be recoverable. Additionally, some of our fixed price contracts do not allow us to adjust our prices and, as a result, increases in material or fuel costs could reduce our profitability with respect to such projects.

We may not have access in the future to sufficient funding to finance desired growth and operations.

If we cannot secure future funds or financing on acceptable terms, we may be unable to support our future operations or growth strategy. We use cash for acquisitions and other investments, both of which are elements of our growth strategy, and the timing and size of our acquisition or investment efforts cannot be readily predicted. Acquisitions and investments funded by cash on hand, cash from operations and cash from our current credit facility limit our financial flexibility and may increase our need to seek capital through additional debt or equity financings. We also rely on financing companies to fund the leasing of certain of our trucks and trailers, support vehicles and specialty construction equipment. Credit market conditions may cause certain of these financing companies to restrict or withhold access to capital for us to fund the leasing of additional equipment. 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.

Our credit agreement contains significant restrictions, including financial covenants and other restrictions on our ability to borrow amounts under the agreement and limitations on our ability to incur additional debt or

 

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conduct certain types of preferred equity financings. Our ability to increase the current commitments under our credit facility is also dependent upon additional commitments from our lenders. Furthermore, if we are permitted under our credit facility to seek additional debt or equity financings, we cannot be certain they will be available to us on acceptable terms or at all, as banks are often restrictive in their lending practices, and additional debt financing may include covenants that further limit our operational and financial flexibility. If we are unable to borrow under our current credit agreement or secure other financing or if our lenders become unable or unwilling to fund their commitments to us, we may not be able to access the capital needed to fund our growth and operations. For additional information on the terms of our credit facility, please read Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Debt Instruments — Credit Facility.

Additionally, the market price of our common stock 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 or the other risks described in this Annual Report on Form 10-K.

Fluctuating foreign currency exchange rates may have a greater impact on our financial results as we expand into international markets.

For the year ended December 31, 2016, we derived $1.59 billion, or 20.8%, of our consolidated revenues from foreign operations, the substantial majority of which was earned in Canada and Australia. The functional currencies for our foreign operations are typically the currency of the country in which the foreign operating unit is located. Accordingly, our financial performance is subject to fluctuation due to changes in foreign currency exchange rates relative to the U.S. dollar. As the U.S. dollar strengthens against foreign currencies, our translation of foreign currency denominated revenues or expenses will result in lower U.S. dollar denominated revenues and expenses. Conversely, if the U.S. dollar weakens against foreign currencies, the translation of these foreign currency denominated revenues or expenses will result in increased U.S. dollar denominated revenues and expenses. For example, during the year ended December 31, 2016, foreign revenues decreased by approximately $41 million in comparison with the year ended December 31, 2015 as a result of less favorable foreign currency exchange rates due to the U.S. dollar strengthening against the Canadian dollar. Also, during the year ended December 31, 2015, foreign revenues decreased by approximately $227 million in comparison with the year ended December 31, 2014 as a result of less favorable foreign currency exchange rates due to the U.S. dollar strengthening against the Canadian and Australian dollars.

We intend to expand the volume of services that we provide internationally. As a result, our reported financial condition, results of operations and cash flows may be further exposed to the effects that fluctuating exchange rates have on the process of translating the financial statements of our international operations and the remeasurement of transactions which are not denominated in the reporting units’ functional currencies.

Our variable rate indebtedness subjects us to interest rate risk, which could cause our debt service obligations to increase significantly.

Borrowings under our credit facility and certain other borrowings are at variable rates of interest and expose us to interest rate risk. If interest rates increase, our debt service obligations on the variable rate indebtedness will increase even though the amount borrowed remains the same, and our net income and cash flows, including cash available for servicing our indebtedness, will correspondingly decrease. Our weighted average interest rate on our variable rate debt for the year ended December 31, 2016 was 2.1%. The annual effect on our pretax earnings of a hypothetical 50 basis point increase or decrease in variable interest rates would be approximately $1.8 million based on our December 31, 2016 balance of variable rate debt.

 

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Our business growth could outpace the capability of our decentralized management infrastructure.

We cannot be certain that our management infrastructure will be adequate to support our operations as they expand. For example, the ability to internally communicate, coordinate and execute business strategies, plans and tactics may be negatively impacted by our increasing size and complexity. A decentralized structure places significant control and decision-making powers in the hands of our operating unit management. This contributes to the risk that we may be slower or less able to identify or react to problems affecting key business matters than we would in a more centralized environment. The lack of timely access to information may impact the quality of decision making by management. Our decentralized organization creates the possibility that our operating subsidiaries assume excessive risk without appropriate guidance from our centralized legal, accounting, tax, treasury and insurance functions as to the potential overall impact. Future growth could also impose significant additional responsibilities on members of our senior management, including the need to recruit and integrate new senior level managers and executives. 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.

We may be unable to compete for or work on certain projects if we are not able to obtain surety bonds, letters of credit or bank guarantees.

A portion of our business depends on our ability to provide surety bonds, letters of credit, bank guarantees or other financial assurances. Current or future market conditions, including losses incurred in the construction industry or as a result of large corporate bankruptcies, as well as changes in our sureties’ assessment of our operating and financial risk, could cause our surety providers and lenders to decline to issue or renew, or substantially reduce the amount of, bid or performance bonds for our work and could increase our costs associated with collateral. These actions could be taken on short notice. If our surety providers or lenders were to limit or eliminate our access to bonding, letters of credit or guarantees, our alternatives would include seeking capacity from other sureties and lenders or finding more business that does not require bonds or that allows for other forms of collateral for project performance, such as cash. We may be unable to secure these alternatives in a timely manner, on acceptable terms, or at all, which could affect our ability to bid for or work on future projects requiring financial assurances.

We have also granted security interests in certain assets to collateralize our obligations to our sureties and lenders. Furthermore, under standard terms in the surety market, sureties issue or continue bonds on a project-by-project basis and can decline to issue bonds at any time or require the posting of additional collateral as a condition to issuing or renewing bonds. If we were to experience an interruption or reduction in the availability of bonding capacity as a result of these or other reasons, we may be unable to compete for or work on certain projects that require bonding.

Our 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. We perform work in and around environmentally sensitive areas such as rivers, lakes and wetlands. In addition, we perform directional drilling operations below certain environmentally sensitive terrains and water bodies. Due to the inconsistent 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

 

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at which we store our equipment. Some of these facilities contain fuel storage tanks that are above or below ground. If these tanks were to leak, we could be responsible for the cost of remediation as well as potential fines.

In addition, new laws and regulations, stricter enforcement of existing laws and regulations, the discovery of previously unknown contamination or leaks, or the imposition of new clean-up requirements could require us to incur significant costs or become the basis for new or increased liabilities that could negatively impact our business, financial condition, results of operations and cash flows. In certain instances, we have obtained indemnification or covenants from third parties (including predecessors or lessors) for such clean-up and other obligations and liabilities. However, such third-party indemnities or covenants may not cover all of our costs and the indemnitors may not pay amounts owed to us, and such unanticipated obligations or liabilities, or future obligations and liabilities, may have a material adverse effect on our business, financial condition, results of operations and 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.

There are also other legislative and regulatory proposals to address greenhouse gas emissions. These proposals, if enacted, could result in potential new regulations, additional charges to fund energy efficiency activities, or other regulatory actions. Any of these actions could result in increased costs associated with our operations and impact the prices we charge our customers. For example, if new regulations are adopted regulating greenhouse gas emissions from mobile sources such as cars and trucks, we could experience a significant increase in environmental compliance costs in light of our large rolling-stock fleet. In addition, if our operations are perceived to result in high greenhouse gas emissions, our reputation could suffer.

We may not be successful in meeting certain regulatory requirements applicable to us and our subsidiaries.

As a public company, we are subject to the corporate governance and financial reporting requirements of The Sarbanes-Oxley Act of 2002, including requirements for management to report on our internal controls over financial reporting and for our independent registered public accounting firm to express an opinion on the operating effectiveness of our internal control over financial reporting. During 2016, we continued actions to ensure our ability to comply with these requirements. As of December 31, 2016, our internal control over financial reporting was effective; however, there can be no assurance that our internal control over financial reporting will be effective in future years. Failure to maintain effective internal controls or to identify significant internal control deficiencies in acquired companies (both prior acquisitions and future acquisitions) could result in a decrease in the market value of our publicly traded securities, a reduced ability to obtain debt and equity financing, a loss of customers, or penalties and additional expenditures to meet the requirements.

Additionally, one of our subsidiaries has registered as an investment adviser with the SEC under the U.S. Investment Advisers Act of 1940, as amended (the Advisers Act). The Advisers Act and the rules promulgated thereunder impose substantive and material restrictions and requirements on the operations of our subsidiary, including certain fiduciary duties that apply to its relationships with its advisory clients. The SEC has broad administrative powers to institute proceedings and impose sanctions for violations of the Advisers Act, ranging from fines and censures to termination of an adviser’s registration. Our subsidiary is also subject to periodic SEC examinations and other requirements, including, among other things, maintaining an effective compliance program, recordkeeping and reporting requirements, disclosure requirements and complying with anti-fraud prohibitions. The failure of our subsidiary to comply with the requirements of the Advisers Act could result in fines, suspensions of individual employees or other sanctions against our subsidiary that could have a material adverse effect on us. Even if an investigation or proceeding does not result in a fine or sanction or if a fine or sanction imposed against our subsidiary or its employees were small in monetary amount, the adverse publicity relating to an investigation, proceeding or imposition of these fines or sanctions could harm our reputation and have a material adverse effect on us.

If we are unable to enforce our intellectual property rights or if our intellectual property rights become obsolete, our competitive position could be adversely impacted.

We utilize a variety of intellectual property rights while performing our services. We view our portfolio of proprietary energized services tools and techniques and other process and design technologies as our competitive

 

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strengths, which we believe differentiate our service offerings. We may not be able to successfully preserve these intellectual property rights in the future, and these rights could be invalidated, circumvented or challenged. In addition, the laws of some foreign countries in which our services may be sold do not protect intellectual property rights to the same extent as the laws of the United States. We also license certain technologies from third parties, and there is a risk that our relationships with licensors may terminate or expire or may be interrupted or harmed. If we are unable to protect and maintain our intellectual property rights, or if intellectual property challenges or infringement proceedings succeed against us, our ability to differentiate our service offerings could be reduced. In addition, if our intellectual property rights or work processes become obsolete, we may not be able to differentiate our service offerings, and some of our competitors may be able to offer more attractive services to our customers. As a result, our business and revenues could be materially and adversely affected.

We may incur additional healthcare costs arising from federal healthcare reform legislation.

In March 2010, the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 (collectively ACA) were signed into law in the United States. The status of the ACA and any repeal or replacement thereof, is currently uncertain. Changes to laws governing health insurance could have a substantial impact on our financial results. We continue to monitor developments under ACA, including any potential repeal or replacement thereof, and assess the extent to which any such change could result in long-term material cost increases for us.

Opportunities within the government arena could subject us to increased governmental regulation and costs.

Most government contracts are awarded through a regulated competitive bidding process, which can often be more time consuming than the bidding process for non-governmental projects. Additionally, involvement with government contracts could require a significant amount of costs to be incurred before any revenues are realized from these contracts. As a government contractor, we are also subject to a number of procurement rules and other public sector regulations, any deemed violation of which could lead to fines or penalties or a loss of business. Government agencies routinely audit and investigate government contractors. Government agencies may review a contractor’s performance under its contracts, cost structure and compliance with applicable laws, regulations and standards. If a government agency determines that costs were improperly allocated to specific contracts, such costs will not be reimbursed or a refund of previously reimbursed costs may be required. If a government agency alleges or proves improper activity, civil and criminal penalties could be imposed and serious reputational harm could result. Many government contracts must be appropriated each year. If appropriations are not made in subsequent years, we would not realize all of the potential revenues from any awarded contracts.

Our sale or issuance of additional common stock or other equity-related securities could dilute each stockholder’s ownership interest or adversely affect the market price of our common stock.

We grow our business organically as well as through acquisitions. We often fund all or a portion of the consideration paid in connection with our acquisitions with the issuance of additional equity securities, including shares of our common stock and securities that are convertible into shares of our common stock.

We may issue additional equity securities in the future, including in connection with future acquisitions or other issuances of our common stock or convertible securities or otherwise. Our Restated Certificate of Incorporation provides that we may issue up to 600,000,000 shares of common stock, of which 144,710,773 shares were outstanding as of December 31, 2016. Additionally, former owners of certain acquired companies own exchangeable shares, 6,515,453 of which were outstanding as of December 31, 2016 and included in the calculation of basic and diluted weighted average shares outstanding. These shares are exchangeable for shares of Quanta common stock on a one-for-one basis. Any additional issuances of common stock or exchangeable shares could have the effect of diluting our earnings per share and our existing stockholders’ individual ownership percentages and could lead to volatility in the market price of our common stock. We cannot predict the effect that future issuances of our common stock or other equity-related securities would have on the market price of our common stock.

 

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Certain provisions of our corporate governing documents could make an acquisition of our company more difficult.

The following provisions of our charter documents, as currently in effect, and Delaware law could discourage potential proposals to acquire us, delay or prevent a change in control of us or limit the price that investors may be willing to pay in the future for shares of our common stock:

 

    our certificate of incorporation permits our board of directors to issue “blank check” preferred stock and to adopt amendments to our bylaws;

 

    our bylaws contain restrictions regarding the right of stockholders to nominate directors and to submit proposals to be considered at stockholder meetings;

 

    our certificate of incorporation and bylaws restrict the right of stockholders to call a special meeting of stockholders and to act by written consent; and

 

    we are subject to provisions of Delaware law which restrict us from engaging in any of a broad range of business transactions with an “interested stockholder” for a period of three years following the date such stockholder became classified as an interested stockholder.

 

ITEM 1B. Unresolved Staff Comments

None.

 

ITEM 2. Properties

Facilities

We lease our corporate headquarters in Houston, Texas and maintain other facilities throughout North America and in various foreign locations where we conduct business. Our facilities are used for offices, equipment yards, warehouses, storage and vehicle shops. As of December 31, 2016, we owned 54 of our facilities and leased the remainder. We believe that our existing facilities are sufficient for our current needs.

Equipment

We operate a fleet of owned and leased trucks and trailers, support vehicles and specialty construction equipment, such as backhoes, excavators, trenchers, generators, boring machines, cranes, robotic arms, wire pullers, tensioners, marine vessels and helicopters. Our owned equipment and the leasehold interests in our leased equipment are encumbered by a security interest granted under our credit agreement. As of December 31, 2016, the total size of the rolling-stock fleet was approximately forty thousand units. Most of our fleet is serviced by our own mechanics who work at various maintenance sites and facilities. We believe that our equipment is generally well maintained and adequate for our present operations.

 

ITEM 3. Legal Proceedings

We are from time to time party to various lawsuits, claims and other legal proceedings that arise in the ordinary course of business. These actions typically seek, among other things, compensation for alleged personal injury, breach of contract and/or property damages, employment-related damages, punitive damages, civil penalties or other losses, or injunctive or declaratory relief. With respect to all such lawsuits, claims and proceedings, we record a reserve when it is probable that a loss has been incurred and the amount of loss can be reasonably estimated. In addition, we disclose matters for which management believes a material loss is at least reasonably possible. See Legal Proceedings and Collective Bargaining Agreements in Note 15 of the Notes to Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data, which are incorporated by reference in this Item 3, for additional information regarding litigation, claims and other legal proceedings.

 

ITEM 4. Mine Safety Disclosures

Not applicable.

 

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PART II

 

ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Our common stock is listed on the New York Stock Exchange (NYSE) under the symbol “PWR.” The following table sets forth the high and low sales prices of our common stock per quarter, as reported by the NYSE, for the two most recent fiscal years.

 

     High      Low  

Year Ended December 31, 2016

     

4th Quarter

   $ 36.85      $ 27.29  

3rd Quarter

   $ 28.14      $ 22.58  

2nd Quarter

   $ 24.47      $ 21.60  

1st Quarter

   $ 22.87      $ 16.77  

Year Ended December 31, 2015

     

4th Quarter

   $ 27.05      $ 18.46  

3rd Quarter

   $ 29.10      $ 21.35  

2nd Quarter

   $ 30.61      $ 27.68  

1st Quarter

   $ 29.94      $ 25.67  

On February 21, 2017, there were 724 holders of record of our common stock, eight holders of record of exchangeable shares of Canadian subsidiaries of Quanta, one holder of record of our Series F preferred stock and one holder of record of our Series G preferred stock. There is no established trading market for the exchangeable shares or the Series F and Series G preferred stock; however, the exchangeable shares may be exchanged at the option of the holder for Quanta common stock on a one-for-one basis. See Note 11 of the Notes to Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data for additional discussion of our equity securities.

Unregistered Sales of Securities During the Fourth Quarter of 2016

During the three months ended December 31, 2016, we issued 104,942 shares of our common stock to certain former owners of an acquired company in exchange, on a one-for-one basis, for exchangeable shares in a Canadian subsidiary of Quanta that were held by certain former owners. Additionally, subsequent to December 31, 2016, we issued 420,904 shares of our common stock to certain former owners of an acquired company in exchange, on a one-for-one basis, for exchangeable shares in a Canadian subsidiary of Quanta that were held by certain former owners. Each of the former owners originally received the exchangeable shares as partial consideration for the sale of the acquired company.

The shares of common stock issued in the above transactions were issued in reliance upon the exemption from registration provided by Section 4(a)(2) of the Securities Act of 1933, as amended, as the shares were issued to the owners of businesses acquired in a privately negotiated transactions not involving any public offering or solicitation.

 

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Issuer Purchases of Equity Securities During the Fourth Quarter of 2016

The following table contains information about our purchases of equity securities during the three months ended December 31, 2016.

 

Period

   Total Number
of Shares
Purchased
     Average Price
Paid per Share
     Total Number of
Shares Purchased
as Part of Publicly
Announced Plans or
Programs
     Maximum
Number (or
Approximate Dollar
Value) of Shares
That May Yet be
Purchased Under
the Plans or
Programs(1)
 

October 1 – 31, 2016 (2)

     19,145       $ 27.88         —        

November 1 – 30, 2016 (2)

     9,606       $ 32.88         —        

December 1 – 31, 2016

     —         $ —           —        
  

 

 

       

 

 

    

Total

     28,751            —         $ 50,120,407   
  

 

 

       

 

 

    

 

(1) On August 5, 2015, we issued a press release announcing that our board of directors approved a stock repurchase program authorizing us to purchase, from time to time through February 28, 2017, up to $1.25 billion of our outstanding common stock. Repurchases under the program can be made in open market or privately negotiated transactions, including pursuant to an accelerated share repurchase arrangement, issuer repurchase plan or otherwise, at our discretion, based on market and business conditions, applicable contractual and legal requirements and other factors. This program does not obligate us to acquire any specific amount of common stock and may be modified or terminated by our board of directors at any time at its sole discretion and without notice. As of December 31, 2016, we had repurchased an aggregate $1.20 billion in Quanta common stock under this program. As discussed in Liquidity and Capital Resources — Debt Instruments — Credit Facility in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations of Part II of this Annual Report on Form 10-K, our credit agreement includes certain limitations on the repurchase of common stock.
(2) Includes shares purchased from employees to satisfy tax withholding obligations in connection with the vesting of restricted stock unit awards.

Dividends

We did not declare any cash dividends on our common stock during the years ended December 31, 2016 or 2015, or in any previous periods. We currently intend to retain our future earnings, if any, to finance the growth, development and expansion of our business. Accordingly, we currently do not intend to declare or pay any cash dividends on our common 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 Liquidity and Capital Resources — Debt Instruments — Credit Facility in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, our credit agreement restricts the payment of cash dividends unless certain conditions are met.

Performance Graph

The following Performance Graph and related information shall not be deemed “soliciting material” or to be “filed” with the Securities and Exchange Commission, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933 or Securities Exchange Act of 1934, each as amended, except to the extent that we specifically incorporate it by reference into such filing.

The following graph compares, for the period from December 31, 2011 to December 31, 2016, the cumulative stockholder return on our common stock with the cumulative total return of the Standard & Poor’s

 

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500 Index (the S&P 500 Index) and two peer groups selected by our management that include public companies within our industries. The companies in each peer group were selected to represent a broad group of publicly held corporations with operations similar to ours. The current peer group (the 2016 Peer Group) includes AECOM Technology Corporation, Chicago Bridge & Iron Company N.V., EMCOR Group Inc., Fluor Corporation, Jacobs Engineering Group Inc., KBR, Inc., MasTec, Inc., MYR Group Inc. and Primoris Services Corporation. The peer group used in the prior year (the 2015 Peer Group) included each of the foregoing companies as well as Willbros Group, Inc. We determined not to include Willbros Group, Inc. in the 2016 Peer Group due to dissimilarities with respect to its trading liquidity and operational performance history.

The graph below assumes an investment of $100 (with reinvestment of all dividends) in our common stock, the S&P 500 Index, the 2016 Peer Group and the 2015 Peer Group on December 31, 2011 and tracks their relative performance through December 31, 2016. The returns of each company in the Peer Group are weighted based on the market capitalization of that company at the beginning of the measurement period. The stock price performance reflected in the following graph is not necessarily indicative of future stock price performance.

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN

Among Quanta Services, Inc., the 2016 Peer Group, the 2015 Peer Group and the S&P 500 Index

 

 

LOGO

 

(1) The 2016 Peer Group and the 2015 Peer Group performed similarly during the five-year performance period, therefore their cumulative total returns overlap in the graph.

 

     12/11      12/12      12/13      12/14      12/15      12/16  

Quanta Services, Inc.

   $ 100.00      $ 126.69      $ 146.52      $ 131.80      $ 94.01      $ 161.79  

2016 Peer Group

     100.00        116.43        163.14        116.63        106.15        130.02  

2015 Peer Group

     100.00        116.61        163.73        116.97        105.94        129.74  

S&P 500

     100.00        116.00        153.58        174.60        177.01        198.18  

 

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ITEM 6. Selected Financial Data

The following historical selected financial data has been derived from the consolidated financial statements of Quanta. See Note 5 of the Notes to Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data for information regarding certain acquisitions and the related impact on our results of operations as these acquisitions may affect the comparability of such results. Additionally, on August 4, 2015, we sold our fiber optic licensing operations, and on December 3, 2012, we sold substantially all of our domestic telecommunications infrastructure services operations and related subsidiaries. We have presented the results of operations, financial position and cash flows of such fiber optic licensing and telecommunications subsidiaries as discontinued operations for all applicable periods presented in this Annual Report on Form 10-K. The historical selected financial data should be read in conjunction with our Consolidated Financial Statements and related notes thereto included in Item 8. Financial Statements and Supplementary Data and Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

    Year Ended December 31,  
    2016     2015     2014     2013     2012  
    (In thousands, except per share information)  

Consolidated Statements of Operations Data:

         

Revenues

  $ 7,651,319      $ 7,572,436      $ 7,747,229      $ 6,411,577      $ 5,825,085   

Cost of services (including depreciation)

    6,637,519        6,648,771        6,578,435        5,424,644        4,953,176   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    1,013,800        923,665        1,168,794        986,933        871,909   

Selling, general and administrative expenses

    653,338        592,863        705,477 (c)      485,069        421,726   

Amortization of intangible assets

    31,685        34,848        34,257        25,865        34,049   

Asset impairment charges (a)

    7,964        58,451        —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

    320,813        237,503        429,060        475,999        416,134   

Interest expense

    (14,887     (8,024     (4,765     (2,668     (3,746

Interest income

    2,423        1,493        3,736        3,378        1,471   

Equity in earnings (losses) of unconsolidated affiliates, including gain on sale of investment

    (979     (466     (332     112,744 (d)      2,084   

Other income (expense), net

    316        (1,831     (1,100     (1,133     (349
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations before income taxes

    307,686        228,675        426,599        588,320        415,594   

Provision for income taxes (b)

    107,246        97,472        139,007        196,875        139,988   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income from continuing operations

    200,440        131,203        287,592        391,445        275,606   

Net income (loss) from discontinued operations

    (342     190,621        27,490        29,864        47,050   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

    200,098        321,824        315,082        421,309        322,656   

Less: Net income attributable to non-controlling interests

    1,715        10,917        18,368        19,388        16,027   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to common stock

  $ 198,383      $ 310,907      $ 296,714      $ 401,921      $ 306,629   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Amounts attributable to common stock:

         

Net income from continuing operations

  $ 198,725      $ 120,286      $ 269,224      $ 372,057      $ 259,579   

Net income (loss) from discontinued operations

    (342     190,621        27,490        29,864        47,050   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to common stock

  $ 198,383      $ 310,907      $ 296,714      $ 401,921      $ 306,629   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Basic earnings per share attributable to common stock from continuing operations

  $ 1.26      $ 0.62      $ 1.22      $ 1.73      $ 1.22   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted earnings per share attributable to common stock from continuing operations

  $ 1.26      $ 0.62      $ 1.22      $ 1.73      $ 1.22   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(a)

In 2016 and 2015, we recorded total asset impairment charges of $8.0 million ($7.1 million net of tax) and $58.5 million ($44.6 million net of tax). The charges recorded in 2016 primarily relate to a pending disposition of certain international renewable energy services operations. The charges recorded in 2015 related to goodwill, intangible assets and property and equipment, including a $39.8 million goodwill impairment and a $12.1 million

 

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  impairment to customer relationships, trade names and non-compete agreement intangible assets. These charges were primarily attributable to lower levels of expected activity in the U.S. Gulf of Mexico and, to a lesser extent, due to the extended low commodity price environment with respect to certain directional drilling operations in Australia. In 2015, we also recorded a $6.6 million impairment to property and equipment associated with the same international renewable energy services operations.
(b) The effective tax rate was lower in 2016 primarily due to $20.5 million in tax benefits from decreases in reserves for uncertain tax positions, which resulted from the expiration of federal and state statute of limitations periods. The effective tax rate in 2015 was higher primarily due to a lower proportion of income before taxes from international jurisdictions. Additionally, certain asset impairments recorded in 2015 were not tax deductible, and a change in the Alberta provincial statutory income tax resulted in additional taxes of $5.0 million. In addition, the effective tax rates in 2014, 2013 and 2012 were impacted by $8.1 million, $9.9 million and $7.8 million in tax benefits primarily due to decreases in reserves for uncertain tax positions resulting from the expiration of federal and state statute of limitations periods.
(c) In 2014, selling, general and administrative expenses included a $102.5 million charge to provision for long-term contract receivable associated with an electric power infrastructure services project and a $38.8 million expense resulting from an arbitration decision associated with a contract dispute on a directional drilling project.
(d) In 2013, we recorded a pre-tax gain of approximately $112.7 million from the sale of all of our equity ownership interest in Howard Midstream Energy Partners, LLC.

 

     December 31,  
     2016      2015      2014      2013      2012  
     (In thousands)  

Balance Sheet Data:

              

Working capital

   $ 1,083,517      $ 1,073,775      $ 1,389,393      $ 1,226,012      $ 1,310,405  

Goodwill

     1,603,169        1,552,658        1,596,695        1,445,927        1,202,854  

Total assets

     5,354,059        5,213,543        6,253,583        5,731,982        5,111,408  

Long-term debt, net of current maturities

     353,562        475,364        72,489        1,053        —    

Total stockholders’ equity

     3,339,427        3,085,494        4,514,473        4,234,188        3,766,548  

 

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ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our historical consolidated financial statements and related notes 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 provider of specialty contracting services, offering infrastructure solutions primarily to the electric power and oil and gas industries in the United States, Canada and Australia and select other international markets. The services we provide include the design, installation, upgrade, repair and maintenance of infrastructure within each of the industries we serve, such as electric power transmission and distribution networks, substation facilities, renewable energy facilities, and pipeline transmission and distribution systems and facilities.

We report our results under two reportable segments: (1) Electric Power Infrastructure Services and (2) Oil and Gas Infrastructure Services. This structure is generally focused on broad end-user markets for our services. Our consolidated revenues for the year ended December 31, 2016 were approximately $7.65 billion, of which 63% was attributable to the Electric Power Infrastructure Services segment and 37% to the Oil and Gas Infrastructure Services 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. We enter into various types of contracts, including competitive unit price, hourly rate, cost-plus (or time and materials basis), and fixed price (or lump sum basis), the final terms and prices of which are frequently negotiated with the customer. Although the terms of our contracts vary considerably, most are made on either a unit price or fixed price basis in which we agree to 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, other than certain large transmission projects, within one year, while we frequently provide maintenance and repair work under open-ended unit price or cost-plus master service agreements that are renewable periodically.

We recognize revenue on our unit price and cost-plus contracts as units are completed or services are performed. For our fixed price contracts, we record revenues as work on the contract progresses on a percentage-of-completion basis. Under this method, 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.

For internal management purposes, we are organized into two internal divisions, namely, the Electric Power Infrastructure Services Division and the Oil and Gas Infrastructure Services Division. These internal divisions are closely aligned with the reportable segments described above based on the predominant type of work provided by the operating units within each division.

Reportable segment information, including revenues and operating income by type of work, is gathered from each operating unit for the purpose of evaluating segment performance in support of our market strategies. These classifications of our operating unit revenues by type of work for segment reporting purposes can at times require judgment on the part of management. Our operating units may perform joint infrastructure service

 

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projects for customers in multiple industries, deliver multiple types of infrastructure services under a single customer contract or provide services across industries. For example, we perform joint trenching projects to install distribution lines for electric power and natural gas customers. Our integrated operations and common administrative support at each of our operating units requires that certain allocations, including allocations of shared and indirect costs, such as facility costs, indirect operating expenses including depreciation, and general and administrative costs, be made to determine operating segment profitability. Corporate costs, such as payroll and benefits, employee travel expenses, facility costs, professional fees, acquisition costs and amortization related to intangible assets are not allocated.

The Electric Power Infrastructure Services segment provides comprehensive network solutions to customers in the electric power industry. Services performed by the Electric Power Infrastructure Services segment generally include the design, installation, upgrade, repair and maintenance of electric power transmission and distribution infrastructure and substation facilities along with other engineering and technical services. This segment also provides emergency restoration services, including the repair of infrastructure damaged by inclement weather, the energized installation, maintenance and upgrade of electric power infrastructure utilizing unique bare hand and hot stick methods and our proprietary robotic arm technologies, and the installation of “smart grid” technologies on electric power networks. In addition, this segment designs, installs and maintains renewable energy generation facilities, consisting of solar, wind and certain types of natural gas generation facilities, and related switchyards and transmission infrastructure. To a lesser extent, this segment provides services such as the construction of electric power generation facilities, the design, installation, maintenance and repair of commercial and industrial wiring, the installation of traffic networks and cable and control systems for light rail lines and ancillary telecommunication infrastructure services.

The Oil and Gas Infrastructure Services segment provides comprehensive network solutions to customers involved in the development and transportation of natural gas, oil and other pipeline products. Services performed by the Oil and Gas Infrastructure Services segment generally include the design, installation, repair and maintenance of pipeline transmission and distribution systems, gathering systems, production systems, storage systems and compressor and pump stations, as well as related trenching, directional boring and mechanized welding services. In addition, this segment’s services include pipeline protection, integrity testing, rehabilitation and replacement, and fabrication of pipeline support systems and related structures and facilities. We also serve the offshore and inland water energy markets, primarily providing services to oil and gas exploration platforms, including mechanical installation (or “hook-ups”), electrical and instrumentation, pre-commissioning and commissioning, coatings, fabrication and marine asset repair. To a lesser extent, this segment designs, installs and maintains fueling systems, as well as water and sewer infrastructure.

Recent Investments, Acquisitions and Divestitures

During 2016, we completed five acquisitions. The results of four of the acquired companies are generally included in our Electric Power Infrastructure Services segment. These companies included an electrical infrastructure services company located in Australia, a utility contracting company located in Canada, a full service medium- and high-voltage powerline contracting company located in the United States and a telecommunications company located in Canada. We also acquired a pipeline service contractor located in the United States, the results of which are generally included in our Oil and Gas Infrastructure Services segment. The aggregate consideration for these acquisitions consisted of approximately $75.9 million paid or payable in cash, subject to certain adjustments, 70,840 shares of Quanta common stock valued at approximately $1.5 million as of the settlement date of the applicable acquisition, and contingent consideration payments of up to $39.5 million, which will be paid if certain financial targets are achieved. Based on the estimated fair value of this contingent consideration, we have recorded an $18.7 million liability. As these transactions were effective during 2016, the results have been included in our consolidated financial statements beginning on the respective dates of acquisition. These acquisitions should enable us to further enhance our service offerings in the United States, Canada and Australia.

 

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During 2015, we acquired 11 companies. The results of eight of the acquired companies are generally included in our Electric Power Infrastructure Services segment. These companies include a foundation services company located in the United States, an electrical contracting company located in the United States, an electrical engineering company located in Australia, a powerline construction company located in the United States, an engineering company located in Canada, an engineering, procurement and construction services company based in the United States, an underground construction contracting company located in Canada and a supplier and material procurement specialist for the power and utility industry in Canada. The results of the remaining three acquired companies are generally included in our Oil and Gas Infrastructure Services segment. These companies include a company that services above-ground storage tanks in the United States, an underground utility distribution contractor that provides services to gas and electric utilities in Canada, and a company that specializes in the engineering, procurement, construction, and commissioning of compression and surface facilities for the high pressure gas industry in Australia. The aggregate consideration for these acquisitions consisted of approximately $110.6 million paid or payable in cash, subject to net working capital adjustments, 461,037 shares of Quanta common stock valued at approximately $10.1 million as of the settlement dates of the applicable acquisitions, and $1.0 million in contingent consideration. As these transactions were effective during 2015, the results have been included in our consolidated financial statements beginning on the respective dates of acquisition. These acquisitions should enable us to further enhance our electric power and oil and gas infrastructure service offerings in the United States, Canada and Australia.

On April 29, 2015, we entered into a stock purchase agreement with Crown Castle International Corp. pursuant to which we agreed to sell our fiber optic licensing operations. The purchase agreement contained customary representations and warranties, covenants and indemnities. On August 4, 2015, we completed the sale for a purchase price of approximately $1 billion in cash, resulting in after-tax net proceeds of approximately $848 million. In the third quarter of 2015, we recognized a net of tax gain of approximately $171 million. We have presented the results of operations, financial position, cash flows and disclosures of the fiber optic licensing operations as discontinued operations for all periods in our consolidated financial statements.

During 2014, we completed nine acquisitions, which enabled us to further enhance our electric power and oil and gas infrastructure service offerings in the United States and Canada and expand our capabilities in Australia to include electric power infrastructure service offerings. These acquisitions included four electric power infrastructure services companies located in Canada; two oil and gas infrastructure services businesses located in Canada; an electric power infrastructure services company located in Australia; a U.S.-based general engineering and construction company specializing in hydrant fueling, waterfront and utility construction for the U.S. Department of Defense the results of which are generally included in our Oil and Gas Infrastructure Services segment; and a geotechnical and geological engineering services company based in the United States the results of which are generally included in our Electric Power Infrastructure Services segment. The aggregate consideration for these acquisitions was approximately $279.5 million in cash, 686,382 shares of Quanta common stock and 3,825,971 exchangeable shares of Canadian subsidiaries of Quanta that are exchangeable on a one-for-one basis for Quanta common stock. The exchangeable shares provide holders with rights equivalent to Quanta common stockholders with respect to dividends and other economic rights. In addition, we issued one share of Series G preferred stock associated with 899,858 of the exchangeable shares, which generally votes on the same matters as Quanta common stock and is entitled to a number of votes equal to the number of such exchangeable shares outstanding at that time. Exchangeable shares not associated with preferred stock do not have voting rights. The aggregate value of the securities issued on the settlement dates of the acquisitions totaled approximately $134.5 million. As these transactions were effective during 2014, the results of each acquired company have been included in our consolidated financial statements beginning on the respective dates of acquisition.

Seasonality; Fluctuations of Results; Economic Conditions

Our revenues and results of operations can be subject to seasonal and other variations. These variations are influenced by weather, customer spending patterns, bidding seasons, receipt of required regulatory approvals,

 

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permits and rights of way, project timing and schedules, and holidays. Typically, our revenues are lowest in the first quarter of the year because cold, snowy or wet conditions can cause delays on projects. In addition, many of our customers develop their capital budgets for the coming year during the first quarter and do not begin infrastructure projects in a meaningful way until their capital budgets are finalized. Second quarter revenues are typically higher than those in the first quarter, as some projects begin, but continued cold and wet weather can often impact second quarter productivity. Third quarter revenues are typically the highest of the year, as a greater number of projects are underway, and weather is more accommodating. Generally, revenues during the fourth quarter of the year are lower than the third quarter but higher than the second quarter. Many projects are completed in the fourth quarter, and revenues are often impacted positively by customers seeking to spend their capital budgets before the end of the year; however, the holiday season and inclement weather can sometimes cause delays, reducing revenues and increasing costs. Any quarter may be positively or negatively affected by atypical weather patterns in any of the areas we serve, such as severe weather, excessive rainfall or unusual winter weather, making it difficult to predict these variations and their effect on particular projects quarter to quarter. The timing of project awards and unanticipated changes in project schedules as a result of delays or accelerations can also create variations in the level of operating activity from quarter to quarter.

These seasonal impacts are typical for our U.S. operations, but as our foreign operations continue to grow, we may see a lessening of this pattern impacting our quarterly revenues. For example, revenues in Canada are often higher in the first quarter as projects are accelerated so that work can be completed prior to the break up, or seasonal thaw, as productivity is adversely affected by wet ground conditions during the warmer spring and summer months. Also, although revenues from Australia and other international operations have not been significant relative to our overall revenues to date, their seasonal patterns may differ from those in North America and may impact our seasonality more in the future.

Additionally, our industry can be highly cyclical. Our volume of business may be adversely affected by declines or delays in new projects due to cyclicality, which may vary by geographic region, including the United States, Canada and Australia. Project schedules, particularly in connection with larger, longer-term projects, can also create fluctuations in the services provided, which may adversely affect us in a given period. For example, in connection with larger, more complicated projects, the timing of obtaining permits and other approvals may be delayed, and we may need to maintain a portion of our workforce and equipment in an underutilized capacity to ensure we are strategically positioned to deliver on such projects when they move forward. Examples of other items that may cause our results or demand for our services to fluctuate materially from quarter to quarter include: the financial condition of our customers and their access to capital; margins of projects performed during any particular period; regional, national and global economic and market conditions; our customers capital spending, including on larger pipeline and electrical infrastructure projects; natural gas and oil prices; the timing of acquisitions, the timing and magnitude of acquisition and integration costs associated with acquisitions; dispositions; equity in earnings (losses) of unconsolidated affiliates; impairments of goodwill, intangible assets, long-lived assets or investments; effective tax rates; and interest rates. Accordingly, our operating results in any particular period may not be indicative of the results that can be expected for any other period. You should read Outlook and Understanding Margins for additional discussion of trends and challenges that may affect our financial condition, results of operations and cash flows.

Understanding Margins

Our gross margin is gross profit expressed as a percentage of revenues, and our operating margin is operating income expressed as a percentage of revenues. Cost of services, which is subtracted from revenues to obtain gross profit, consists primarily of salaries, wages and benefits to employees, depreciation, fuel and other equipment expenses, equipment rentals, subcontracted services, insurance, facilities expenses, materials and parts and supplies. Selling, general and administrative expenses and amortization of intangible assets are then subtracted from gross profit to obtain operating income. Various factors — some controllable, some not — can impact our margins on a quarterly or annual basis.

 

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Seasonal and geographical. As discussed previously, seasonal patterns can have a significant impact on margins. Generally, business is slower in the winter months versus the warmer months of the year, resulting in lower productivity and consequently reducing our ability to cover fixed costs. This can be offset somewhat by increased demand for electrical service and repair work resulting from severe weather. Additionally, project schedules, including when projects begin and when they are completed, may impact margins. The mix of business conducted in the areas we serve will also affect margins, as some of the areas we serve offer the opportunity for higher margins than others due to the geographic characteristics associated with the physical location where the work is being performed. Such characteristics include whether the project is performed in an urban versus a rural setting or in a mountainous area or in open terrain. Site conditions, including unforeseen underground conditions, can also impact margins.

Weather. Adverse or favorable weather conditions can impact gross margins in a given period. For example, snowfall or rainfall in the areas in which we operate may negatively impact our revenues and margins due to reduced productivity, as projects may be delayed or temporarily placed on hold until weather conditions improve. 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 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 and the types of services we provide within an industry will impact margins, as certain industries and services provide higher margin opportunities. Additionally, changes in our customers’ spending patterns 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 performed on a fixed price basis, while maintenance work is often performed under pre-established or negotiated prices or cost-plus pricing arrangements. Margins for installation work may vary from project to project, and may be higher than maintenance work, as work obtained on a fixed price basis has higher risk than other types of pricing arrangements. We typically derive approximately 30% of our annual revenues from maintenance work, but a higher portion of installation work in any given period may affect our gross margins for that period.

Subcontract work. Work that is subcontracted to other service providers generally yields lower margins. An increase in subcontract work in a given period may contribute to a decrease in margins. We typically subcontract approximately 20% to 25% of our work to other service providers.

Materials versus labor. Typically, our customers are responsible for supplying their own materials on projects; however, for some of our contracts, we may agree to procure all or part of the required materials. Margins may be lower on projects where we furnish a significant amount of materials, as our mark-up on materials is generally lower than on our labor costs. In a given period, an increase in the percentage of work with higher materials procurement requirements may decrease our overall margins.

Size, scope and complexity of projects. We may experience a decrease or fluctuations in margins when larger, more complex electric transmission and pipeline projects across the industries we serve experience significant delays. Larger projects with higher voltage capacities, larger diameter throughput capacities, increased construction or design complexities, more difficult terrain requirements or longer distance requirements typically yield opportunities for higher margins as we assume a greater degree of performance risk and allow for a higher degree of utilization of our resources for longer construction timeframes. Conversely, smaller or less complex electric transmission and pipeline projects typically provide lower margin opportunities as there are a greater number of competitors capable of performing in this market, and competitors at times may more aggressively pursue available volumes of work to absorb fixed costs. A greater mix of smaller scale or less complex electric transmission and pipeline work also could negatively impact margins due to the inefficiency of transitioning between a greater number of smaller projects versus continuous production on fewer larger projects.

 

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Our margins may be further impacted by delays in the timing of larger projects or temporary decreases in capital spending by our customers, as we may choose to maintain a portion of our workforce and equipment in an underutilized capacity to ensure we are strategically positioned to deliver on larger, more complicated electric transmission or pipeline projects when they move forward.

Depreciation. We include depreciation in cost of services. This is common practice in our industry, but it can make comparability of our margins to those of other companies difficult. This must be taken into consideration when comparing us to other companies.

Insurance. As discussed in Liquidity and Capital Resources — Self-Insurance, we are insured for employer’s liability, workers’ compensation, auto liability and general liability claims. We also have employee health care benefit plans for most employees not subject to collective bargaining agreements. Margins could be impacted by fluctuations in insurance accruals as additional claims arise and as circumstances and conditions of existing claims change.

Performance risk. Margins may fluctuate because of the volume of work and the impacts of pricing and job productivity, which can be affected both favorably and negatively by, among other things, weather, geography, customer decisions and crew productivity. For example, when comparing a service contract between a current quarter and the comparable prior year’s quarter, factors affecting the gross margins associated with the revenues generated by the contract may include pricing under the contract, the volume of work performed under the contract, the mix of the type of work specifically being performed and the productivity of the crews performing the work. Productivity can be influenced by many factors, including where the work is performed (e.g., rural versus urban area or mountainous or rocky area versus open terrain), whether the work is on an open or encumbered right of way, the impact of inclement weather, the effects of environmental restrictions or regulatory delays, or the performance of third parties on a project. These types of factors are not practicable to quantify through accounting data, but each of these items may individually or in the aggregate have a direct impact on the gross margin of a specific project.

Foreign currency risk. Our financial performance is reported on a U.S. dollar-denominated basis but is partially subject to fluctuations in foreign currency exchange rates. Fluctuations in exchange rates relative to the U.S. dollar, primarily the Canadian and Australian dollars, could cause material fluctuations in comparisons of our results of operations between periods.

Selling, General and Administrative Expenses

Selling, general and administrative expenses consist primarily of compensation and related benefits to management, administrative salaries and benefits, marketing, office rent and utilities, communications, professional fees, bad debt expense, acquisition costs, gains and losses on the sale of property and equipment, letter of credit fees and maintenance, training and conversion costs related to the implementation of an information technology solution.

 

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Results of Operations

As previously discussed, we have acquired certain businesses, the results of which have been included in the following results of operations beginning on their respective acquisition dates. Additionally, the results of operations for our fiber optic licensing operations, which were disposed of on August 4, 2015, have been reclassified from continuing operations to net income from discontinued operations for all periods presented. 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):

Consolidated Results

 

     Year Ended December 31,  
     2016     2015     2014  

Revenues

   $ 7,651,319       100.0   $ 7,572,436       100.0   $ 7,747,229       100.0

Cost of services (including depreciation)

     6,637,519       86.7       6,648,771       87.8       6,578,435       84.9  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     1,013,800       13.3       923,665       12.2       1,168,794       15.1  

Selling, general and administrative expenses

     653,338       8.5       592,863       7.8       705,477       9.1  

Amortization of intangible assets

     31,685       0.5       34,848       0.5       34,257       0.5  

Asset impairment charges

     7,964       0.1       58,451       0.8       —         —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     320,813       4.2       237,503       3.1       429,060       5.5  

Interest expense

     (14,887     (0.2     (8,024     (0.1     (4,765     —    

Interest income

     2,423       —         1,493       —         3,736       —    

Equity in losses of unconsolidated affiliates

     (979     —         (466     —         (332     —    

Other income (expense), net

     316       —         (1,831     —         (1,100     —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations before income taxes

     307,686       4.0       228,675       3.0       426,599       5.5  

Provision for income taxes

     107,246       1.4       97,472       1.3       139,007       1.8  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income from continuing operations

     200,440       2.6       131,203       1.7       287,592       3.7  

Net income (loss) from discontinued operations

     (342     —         190,621       2.5       27,490       0.4  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     200,098       2.6       321,824       4.2       315,082       4.1  

Less: Net income attributable to non-controlling interests

     1,715       —         10,917       0.1       18,368       0.3  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to common stock

   $ 198,383       2.6   $ 310,907       4.1   $ 296,714       3.8
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Amounts attributable to common stock:

            

Net income from continuing operations

   $ 198,725       2.6   $ 120,286       1.6   $ 269,224       3.4

Net income (loss) from discontinued operations

     (342     —         190,621       2.5       27,490       0.4  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to common stock

   $ 198,383       2.6   $ 310,907       4.1   $ 296,714       3.8
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

2016 compared to 2015

Revenues. Revenues increased $78.9 million, or 1.0%, to $7.65 billion for the year ended December 31, 2016. Contributing to the increase was a $165.7 million increase in revenues from oil and gas infrastructure services, partially offset by a $86.8 million decrease in revenues from electric power infrastructure services. The increase in revenues from oil and gas infrastructure services primarily resulted from increased capital spending by our customers associated with larger projects, certain of which moved into full construction during the second half of 2016, after experiencing regulatory and permitting delays in the first half of 2016, as well as from increased customer spending for natural gas distribution services. Consolidated revenues were also favorably

 

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impacted by approximately $125 million due to revenues generated by acquired companies, primarily in the Electric Power Infrastructure Services segment. The decrease in revenues from electric power infrastructure services resulted from reduced customer spending associated with larger electric transmission projects as customers continued to face heightened regulatory and environmental requirements from state and federal agencies and more stringent permitting processes with various regional system operators. This regulatory environment negatively impacted the timing of existing projects and delayed the development of other infrastructure projects, which resulted in decreased demand for our services. In addition, revenues contributed by our international operations were negatively impacted by approximately $41 million due to less favorable average foreign currency translation rates in 2016 as compared to 2015, primarily attributable to the strengthening of the U.S. dollar against the Canadian dollar throughout 2016.

Gross profit. Gross profit increased $90.1 million, or 9.8%, to $1.01 billion for the year ended December 31, 2016. Gross profit as a percentage of revenues increased to 13.3% for the year ended December 31, 2016 from 12.2% for the year ended December 31, 2015. These increases were primarily due to better utilization of certain larger transmission project resources, mainly in the second half of 2016, as compared to the utilization of similar resources during 2015. Also contributing to these increases was improved performance of ongoing larger pipeline and electric power projects, as we experienced increased productivity compared to the year ended December 31, 2015 which was negatively impacted by heavy snowfall and other unfavorable weather conditions in certain areas of Canada and the northern United States. Also contributing to these increases was the contribution of profits from higher overall revenues during the current period. Gross profit and gross profit as a percentage of revenues were adversely impacted during 2016 by project losses of $54.8 million related to a power plant construction project in Alaska, which are discussed further in the results of operations for the Electric Power Infrastructure Services segment, as compared to project losses of $66.1 million during 2015 related to the same project and an electric transmission project in Canada completed in the third quarter of 2015.

Selling, general and administrative expenses. Selling, general and administrative expenses increased $60.5 million, or 10.2%, to $653.3 million for the year ended December 31, 2016. This increase was primarily attributable to $9.8 million in incremental costs associated with acquired companies, net of reduced acquisition costs; $8.9 million in higher salaries and benefits from annual compensation increases and increased personnel; $8.6 million in higher incentive compensation costs associated with levels of profitability; $7.1 million in higher costs associated with ongoing technology and business development initiatives. Also contributing to the increase were $6.3 million in severance costs associated with the departure of Quanta’s former president and chief executive officer and severance and restructuring costs primarily associated with certain operations within the Oil and Gas Infrastructure Services segment; $2.5 million in higher legal costs related to ongoing litigation, which included $6.9 million of litigation costs related to our disposition of certain telecommunication operations; and $2.3 million contributed to a university endowment. Selling, general and administrative expenses as a percentage of revenues increased to 8.5% for the year ended December 31, 2016 from 7.8% for the year ended December 31, 2015.

Amortization of intangible assets. Amortization of intangible assets decreased $3.2 million to $31.7 million for the year ended December 31, 2016. This decrease was primarily due to reduced amortization expense from previously acquired intangible assets as certain of these assets became fully amortized, partially offset by increased amortization of intangible assets associated with acquired companies.

Asset impairment charges. Asset impairment charges were $8.0 million for the year ended December 31, 2016 compared to $58.5 million for the year ended December 31, 2015. During the fourth quarter of 2015, we recorded an asset impairment of $6.6 million related to certain international renewable energy services operations. These assets were further impaired during the fourth quarter of 2016 as a result of the pending disposition of these operations. Additionally, during the fourth quarter of 2015, we recorded a $39.8 million goodwill impairment and a $12.1 million impairment of other intangible assets related to certain operations within our Oil and Gas Infrastructure Services Division, which were primarily attributable to lower levels of expected activity in the U.S. Gulf of Mexico and, to a lesser extent, due to the extended low commodity price environment with respect to certain directional drilling operations in Australia.

 

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Interest expense. Interest expense increased $6.9 million to $14.9 million for the year ended December 31, 2016 primarily due to increased borrowing activity and a higher weighted average interest rate during the year ended December 31, 2016.

Provision for income taxes. The provision for income taxes was $107.2 million for the year ended December 31, 2016, with an effective tax rate of 34.9%. The provision for income taxes was $97.5 million for the year ended December 31, 2015, with an effective tax rate of 42.6%. The lower effective tax rate for the year ended December 31, 2016 was primarily due to $20.5 million in tax benefits due to decreases in reserves for uncertain tax positions resulting from the expiration of federal and state statute of limitations periods, partially offset by the impact of a lower proportion of income before taxes from international operations, which are generally taxed at lower statutory rates. The provision for income taxes for the year ended December 31, 2015 included $5.0 million related to an increase in the Alberta provincial statutory income tax rate, effective as of June 1, 2015 and requiring a remeasurement of certain cumulative deferred tax assets and liabilities, which was partially offset by the realization of $4.2 million in tax benefits associated with the realization of a previously unrecognized deferred tax asset related to our investment in a foreign operating subsidiary. The effective tax rate for 2015 did not reflect a significant decrease in reserves for uncertain tax positions because the statute of limitations periods remained open for various tax years under audit.

Other comprehensive income (loss). Other comprehensive income (loss), net of taxes was a gain of $23.0 million in the year ended December 31, 2016 compared to a loss of $171.4 million in the year ended December 31, 2015. The gain in 2016 was due to a strengthening of foreign currencies associated with our international operations, primarily the Canadian dollar, against the U.S. dollar as of December 31, 2016 when compared to the exchange rates for those same currencies as of December 31, 2015. The loss in 2015 was due to weaker foreign currencies associated with our international operations, primarily the Canadian dollar, against the U.S. dollar as of December 31, 2015 when compared to the exchange rates for those same currencies as of December 31, 2014.

2015 compared to 2014

Revenues. Revenues decreased $174.8 million, or 2.3%, to $7.57 billion for the year ended December 31, 2015. This decrease was primarily attributable to a decrease in electric power infrastructure services revenues of $365.4 million, or 6.9%, partially offset by an increase in oil and gas infrastructure services revenues of $190.6 million, or 7.8%. Revenues from electric power infrastructure services were adversely impacted primarily by reduced customer spending and delays in project timing due to regulatory and permitting issues associated with larger electric transmission projects during the year ended December 31, 2015. In addition, revenues contributed by our international operations were negatively impacted by approximately $227 million due to less favorable average foreign currency exchange rates as the U.S. dollar strengthened against the Canadian and Australian dollars throughout 2015. Partially offsetting these decreases for the year ended December 31, 2015 was the favorable impact of approximately $375 million in revenues generated by acquired companies, primarily in the Oil and Gas Infrastructure Services segment.

Gross profit. Gross profit decreased $245.1 million, or 21.0%, to $923.7 million for the year ended December 31, 2015. Gross profit as a percentage of revenues decreased to 12.2% for the year ended December 31, 2015 from 15.1% for the year ended December 31, 2014. These decreases were primarily due to the decrease in revenues from larger electric transmission and larger pipeline transmission projects, which typically yield higher margins, and an increase in revenues from services that typically yield lower margins. Gross profit was also negatively impacted by approximately $73 million in aggregate losses recorded during the year ended December 31, 2015 on three projects due to increased costs associated with performance and site related factors that adversely impacted production. The projects included the previously mentioned power plant project in Alaska, an electric transmission project in Canada substantially completed in the third quarter of 2015, and a directional drilling project in Canada that was completed during the fourth quarter of 2015.

 

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Selling, general and administrative expenses. Selling, general and administrative expenses decreased $112.6 million, or 16.0%, to $592.9 million for the year ended December 31, 2015. The decrease was primarily attributable to an aggregate $102.5 million charge to provision for long-term contract receivable recorded in the third and fourth quarters of 2014 associated with an electric power infrastructure services project completed in 2012 and an aggregate $38.8 million expense recorded in the year ended December 31, 2014 associated with an adverse arbitration decision regarding a contract dispute on a 2010 directional drilling project. Partially offsetting these decreases was $16.5 million in incremental general and administrative costs associated with acquired companies and $11.0 million in higher costs associated with ongoing technology, business development initiatives and facilities expenses. Selling, general and administrative expenses as a percentage of revenues decreased to 7.8% for the year ended December 31, 2015 from 9.1% for the year ended December 31, 2014, due primarily to the impact of the charge to provision for long-term contract receivable and arbitration expense described above.

Amortization of intangible assets. Amortization of intangible assets increased $0.6 million to $34.8 million for the year ended December 31, 2015. This increase was primarily due to increased amortization of intangibles associated with acquired companies, partially offset by reduced amortization expense from previously acquired intangible assets as certain of these assets became fully amortized.

Asset impairment charges. Asset impairment charges were $58.5 million for the year ended December 31, 2015 compared to none for the year ended December 31, 2014. During the fourth quarter of 2015, we recorded a $39.8 million goodwill impairment and a $12.1 million impairment related to customer relationships, trade names and non-compete agreement intangible assets. The extended low commodity price environment had significantly impacted certain reporting units within our Oil and Gas Infrastructure Services Division. Specifically, lower levels of expected activity in the U.S. Gulf of Mexico and, to a lesser extent, with respect to certain directional drilling operations in Australia resulted in impairments of goodwill and intangible assets. Additionally, we recorded a property and equipment impairment of $6.6 million related to certain international renewable energy services operations during the fourth quarter of 2015.

Interest expense. Interest expense increased $3.3 million to $8.0 million for the year ended December 31, 2015 as compared to the year ended December 31, 2014 due to increased borrowing activity.

Provision for income taxes. The provision for income taxes was $97.5 million for the year ended December 31, 2015, with an effective tax rate of 42.6%. The provision for income taxes was $139.0 million for the year ended December 31, 2014, with an effective tax rate of 32.6%. The effective tax rate was higher in 2015 due to a lower proportion of income before taxes from international jurisdictions, which are generally taxed at lower statutory rates. Additionally, certain of the asset impairments recorded were not deductible for tax purposes. A change in the Alberta provincial statutory income tax, effective as of June 1, 2015, which required a remeasurement of certain cumulative deferred tax assets and liabilities, resulted in additional taxes of $5.0 million. These negative impacts were partially offset by the realization of $4.2 million in tax benefits associated with the realization of a previously unrecognized deferred tax asset related to our investment in a foreign operating subsidiary. The effective tax rate in 2015 did not reflect a significant decrease in reserves for uncertain tax positions because the statute of limitations periods remained open for various tax years under audit. The effective tax rate for 2014 was impacted by an $8.1 million decrease in reserves for uncertain tax positions resulting from the expiration of federal and state statute of limitations periods.

Other comprehensive income (loss). Other comprehensive income (loss), net of taxes was a loss of $171.4 million in the year ended December 31, 2015 compared to a loss of $86.1 million in the year ended December 31, 2014. These losses were primarily due to less favorable foreign currency exchange rates related to the strengthening of the U.S. dollar against the Canadian and Australian dollars.

 

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Segment Results

The following table sets forth segment revenues and segment operating income (loss) for the years indicated (dollars in thousands):

 

     Year Ended December 31,  
     2016     2015     2014  

Revenues:

            

Electric Power Infrastructure Services

   $ 4,850,495       63.4   $ 4,937,289       65.2   $ 5,302,671       68.4

Oil and Gas Infrastructure Services

     2,800,824       36.6       2,635,147       34.8       2,444,558       31.6  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated revenues from external customers

   $ 7,651,319       100.0   $ 7,572,436       100.0   $ 7,747,229       100.0
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss):

            

Electric Power Infrastructure Services

   $ 395,745       8.2   $ 362,328       7.3   $ 462,985       8.7

Oil and Gas Infrastructure Services

     149,502       5.3       142,929       5.4       162,797       6.7  

Corporate and non-allocated costs

     (224,434     N/A       (267,754     N/A       (196,722     N/A  
  

 

 

     

 

 

     

 

 

   

Consolidated operating income

   $ 320,813       4.2   $ 237,503       3.1   $ 429,060       5.5
  

 

 

     

 

 

     

 

 

   

2016 compared to 2015

Electric Power Infrastructure Services Segment Results

Revenues for this segment decreased $86.8 million, or 1.8%, to $4.85 billion for the year ended December 31, 2016. This decrease was primarily a result of reduced customer spending associated with larger electric transmission projects as customers continued to face heightened regulatory and environmental requirements from state and federal agencies and more stringent permitting processes with various regional system operators. This regulatory environment negatively impacted the timing of existing projects and delayed the development of other infrastructure projects, which resulted in decreased demand for our services. Revenues also declined as a result of less favorable foreign currency exchange rates during the year ended December 31, 2016, which negatively impacted our international operations by approximately $23 million and were primarily attributable to the strengthening of the U.S. dollar against the Canadian dollar. Partially offsetting these decreases were approximately $95 million in revenues from acquired companies and $29.9 million in higher emergency restoration services revenues.

Operating income increased $33.4 million, or 9.2%, to $395.7 million for the year ended December 31, 2016. Operating income as a percentage of segment revenues increased to 8.2% for the year ended December 31, 2016 from 7.3% for the year ended December 31, 2015. These increases were primarily due to better utilization of certain larger transmission project resources as compared to the utilization of similar resources in 2015. Also contributing to these increases was improved performance of ongoing projects, as we experienced more favorable weather and increased productivity compared to the year ended December 31, 2015, which was negatively impacted by heavy snowfall and other unfavorable weather conditions in certain areas of Canada and the northern United States. Operating income and operating income as a percentage of revenues during 2016 were adversely impacted by project losses of $54.8 million related to performance issues on a power plant construction project in Alaska which compares to the 2015 impact of project losses of $66.1 million primarily associated with the same project in Alaska and an electric transmission project in Canada that was completed in the third quarter of 2015.

The project losses related to the Alaska power plant construction project recognized during the year ended December 31, 2016 were primarily due to performance issues and a claimed force majeure event that disrupted the commissioning phase of the project during the second quarter of 2016. These issues resulted in higher than

 

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expected production costs due to quality deficiencies and their impact on production sequencing. We provided the customer and its insurance providers with a notice of force majeure in order to seek schedule relief and cost recovery from the disruptions. We are also in the process of developing potential claims for damages that may have resulted from third party engineering and other contractor performance issues; however, no revenues or cost recovery has been reflected in the estimate of total project losses at December 31, 2016. This project had a contract value of $202 million and was substantially completed in the fourth quarter of 2016. As this project continues through its final close out phase, it is possible that additional performance issues or other unforeseen circumstances could occur and result in the recognition of additional losses on this project; however, such amounts cannot currently be estimated.

Oil and Gas Infrastructure Services Segment Results

Revenues for this segment increased $165.7 million, or 6.3%, to $2.80 billion for the year ended December 31, 2016. This increase was primarily the result of increased capital spending by our customers on larger projects, certain of which moved into full construction during the second half of 2016, after experiencing regulatory and permitting delays in the first half of 2016, as well as increased customer spending for natural gas distribution services. In addition, revenues were favorably impacted by the contribution of approximately $30 million in revenues from acquired companies. The revenues contributed from our international operations were negatively impacted by approximately $18 million as a result of less favorable foreign currency exchange rates in the year ended December 31, 2016 as compared to the year ended December 31, 2015, primarily attributable to the strengthening of the U.S. dollar against the Canadian dollar.

Operating income increased $6.6 million, or 4.6%, to $149.5 million for the year ended December 31, 2016. Operating income as a percentage of segment revenues decreased to 5.3% for the year ended December 31, 2016 from 5.4% for the year ended December 31, 2015. The increase in operating income was primarily due to the increase in revenues described above. The decrease in operating income as a percentage of segment revenues was primarily due to the negative impact on resource utilization due to permitting delays on certain pipeline projects that were scheduled to begin in the first half of 2016 but did not start until the second half of 2016. Operating income as a percentage of revenues was also negatively impacted by approximately $2 million in severance and restructuring costs recognized during 2016. Partially offsetting these items that negatively impacted operating income as a percentage of revenues was improved performance on certain larger pipeline projects that moved into full construction during 2016.

Corporate and Non-allocated Costs

Certain selling, general and administrative expenses and amortization of intangible assets are not allocated to segments. Corporate and non-allocated costs for the year ended December 31, 2016 decreased $43.3 million to $224.4 million as compared to the year ended December 31, 2015. This decrease was primarily due to the $51.9 million previously described goodwill and intangible asset impairment charges recorded in the year ended December 31, 2015, partially offset by $4.6 million in higher costs related to ongoing litigation, which included $6.9 million of litigation costs related to our disposition of certain telecommunication operations, and $4.0 million in costs associated with the departure of Quanta’s former president and chief executive officer recognized during 2016.

2015 compared to 2014

Electric Power Infrastructure Services Segment Results

Revenues for this segment decreased $365.4 million, or 6.9%, to $4.94 billion for the year ended December 31, 2015. Revenues from electric power infrastructure services were adversely impacted by reduced customer spending and delays in project timing due to regulatory and permitting issues associated with larger electric transmission projects. The revenues contributed from our international operations were negatively

 

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impacted by approximately $132 million as a result of less favorable foreign currency exchange rates in the year ended December 31, 2015 as compared to the year ended December 31, 2014, primarily attributable to the strengthening of the U.S. dollar against the Canadian and Australian dollars. Also contributing to the decrease was $23.4 million in lower emergency restoration services revenues. Partially offsetting these decreases were the contribution of approximately $85 million in revenues generated by acquired companies and increased activity from smaller scale transmission and electric distribution projects due to increased spending by our customers.

Operating income decreased $100.7 million, or 21.7%, to $362.3 million for the year ended December 31, 2015. Operating income as a percentage of segment revenues decreased to 7.3% for the year ended December 31, 2015 from 8.7% for the year ended December 31, 2014. These decreases were primarily due to a decrease in revenues from large electric transmission projects mentioned above, which typically yield higher margins, and a corresponding increase in lower margin revenues from smaller scale transmission work. This change in revenue mix also resulted in increased inefficiencies associated with transitioning between smaller projects that are not experienced during continuous production on larger projects, as well as certain large transmission resources being underutilized during the year ended December 31, 2015. In addition, operating income and operating income as a percentage of segment revenues decreased in 2015 due to the negative impact of approximately $66.1 million in aggregate losses recorded during the year ended December 31, 2015 on two projects due to increased costs associated with performance and site related factors that adversely impacted production. These projects included the power plant project in Alaska and the electric transmission project in Canada described above. Also contributing to the decreases was the negative impact on production for various projects due to heavy snowfall and other unfavorable weather conditions in certain areas of Canada and the northern United States during the first three months of 2015 and a property and equipment impairment of $6.6 million related to certain international renewable energy services operations recorded during the fourth quarter of 2015. Additionally, lower emergency restoration services revenues impacted margins since such services typically yield higher margins. Operating income and margins during 2014 were negatively impacted by the $102.5 million charge to provision for long-term contract receivable associated with an electric power infrastructure services project completed in 2012 described above.

Oil and Gas Infrastructure Services Segment Results

Revenues for this segment increased $190.6 million, or 7.8%, to $2.64 billion for the year ended December 31, 2015. Revenues for the year ended December 31, 2015 were favorably impacted by approximately $290 million in revenues generated by acquired companies. Increased revenues from distribution and other services also impacted revenues in 2015. These increases were partially offset by reduced demand for certain services due to lower oil prices and their impact on customer spending, fluctuations in larger project timing and regulatory delays on certain other larger diameter pipe projects that shifted work from the second half of 2015 into 2016. Revenues for the year ended December 31, 2015 also reflect the negative impact of changes in foreign currency exchange rates, which negatively impacted revenues contributed by our international operations by approximately $95 million as a result of the strengthening of the U.S. dollar against the Canadian and Australian dollars.

Operating income decreased $19.9 million, or 12.2%, to $142.9 million for the year ended December 31, 2015. Operating income as a percentage of segment revenues decreased to 5.4% for the year ended December 31, 2015 from 6.7% for the year ended December 31, 2014. The decreases were primarily due to a decrease in transmission revenues, which typically yield higher margins, and project losses of approximately $7 million on a directional drilling project in Canada that was completed in the fourth quarter of 2015. Also contributing to the decrease in operating income as a percentage of revenues was lower demand for services associated with certain operations as a result of lower oil prices, which negatively impacted this segment’s ability to cover fixed and overhead costs. These decreases were partially offset by the impact during the year ended December 31, 2014 of an aggregate $38.8 million expense associated with an adverse arbitration decision regarding a contract dispute on a 2010 directional drilling project as well as an increase in the estimated withdrawal liability associated with the Central States, Southeast and Southwest Areas Pension Plan (the Central States Plan) based on an increase in the estimated range of possible liability.

 

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Corporate and Non-allocated Costs

Certain selling, general and administrative expenses and amortization of intangible assets are not allocated to segments. Corporate and non-allocated costs for the year ended December 31, 2015 increased $71.0 million to $267.8 million as compared to the year ended December 31, 2014. This increase was primarily due to the $51.9 million previously described goodwill and intangible asset impairment charges recorded in the year ended December 31, 2015, $10.9 million in higher salaries and benefits associated with cost of living increases and increased personnel, $8.1 million in higher costs associated with ongoing technology and business development initiatives, and $3.6 million in higher consulting and professional fees. These increases were partially offset by a $6.8 million decrease in acquisition and integration costs due to the smaller size and reduced complexity of our acquisitions closed in 2015.

Liquidity and Capital Resources

Cash Requirements

Our cash and cash equivalents totaled $112.2 million and $128.8 million as of December 31, 2016 and 2015. As of December 31, 2016 and 2015, cash and cash equivalents held in domestic bank accounts were approximately $19.5 million and $16.1 million, and cash and cash equivalents held in foreign bank accounts were approximately $92.7 million and $112.7 million. As of December 31, 2016 and 2015, cash and cash equivalents held by our investments in joint ventures, which are either consolidated or proportionately consolidated, were approximately $11.5 million and $24.9 million, of which $10.0 million and $11.9 million related to domestic joint ventures. Cash and cash equivalents held by the joint ventures are available to support the operations of the related joint ventures, and we do not have access to that cash for our other operations. Under the terms of the partnership agreements, we generally have no right to the joint ventures’ cash other than participating in distributions and in the event of dissolution.

We were in compliance with the covenants under our credit agreement at December 31, 2016. We anticipate that our cash and cash equivalents on hand, 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 and our planned capital expenditures, as well as facilitate our ability to grow in the foreseeable future.

Our industry is capital intensive, and we expect the need for substantial capital expenditures to continue into the foreseeable future to meet the anticipated demand for our services. Capital expenditures related to continuing operations are expected to total $210 million to $225 million for 2017.

We also evaluate opportunities for strategic acquisitions from time to time that may require cash, as well as opportunities to make investments in customer-sponsored projects where we anticipate performing services such as project management, engineering, procurement or construction services. These investment opportunities exist in the markets and industries we serve and may require the use of cash in the form of debt or equity investments.

Management continues to monitor the financial markets and general national and global economic conditions for factors that may affect our liquidity and capital resources. We consider our cash and cash equivalents investment policies to be conservative in that we maintain a diverse portfolio of what we believe to be high-quality cash and cash equivalent investments with short-term maturities. Accordingly, we do not anticipate that any weakness in the capital markets will have a material impact on the principal amounts of our cash and cash equivalents or our ability to rely upon our credit facility for funds. To date, we have experienced no loss of or lack of access to our cash or cash equivalents or funds under our credit facility; however, we can provide no assurances that access to our invested cash and cash equivalents or availability under our credit facility will not be impacted in the future by adverse conditions in the financial markets.

We have not provided U.S. income taxes on approximately $298.8 million of accumulated foreign earnings that we intend to permanently reinvest outside the United States. We could be subject to additional U.S. income

 

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and foreign withholding taxes if we were to repatriate cash that is indefinitely reinvested outside the United States. Because of the number and variability of assumptions required, it is not practicable to determine the amount of any additional U.S. tax liability that may result if we decide to no longer indefinitely reinvest foreign earnings outside the United States. If our intentions or U.S. tax laws change in the future, there may be a significant negative impact on the provision for income taxes and cash flows as a result of recording an incremental tax liability in the period such change occurs.

Sources and Uses of Cash

As of December 31, 2016, we had cash and cash equivalents of $112.2 million and working capital of $1.08 billion. We also had $305.6 million of outstanding letters of credit and bank guarantees, $210.8 million of which was denominated in U.S. dollars and $94.8 million of which was denominated in currencies other than the U.S. dollar, primarily in Australian or Canadian dollars. We also had $351.3 million of outstanding revolving loans under our credit facility, $210.0 million of which was denominated in U.S. dollars and $141.3 million of which was denominated in Canadian dollars. As of December 31, 2016, our $1.81 billion senior secured revolving credit facility, which matures on December 18, 2020, had $1.15 billion available for revolving loans or issuing new letters of credit or bank guarantees.

Operating Activities

Cash flow from operations is primarily influenced by demand for our services and operating margins but can also be influenced by working capital needs associated with the various types of services that we provide. In particular, working capital needs may increase when we commence large volumes of work under circumstances where project costs, primarily associated with labor, equipment and subcontractors, are required to be paid before the receivables resulting from the work performed are billed and collected. Accordingly, changes within working capital in accounts receivable, costs and estimated earnings in excess of billings on uncompleted contracts, and billings in excess of costs and estimated earnings on uncompleted contracts are normally related and are typically affected on a collective basis by changes in revenue due to both changes in the timing and volume of work performed and variability in the timing of customer billings and payments. Additionally, working capital needs are generally higher during the summer and fall months due to increased demand for our services when favorable weather conditions exist in many of the regions in which we operate. Conversely, working capital assets are typically converted to cash during the winter months. These seasonal trends can be offset by changes in the timing of projects which can be impacted by project delays or accelerations and other economic factors that may affect customer spending.

Operating activities of continuing operations provided net cash of $381.2 million during 2016 as compared to $618.2 million during 2015 and $247.7 million during 2014. This decrease was primarily due to additional working capital requirements associated with larger oil and gas infrastructure projects that moved into full construction during the second half of 2016 and invoicing challenges and billing delays on two related electric transmission projects located in remote regions of northeastern Canada, which resulted from extensive quality assurance documentation and administrative requirements. We continue to work collaboratively with this customer to improve the invoicing and billing processes on these projects. Operating activities of continuing operations for 2015 were positively impacted by the receipt of a $65 million cash payment associated with the settlement of a large project receivable that was resolved in 2014, as well as the benefit from a corresponding reduction in income tax payments during early 2015 that resulted from the prior year charge to selling, general and administrative expenses of $102.5 million associated with this settlement. The increase in cash flow from operating activities of continuing operations for the year ended December 31, 2015 compared to the year ended December 31, 2014 was also due to decreased working capital requirements associated with fewer larger electric transmission projects during 2015 as compared to 2014. Also impacting cash flow from operating activities of continuing operations for the year ended December 31, 2015 was the receipt of $86.8 million related to favorable billing terms for certain projects that began in 2015. Cash flow from operating activities of continuing operations for the year ended December 31, 2014 was negatively impacted by weather related delays in part of North

 

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America, the timing of project close-outs that affected the achievement of certain billing milestones, and a $28.3 million payment associated with an arbitration decision associated with claims from a directional drilling project.

Days sales outstanding (DSO) as of December 31, 2016 was 74 days, as compared to 75 days as of December 31, 2015. This decrease was primarily due to favorable billing terms for certain projects ongoing in 2016 as compared to projects ongoing in 2015, partially offset by the impact of invoicing challenges and billing delays on the two related large electric transmission projects in remote regions of northeastern Canada discussed above. DSO is calculated by using the sum of current accounts receivable, net of allowance (which includes retainage and unbilled balances), plus costs and estimated earnings in excess of billings on uncompleted contracts less billings in excess of costs and estimated earnings on uncompleted contracts, divided by average revenues per day during the quarter.

Investing Activities

During 2016, we used net cash in investing activities of continuing operations of $266.0 million as compared to $307.1 million and $488.6 million used in investing activities of continuing operations in 2015 and 2014. Investing activities of continuing operations in 2016 included $212.6 million used for capital expenditures and $68.8 million used in connection with acquisitions, partially offset by $22.0 million of proceeds from the sale of property and equipment. Investing activities of continuing operations in 2015 included $210.0 million used for capital expenditures and $112.9 million used in connection with acquisitions, partially offset by $26.2 million of proceeds from the sale of property and equipment. Investing activities of continuing operations in 2014 included $247.2 million used for capital expenditures and $262.2 million used in connection with acquisitions, partially offset by $14.4 million of proceeds from the sale of property and equipment.

Financing Activities

During 2016, net cash used in financing activities of continuing operations was $124.8 million as compared to net cash used by financing activities of continuing operations of $1.22 billion and $58.3 million in 2015 and 2014. Financing activities of continuing operations during 2016 included $116.2 million of net repayments under our credit facility. Financing activities of continuing operations in 2015 included $1.61 billion for common stock repurchases under our stock repurchase programs and $21.2 million of cash payments to non-controlling interests as distributions of joint venture profits, partially offset by $413.6 million of net borrowings under our credit facility. Financing activities of continuing operations in 2014 included $93.5 million of common stock repurchases under a stock repurchase program approved by Quanta’s board of directors during the fourth quarter of 2013 (the 2013 Repurchase Program), $30.4 million of debt repayments primarily related to debt of acquired companies that was repaid shortly after the respective acquisition dates and $14.4 million of cash payments to non-controlling interests as distributions of joint venture profits, partially offset by $71.8 million of net borrowings under our credit facility.

On August 4, 2015, we completed the sale of our fiber optic licensing operations for a purchase price of approximately $1 billion in cash, resulting in after-tax net proceeds of approximately $848 million. We have presented the results of operations, financial position, cash flows and disclosures of the fiber optic licensing operations as discontinued operations for all periods in our consolidated financial statements. A cash tax payment of approximately $134 million related to the gain was paid in the fourth quarter of 2015 and was included in net cash provided by (used in) investing activities from discontinued operations on the consolidated statement of cash flows for the year ended December 31, 2015.

Stock Repurchases

During the third quarter of 2015, our board of directors approved a stock repurchase program authorizing us to purchase, from time to time through February 28, 2017, up to $1.25 billion of our outstanding common stock

 

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(the 2015 Repurchase Program). Repurchases under the 2015 Repurchase Program can be made in open market or privately negotiated transactions, including pursuant to an accelerated share repurchase arrangement, an issuer repurchase plan or otherwise, at our discretion, based on market and business conditions, applicable contractual and legal requirements and other factors. The 2015 Repurchase Program does not obligate us to acquire any specific amount of common stock and may be modified or terminated by our board of directors at any time at its sole discretion and without notice. During 2015, we repurchased 19.2 million shares of our common stock at a cost of $449.9 million in the open market under the 2015 Repurchase Program.

Also during the third quarter of 2015, we entered into an accelerated share repurchase arrangement (the ASR) to repurchase $750.0 million of our common stock under the 2015 Repurchase Program. Under the terms of the ASR, we paid $750.0 million to JPMorgan Chase Bank, National Association, London Branch (JPMorgan) and initially received 25.7 million shares of our common stock. The fair market value of these 25.7 million shares at the time of delivery was approximately $600.0 million, and the repurchased shares and the related cost to acquire them were accounted for as an adjustment to the balance of treasury stock during the quarter ended September 30, 2015, reducing the weighted-average number of basic and diluted common shares used to calculate our earnings per share. The $150.0 million remaining under the ASR was recorded as an adjustment to additional paid-in capital (APIC) during the third quarter of 2015 and was reclassified from APIC to treasury stock as a result of the final settlement of the ASR on April 12, 2016. Upon final settlement and based on the final volume-weighted average share price during the term of the ASR, minus a discount and subject to other adjustments pursuant to the terms and conditions of the ASR, we received 9.4 million additional shares of our common stock from JPMorgan. As of December 31, 2016, we had repurchased 54.3 million shares of our common stock at a cost of $1.20 billion, and approximately $50.1 million remained available under the 2015 Repurchase Program.

During the fourth quarter of 2013, our board of directors approved a stock repurchase program authorizing us to purchase from time to time through December 31, 2016, up to $500.0 million of our outstanding common stock. During the year ended December 31, 2014, we repurchased a total of 3.0 million shares valued at $93.5 million pursuant to the 2013 Repurchase Program. During the year ended December 31, 2015, we repurchased 14.3 million shares of our common stock at a cost of $406.5 million in the open market and completed the 2013 Repurchase Program.

Debt Instruments

Credit Facility

On December 18, 2015, we entered into an amended and restated credit agreement with various lenders that provides for a $1.81 billion senior secured revolving credit facility maturing on December 18, 2020. The entire amount available under the facility may be used by us for revolving loans and letters of credit in U.S. dollars and certain alternative currencies. Up to $600.0 million of the facility may be used by certain of our subsidiaries for revolving loans and letters of credit in certain alternative currencies. Up to $100.0 million of the facility may be used for swing line loans in U.S. dollars, up to $50.0 million of the facility may be used for swing line loans in Canadian dollars and up to $30.0 million of the facility may be used for swing line loans in Australian dollars. In addition, subject to the conditions specified in the credit agreement, we have the option to increase the revolving commitments by up to $400.0 million from time to time upon receipt of additional commitments from new or existing lenders. Borrowings under the credit agreement are to be used to refinance existing indebtedness and for working capital, capital expenditures and other general corporate purposes.

As of December 31, 2016, we had approximately $305.6 million of outstanding letters of credit and bank guarantees, $210.8 million of which were denominated in U.S. dollars and $94.8 million of which were denominated in currencies other than the U.S. dollar, primarily in Australian or Canadian dollars. We also had $351.3 million of outstanding revolving loans under the credit facility, $210.0 million of which were denominated in U.S. dollars and $141.3 million of which were denominated in Canadian dollars. The remaining $1.15 billion was available for revolving loans or new letters of credit or bank guarantees.

 

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Under our current credit agreement, amounts borrowed in U.S. dollars bear interest, at our option, at a rate equal to either (i) the Eurocurrency Rate (as defined in the credit agreement) plus 1.125% to 2.125%, as determined based on our Consolidated Leverage Ratio (as described below), or (ii) the Base Rate (as described below) plus 0.125% to 1.125%, as determined based on our Consolidated Leverage Ratio. Amounts borrowed as revolving loans under the credit agreement in any currency other than U.S. dollars bear interest at a rate equal to the Eurocurrency Rate plus 1.125% to 2.125%, as determined based on our Consolidated Leverage Ratio. Standby letters of credit issued under the credit agreement are subject to a letter of credit fee of 1.125% to 2.125%, based on our Consolidated Leverage Ratio, and Performance Letters of Credit (as defined in the credit agreement) issued under the credit agreement in support of certain contractual obligations are subject to a letter of credit fee of 0.675% to 1.275%, based on our Consolidated Leverage Ratio. We are also subject to a commitment fee of 0.20% to 0.40%, based on our Consolidated Leverage Ratio, on any unused availability under the credit agreement.

The Consolidated Leverage Ratio is the ratio of our Consolidated Funded Indebtedness to Consolidated EBITDA (as those terms are defined in the credit agreement). For purposes of calculating our Consolidated Leverage Ratio, Consolidated Funded Indebtedness is reduced by available cash and Cash Equivalents (as defined in the credit agreement) in excess of $25.0 million. The Base Rate equals the highest of (i) the Federal Funds Rate (as defined in the credit agreement) plus 0.5%, (ii) the prime rate publicly announced by Bank of America, N.A. and (iii) the Eurocurrency Rate plus 1.00%.

Subject to certain exceptions, the credit agreement is secured by substantially all of our assets and the assets of our wholly owned U.S. subsidiaries and by a pledge of all of the capital stock of our wholly owned U.S. subsidiaries and 65% of the capital stock of direct foreign subsidiaries of our wholly owned U.S. subsidiaries. Our wholly owned U.S. subsidiaries also guarantee the repayment of all amounts due under the credit agreement. Subject to certain conditions, all collateral will automatically be released from the liens at any time we maintain an Investment Grade Rating (defined in the credit agreement as two of the following three conditions being met: (i) a corporate credit rating that is BBB- or higher by Standard & Poor’s Rating Services, (ii) a corporate family rating that is Baa3 or higher by Moody’s Investors Services, Inc. or (iii) a corporate credit rating that is BBB- or higher by Fitch Ratings, Inc.).

The credit agreement contains certain covenants, including a maximum Consolidated Leverage Ratio and a minimum Consolidated Interest Coverage Ratio (as defined in the credit agreement). The credit agreement also limits certain acquisitions, mergers and consolidations, indebtedness, asset sales and prepayments of indebtedness and, subject to certain exceptions, prohibits liens on our assets. The credit agreement allows cash payments for dividends and stock repurchases subject to compliance with the following requirements (after giving effect to the dividend or stock repurchase): (i) no default or event of default under the credit agreement; (ii) continued compliance with the financial covenants in the credit agreement; and (iii) at least $100.0 million of availability under the credit agreement and/or cash and cash equivalents on hand. As of December 31, 2016, we were in compliance with all of the covenants in the credit agreement.

The credit agreement provides for customary events of default and contains cross-default provisions with our underwriting, continuing indemnity and security agreement with our sureties and all of our other debt instruments exceeding $100.0 million in borrowings or availability. If an Event of Default (as defined in the credit agreement) occurs and is continuing, on the terms and subject to the conditions set forth in the credit agreement, the lenders may declare all amounts outstanding and accrued and unpaid interest immediately due and payable, require that we provide cash collateral for all outstanding letter of credit obligations, terminate the commitments under the credit agreement, and foreclose on the collateral.

Prior to the amendment and restatement of our credit agreement on December 18, 2015 and after April 1, 2014, amounts borrowed bore interest at the same rates as above, and we were subject to the same commitment fees as above. Prior to April 1, 2014, amounts borrowed in U.S. dollars bore interest, at our option, at a rate equal to either (i) the Eurocurrency Rate plus 1.25%, or (ii) the Base Rate plus 0.25%, and amounts borrowed as

 

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revolving loans in any currency other than U.S. dollars bore interest at a rate equal to the Eurocurrency Rate plus 1.25%. Prior to April 1, 2014, standby letters of credit issued under the credit agreement were also subject to a letter of credit fee of 1.25%. Performance Letters of Credit issued in support of certain contractual obligations were subject to a letter of credit fee of 0.75%, and we were also subject to a commitment fee of 0.20% on any unused availability under the credit agreement.

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 purchase equipment, surety guarantees related to performance bonds, certain multiemployer pension plan liabilities and obligations relating to our investments and joint venture arrangements. Certain joint venture structures involve risks not directly reflected in our balance sheets. For certain joint ventures, we have guaranteed all of the obligations of the joint venture under a contract with the customer. Additionally, other joint venture arrangements qualify as a general partnership, for which we are jointly and severally liable for all of the obligations of the joint venture. In our joint venture arrangements, typically each joint venturer indemnifies the other party for any liabilities incurred in excess of the liabilities such other party is obligated to bear under the respective joint venture agreement. Other than as discussed in this report, we have not engaged in any material 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, 2016, the maximum guaranteed residual value was approximately $556.5 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, certain 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, typically pursuant to our credit agreement. Each letter of credit commits the issuer to pay specified amounts to the holder of the letter of credit if the holder claims that we have failed to perform specified actions. If this were to occur, we would be required to reimburse the issuer of the letter of credit. Depending on the circumstances of such a reimbursement, we may also be required to record a charge to earnings for the reimbursement. We do not believe that it is likely that any material claims will be made under a letter of credit in the foreseeable future.

As of December 31, 2016, we had $305.6 million in outstanding letters of credit and bank guarantees to secure our casualty insurance program and various contractual commitments. These are irrevocable stand-by

 

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letters of credit with maturities generally expiring at various times throughout 2017. Upon maturity, it is expected that the majority of the letters of credit related to the casualty insurance program will be renewed for subsequent one-year periods.

Performance Bonds and Parent Guarantees

Many customers, particularly in connection with new construction, require us to post performance and payment bonds issued by a financial institution known as a surety. These bonds provide a guarantee to the customer that we will perform under the terms of a contract and that we will pay subcontractors and vendors. If we fail to perform 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 underwriting, continuing indemnity and security agreement with our sureties and with the consent of the lenders that are party to our credit agreement, we have granted security interests in certain of our assets to collateralize our obligations to the sureties. Subject to certain conditions and consistent with terms of our credit agreement, these security interests will be automatically released if we maintain a credit rating that meets two of the following three conditions: (i) a corporate credit rating that is BBB- or higher by Standard & Poor’s Rating Services, (ii) a corporate family rating that is Baa3 or higher by Moody’s Investors Services, Inc. or (iii) a corporate credit rating that is BBB- or higher by Fitch Ratings, Inc. We may be required to post letters of credit or other collateral in favor of the sureties or our customers in the future. 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, 2016, the total amount of outstanding performance bonds was estimated to be approximately $3.4 billion. Our estimated maximum exposure as it relates to the value of performance bonds outstanding is lowered on each bonded project as the cost to complete is reduced, and each of our commitments under the performance bonds generally extinguishes concurrently with the expiration of our related contractual obligation. The estimated cost to complete these bonded projects was approximately $1.2 billion as of December 31, 2016.

Additionally, from time to time, we guarantee the obligations of our wholly owned subsidiaries, including obligations under certain contracts with customers, certain lease obligations, certain joint venture arrangements and, in some states, obligations in connection with obtaining contractors’ licenses. We are not aware of any material obligations for performance or payment asserted against us under any of these guarantees.

Contractual Obligations

As of December 31, 2016, our future contractual obligations were as follows (in thousands):

 

    Total     2017     2018     2019     2020     2021     Thereafter  

Long-term debt — principal (1)

  $ 354,646      $ 3,305      $ —        $ —        $ 351,341      $ —        $ —     

Long-term debt — cash interest (2)

    13        13        —          —          —          —          —     

Short-term debt (3)

    2,735        2,735        —          —          —          —          —     

Operating lease obligations

    266,463        99,677        67,034        44,216        25,444        13,761        16,331   

Capital lease obligations and related interest obligations (4)

    3,744        1,523        1,416        805        —          —          —     

Equipment purchase commitments

    22,425        22,425        —          —          —          —          —     

Capital commitment related to investments in unconsolidated affiliates (5)

    57,650        34,083        —          23,567        —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 707,676      $ 163,761      $ 68,450      $ 68,588      $ 376,785      $ 13,761      $ 16,331   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

Amounts were recorded in our December 31, 2016 consolidated balance sheet and included $351.3 million of outstanding revolving loans under our credit facility, which bear interest at variable market rates.

 

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  Assuming the principal amount outstanding at December 31, 2016 remained outstanding and the interest rate in effect at December 31, 2016 remained the same, the annual cash interest expense with respect to the credit facility would be approximately $8.6 million, payable for the remainder of the term of the facility, which matures in December 2020.
(2) Amounts relate to cash interest expense on our fixed-rate long-term debt, which excludes the credit facility.
(3) Amounts were recorded in our December 31, 2016 consolidated balance sheet.
(4) Principal amounts of capital lease obligations were recorded in our December 31, 2016 consolidated balance sheet.
(5) A return of capital from unconsolidated affiliates of approximately $42.1 million is anticipated in August 2017 and is not included in these amounts. As of December 31, 2016, we had made aggregate contributions to this unconsolidated affiliate of $13.5 million and had received $2.9 million as a return of capital.

Equipment Purchase Commitments

We have committed capital for the expansion of our vehicle fleet in order to accommodate manufacturer lead times on certain types of vehicles. As of December 31, 2016, production orders for approximately $22.4 million had been issued with delivery dates scheduled to occur throughout 2017. Although we have committed to the purchase of these vehicles at the time of their delivery, we intend that these orders will be assigned to third party leasing companies and made available to us under certain of our master equipment lease agreements, which will release us from our capital commitment.

Capital Commitments Related to Investments in Unconsolidated Affiliates

We have excluded from the Contractual Obligations table additional capital commitments associated with investments in unconsolidated affiliates related to planned oil and gas infrastructure projects of approximately $20.2 million because we are unable to determine the exact timing of these capital commitments. We anticipate these commitments to be paid by May 31, 2022 and as specific commitment amounts and their timing are determined, we will reflect such amounts in the Contractual Obligations table.

Unrecognized Tax Benefits

During 2016, the Internal Revenue Service (IRS) completed its examination related to tax years 2010, 2011 and 2012; however, certain subsidiaries remain under examination by various U.S. state, Canadian and other foreign tax authorities for multiple periods, and the amount of unrecognized tax benefits could therefore increase or decrease as a result of the expiration of certain statute of limitations periods or settlements of these examinations. We believe it is reasonably possible that within the next 12 months unrecognized tax benefits may decrease by up to $12.3 million due to the expiration of certain statute of limitations periods or settlements of the examinations.

Multiemployer Pension Plans

The previously presented table of estimated contractual obligations does not reflect the obligations under the multiemployer pension plans in which our union employees participate. Some of our operating units are parties to various collective bargaining agreements that require us to provide to the employees subject to these agreements specified wages and benefits, as well as to make contributions to multiemployer pension plans. Our multiemployer pension plan contribution rates generally are specified in the collective bargaining agreements (usually on an annual basis), and contributions are made to the plans on a “pay-as-you-go” basis based on our union employee payrolls. The location and number of union employees that we employ at any given time and the plans in which they may participate vary depending on the projects we have ongoing at any time and the need for union resources in connection with those projects. Therefore, we are unable to accurately predict our union employee payroll and the amount of the resulting multiemployer pension plan contribution obligations for future periods.

 

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We may also be required to make additional contributions to our multiemployer pension plans if they become underfunded, and these additional contributions will be determined based on our union employee payrolls. The Pension Protection Act of 2006 added special funding and operational rules generally applicable to plan years beginning after 2007 for multiemployer plans that are classified as “endangered,” “seriously endangered” or “critical” status. Plans in these classifications must adopt measures to improve their funded status through a funding improvement or rehabilitation plan, as applicable, which may require additional contributions from employers (which may take the form of a surcharge on benefit contributions) and/or modifications to retiree benefits. A number of multiemployer plans to which our operating units contribute or may contribute in the future are in “endangered,” “seriously endangered” or “critical” status. The amount of additional funds, if any, that we may be obligated to contribute to these plans in the future cannot be reasonably estimated and are not included in the above table due to uncertainty of the future levels of work that require the specific use of the union employees covered by these plans, as well as the future contribution levels and possible surcharges on contributions applicable to these plans.

We may also have additional liabilities imposed by law as a result of our participation in multiemployer defined benefit pension plans. The Employee Retirement Income Security Act of 1974, as amended by the Multiemployer Pension Plan Amendments Act of 1980, imposes certain liabilities upon employers who are contributors to a multiemployer plan if the employer withdraws from the plan or the plan is terminated or experiences a mass withdrawal. These liabilities include an allocable share of the unfunded vested benefits in the plan for all plan participants, not merely the benefits payable to a contributing employer’s own retirees. Other than as noted below, we are not aware of any material amounts of withdrawal liability that have been or are expected to be incurred as a result of a withdrawal by any of our operating units from any multiemployer defined benefit pension plans.

2011 Central States Plan Withdrawal Liability. In the fourth quarter of 2011, certain of our subsidiaries withdrew from the Central States Plan. This withdrawal event was the result of an amendment to a collective bargaining agreement with the International Brotherhood of Teamsters (Teamsters) that eliminated certain employers’ obligations to contribute to the Central States Plan, which was then in critical status and significantly underfunded as to its vested benefit obligations. The amendment was negotiated by the Pipe Line Contractors Association (PLCA) on behalf of its members, which include certain of our subsidiaries. Because certain of our other subsidiaries continued participation in the Central States Plan into 2012, the subsidiaries’ withdrawals in 2011 effected only a partial withdrawal on our behalf in 2011. We believed that the partial withdrawal was advantageous because it limited exposure to increased liability resulting from a future withdrawal event, at which point the Central States Plan could have been further underfunded. We and other PLCA members now contribute to a different multiemployer pension plan on behalf of the affected Teamsters employees. While certain of our subsidiaries continued participation in the Central States Plan into 2012, we believe that such subsidiaries withdrew from the Central States Plan in 2012, thereby effecting a complete withdrawal as of December 30, 2012 for all Quanta subsidiaries.

In connection with the partial withdrawal in 2011, we recorded a withdrawal liability of approximately $32.6 million in the fourth quarter of 2011 based on estimates received from the Central States Plan. The Central States Plan subsequently asserted that the withdrawal of the PLCA members, and thus our partial withdrawal, was not effective in 2011. The PLCA and Quanta believed at that time that a legally effective withdrawal had occurred during the fourth quarter of 2011, and this issue was litigated in the federal district court for the Northern District of Illinois, Eastern Division. In September 2013, the district court ruled in favor of the Central States Plan, and that decision was appealed by the PLCA. In July 2014, the Central States Plan provided us with a Notice and Demand claiming partial withdrawal liability in the amount of $39.6 million and requiring Quanta to make payments on this assessment while the dispute is ongoing. In September 2015, the United States Court of Appeals for the Seventh Circuit ruled in favor of the PLCA and reversed the district court’s previous ruling, which had been in favor of the Central States Plan. Based on the outcome of the appeal, in January 2016, the Central States Plan issued a revised Notice and Demand claiming partial withdrawal liability in the amount of $32.9 million.

 

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Separately, in December 2013, the Central States Plan filed lawsuits against two of our subsidiaries in connection with their withdrawal in 2012. In the first lawsuit, the Central States Plan alleged that the subsidiary elected to participate in the Central States Plan pursuant to the collective bargaining agreement under which it participated. We argued that no such election was made and that any payments made to the Central States Plan were made in error. In July 2014, the parties reached an agreement to settle the lawsuit, and the court dismissed the case with prejudice. In the second lawsuit, the Central States Plan alleged that contributions made by our subsidiary to a new industry fund created after we withdrew from the Central States Plan should have been made to the Central States Plan. This arguably would have extended our withdrawal date for this subsidiary to at least the end of 2013. We disputed these allegations on the basis that we properly paid contributions to the new industry fund based on the terms of the collective bargaining agreement under which we participated and asserted that we terminated our obligation to contribute to the Central States Plan by the end of 2012. The parties both moved for summary judgment, and in March 2015, the court entered judgment in our favor. The Central States Plan filed a notice of appeal in April 2015, and in December 2015, the Central States Plan agreed to dismiss the appeal with prejudice.

The ultimate liability associated with the complete withdrawal of our subsidiaries from the Central States Plan will depend on various factors, including interpretations of the terms of the collective bargaining agreements under which the subsidiaries participated and whether exemptions from withdrawal liability applicable to construction industry employers will be available. In March 2014, the Central States Plan provided revised estimates indicating that the total withdrawal liability based on certain withdrawal scenarios from 2011 through 2014 could range between $40.1 million and $55.4 million, which we believe to be the range of reasonably possible loss for this matter. Additionally, based on those estimates and allowing for the exclusion of amounts believed by management to have been improperly included in such estimates, we recorded an adjustment to cost of services during the three months ended March 31, 2014 to increase the recognized withdrawal liability to an amount within the range communicated to us by the Central States Plan. Given the unknown nature of some of the factors mentioned above, the final withdrawal liability cannot yet be determined with certainty. Accordingly, it is reasonably possible that the amount owed upon final resolution of these matters could be materially higher than the expense we recognized through December 31, 2016. Although we dispute the total liability owed to the Central States Plan, we continue to make monthly payments according to the terms of the January 2016 Notice and Demand while the parties determine the final withdrawal liability. As of December 31, 2016, we had made payments totaling $17.5 million toward the withdrawal liability assessment.

2013 Central States Plan Withdrawal Liability. On October 9, 2013, we acquired a company that experienced a complete withdrawal from the Central States Plan prior to the date of acquisition. Prior to the acquisition, the Central States Plan issued a Notice and Demand to the acquired company claiming a withdrawal liability in the total amount of $6.9 million and requiring payments to be made on this assessment while the dispute is ongoing. In connection with the acquisition, we recorded an initial liability of $4.8 million related to this withdrawal liability, and a portion of the purchase price for the acquired company was deposited into an escrow account to fund any withdrawal obligation in excess of the initial liability recorded. In January 2016, the Central States Plan issued a revised Notice and Demand claiming a withdrawal liability in the amount of $4.8 million. Although we continue to dispute the total liability owed to the Central States Plan, we continue to make monthly payments according to the terms of this revised Notice and Demand while the parties determine the final withdrawal liability. As of December 31, 2016, payments totaling $3.5 million had been made toward the withdrawal liability assessment.

The final amount of withdrawal liability payable in connection with this matter remains the subject of a pending arbitration proceeding and will ultimately depend on various factors, including the outcome of the PLCA litigation described above. However, the acquired company’s withdrawal from the Central States Plan is not expected to have a material impact on our financial condition, results of operations or cash flows.

Letters of Credit Fees and Commitment Fees

We have excluded from the Contractual Obligations table interest associated with letters of credit fees and commitment fees under our credit facility because the outstanding letters of credit, availability and applicable

 

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interest rates and fees are variable. For additional information regarding the interest rates and fees associated with borrowings under our credit facility, see Liquidity and Capital Resources — Debt Instruments — Credit Facility above.

Self-Insurance

We are insured for employer’s liability, workers’ compensation, auto liability and general liability claims. Under these programs, the deductible for employer’s liability is $1.0 million per occurrence, the deductible for workers’ compensation is $5.0 million per occurrence, and the deductibles for auto liability and general liability are $10.0 million per occurrence. We are generally self-insured for all claims that do not exceed the amount of the applicable deductible. In connection with our casualty insurance programs, we are required to issue letters of credit to secure our self-insured obligations. We also have employee health care benefit plans for most employees not subject to collective bargaining agreements, of which the primary plan is subject to a deductible of $0.4 million per claimant per year.

Losses under all of these insurance programs are accrued based upon our estimate of the ultimate liability for claims reported and an estimate of claims incurred but not reported, with assistance from third-party actuaries. These insurance liabilities are difficult to assess and estimate due to unknown factors, including the severity of an injury, the extent of damage, the determination of our liability in proportion to other parties and the number of incidents not reported. The accruals are based upon known facts and historical trends, and management believes such accruals are adequate. As of December 31, 2016 and 2015, the gross amount accrued for insurance claims totaled $218.2 million and $209.0 million, with $162.0 million and $153.5 million considered to be long-term and included in other non-current liabilities. Related insurance recoveries/receivables as of December 31, 2016 and 2015 were $8.7 million and $8.6 million, of which $0.4 million and $0.6 million were included in prepaid expenses and other current assets and $8.3 million and $8.0 million were included in other assets, net.

We renew our insurance policies on an annual basis, and therefore deductibles and levels of insurance coverage may change in future periods. In addition, insurers may cancel our coverage or determine to exclude certain items from coverage, or we may elect not to obtain certain types or incremental levels of insurance if we believe that the cost to obtain such coverage exceeds the additional benefits obtained. In any such event, our overall risk exposure would increase, which could negatively affect our results of operations, financial condition and cash flows. The Contractual Obligations table excludes commitments associated with our insurance liabilities, as we are unable to determine the timing of payments related to these obligations.

Concentrations of Credit Risk

We are subject to concentrations of credit risk related primarily to our cash and cash equivalents and our net receivable position with customers, which includes amounts related to billed and unbilled accounts receivable and costs and estimated earnings in excess of billings on uncompleted contracts net of advanced billings with the same customer. Substantially all of our cash and cash equivalent 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 cash and cash equivalents in a diversified portfolio of what we believe to be high quality investments, which primarily include interest-bearing demand deposits, money market investments, money market mutual funds and investment grade commercial paper with original maturities of three months or less. Although we do not currently believe the principal amount of these investments is subject to any material risk of loss, changes in economic conditions could impact the interest income we receive from these investments. In addition, we grant credit under normal payment terms, generally without collateral, to our customers, which include electric power and oil and gas companies, governmental entities, general contractors, and builders, owners and managers of commercial and industrial properties located primarily in the United States, Canada and Australia. Consequently, we are subject to potential credit risk related to changes in business and economic factors throughout the United States, Canada and Australia, which may be heightened as a result of uncertain

 

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economic and financial market conditions that have existed in recent years. However, we generally have certain statutory lien rights with respect to services provided. 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 billed and unbilled receivables and costs and estimated earnings in excess of billings on uncompleted contracts for services we have performed.

At December 31, 2016 and 2015, one customer within our Electric Power Infrastructure Services segment accounted for approximately 16% and 12% of our consolidated net receivable position. At December 31, 2016 and 2015, the net receivable position for this customer was $277.3 million and $195.2 million, which included $175.9 million and $83.9 million of costs and estimated earnings in excess of billings on uncompleted contracts. These balances were associated with invoicing challenges and billing delays on two related electric transmission projects located in remote regions of northeastern Canada that resulted from extensive quality assurance documentation and administrative requirements. We continue to work collaboratively with the customer to improve these processes, which has resulted in increased billings and payment activity in the latter half of 2016. Partially offsetting these decreases to this net receivable position was the impact of additional change orders and claims on the project that were in the process of being negotiated in the normal course of business. No other customers represented 10% or more of our consolidated net receivable position as of December 31, 2016 and 2015. No customers represented 10% or more of our revenues for the years ended December 31, 2016, 2015 and 2014.

Legal Proceedings

We are from time to time party to various lawsuits, claims and other legal proceedings that arise in the ordinary course of business. These actions typically seek, among other things, compensation for alleged personal injury, breach of contract and/or property damages, employment-related damages, punitive damages, civil penalties or other losses, or injunctive or declaratory relief. With respect to all such lawsuits, claims and proceedings, we record a reserve when it is probable that a loss has been incurred and the amount of loss can be reasonably estimated. In addition, we disclose matters for which management believes a material loss is at least reasonably possible. See Legal Proceedings and Collective Bargaining Agreements in Note 15 of the Notes to Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data for additional information regarding litigation, claims and other legal proceedings.

Related Party Transactions

In the normal course of business, we enter into transactions from time to time with related parties. Our significant related party transactions typically take the form of facility leases with prior owners of certain acquired companies.

Inflation

Due to relatively low levels of inflation experienced during the years ended December 31, 2016, 2015 and 2014, inflation did not have a significant effect on our results.

New Accounting Pronouncements

Adoption of New Accounting Pronouncements

In February 2015, the FASB issued an update which amends consolidation guidance, including amending the guidance related to determining whether an entity is a variable interest entity. The guidance may be applied using a modified retrospective approach whereby the entity records a cumulative effect of adoption at the beginning of the fiscal year of initial application. A reporting entity may also apply the amendments on a full retrospective basis. We adopted this guidance effective January 1, 2016, and the adoption of the update did not have a significant impact on our consolidated financial statements or related disclosures.

 

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In April 2015, the FASB issued an update that requires debt issuance costs related to a recognized debt liability to be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with the presentation of debt discounts and premiums. The update is required to be adopted retroactively for all periods presented. In August 2015, the FASB issued another update that states that the Securities Exchange Commission (SEC) staff would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. We adopted this guidance effective January 1, 2016, and the adoption of the update did not have a significant impact on our consolidated financial statements or related disclosures.

In April 2015, the FASB issued an update that provides guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. An entity can elect to adopt the amendments either prospectively to all arrangements entered into or materially modified after the effective date or retrospectively. We adopted this guidance effective January 1, 2016, and the adoption of the update did not have a significant impact on our consolidated financial statements or related disclosures.

In September 2015, the FASB issued an update that requires an acquiring company to recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which such adjustments are determined. An acquiring company must record any effect on earnings from changes in depreciation or amortization or other income effects, calculated as if the accounting had been completed at the acquisition date. The acquiring company must also present separately on the face of the income statement or disclose in the notes the amount recorded in current-period earnings that would have been recorded in previous reporting periods if the adjustment had been recognized as of the acquisition date. The update is required to be adopted prospectively to adjustments that occur after the effective date with earlier application permitted for financial statements that have not yet been issued. We adopted this guidance effective January 1, 2016, and the adoption of the update did not have a significant impact on our consolidated financial statements or related disclosures.

In August 2014, the FASB issued guidance to address the diversity in practice in determining when there is substantial doubt about an entity’s ability to continue as a going concern and when and how an entity must disclose certain relevant conditions and events. This update requires an entity to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern for a period of one year after the date that the financial statements are issued (or available to be issued). If such conditions or events exist, an entity should disclose that there is substantial doubt about the entity’s ability to continue as a going concern for a period of one year after the date that the financial statements are issued (or available to be issued), along with the principal conditions or events that raise substantial doubt, management’s evaluation of the significance of those conditions or events in relation to the entity’s ability to meet its obligations and management’s plans that are intended to mitigate those conditions or events. This guidance will impact the disclosure and presentation of any substantial doubt about our ability to continue as a going concern, if such substantial doubt were to exist. We adopted this guidance on December 31, 2016, and the adoption of the update did not have a significant impact on our consolidated financial statements or related disclosures but would have an impact if such a substantial doubt were to exist in the future.

In January 2017, the FASB issued an update that amended SEC guidance within the Accounting Standards Codification related to disclosing the impact that recently issued accounting standards will have on a registrant’s financial statements when such standards are adopted in future periods. We have followed the guidance in this amendment within this section and in Note 2 to the consolidated financial statements.

 

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Accounting Standards Not Yet Adopted

In May 2014, the FASB issued an update that supersedes most current revenue recognition guidance as well as some cost recognition guidance. The update requires that the recognition of revenue related to the transfer of goods or services to customers reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This update also requires new qualitative and quantitative disclosures about the nature, amount, timing and uncertainty of revenues and cash flows arising from customer contracts, including significant judgments and changes in judgments, information about contract balances and performance obligations, and assets recognized from costs incurred to obtain or fulfill a contract. In July 2015, the FASB affirmed its proposal to defer the effective date until fiscal years beginning on or after December 15, 2017. The guidance can be applied on a full retrospective or modified retrospective basis whereby the entity records a cumulative effect of initially applying this update at the date of initial application.

We are currently evaluating the potential impact of this update on our consolidated financial statements, as well as the impact of our selected transition method as we continue through the implementation process. In addition, we continue to monitor activity related to the new standard as well as working with various non-authoritative groups regarding industry clarifications and interpretations, which may impact our considerations and conclusions. Significant areas of ongoing consideration include the impact of termination for convenience provisions on the duration of contracts and accounting for mobilization-related costs and uninstalled materials. While we are still evaluating the requirements of this update, we currently do not expect the update to materially affect our results of operations, financial position or cash flows. This preliminary conclusion is based on our belief that we will generally continue to recognize revenues from long-term service contracts over time as services are performed and the underlying obligation to the customer is fulfilled. We have identified and are in the process of implementing changes to our processes and internal controls to meet the reporting and disclosure requirements of this update and will adopt this update effective January 1, 2018.

In July 2015, the FASB issued an update that requires inventory to be measured at the lower of either cost or net realizable value. When evidence exists that the net realizable value of inventory is lower than its cost, the difference will be recognized as a loss in earnings in the period in which it occurs. The update is required to be adopted prospectively and is effective for interim and annual reporting periods beginning after December 15, 2016, although early adoption is permitted. The adoption of the update is not anticipated to have a significant impact on our consolidated financial statements or related disclosures.

In January 2016, the FASB issued an update that addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments to provide users of financial statements with more decision-useful information. The new standard is effective for interim and annual periods beginning after December 15, 2017. Early adoption is permitted for financial statements of fiscal years or interim periods that have not been previously issued. We are evaluating the impact of the new standard on our consolidated financial statements and will adopt the new standard by January 1, 2018.

In February 2016, the FASB issued an update that requires companies to recognize on the balance sheet the contractual right of use assets and liabilities corresponding to the rights and obligations created by lease contracts. The new standard is effective for interim and annual periods beginning after December 15, 2018. Early adoption is permitted for financial statements of fiscal years or interim periods that have not been previously issued. While we continue to evaluate the effect of the standard on our consolidated financial statements, it is anticipated that the adoption of the standard will materially impact our statement of financial position.

In March 2016, the FASB issued an update that will amend the accounting for share-based payments in several key areas, including the treatment and cash flow presentation of tax effects related to the settlement of share-based payments and the accounting for forfeitures of share-based awards. The new guidance will require companies with share-based payments to record all tax effects related thereto at settlement (or expiration) through income tax expense on the statement of operations rather than through additional paid-in capital within

 

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equity. This update will also require excess tax benefits to be classified as an operating activity on the statement of cash flows rather than reclassified as a financing activity and will require cash paid by an employer when withholding shares for the employee portion of taxes to be presented as a financing activity. The update also allows companies to either account for forfeitures of share-based payments as they occur or to estimate forfeitures. This guidance is required to be applied prospectively except for the requirement to classify cash paid when withholding shares for taxes as a financing activity, which requires retrospective application. The update is effective for interim and annual reporting periods beginning after December 15, 2016. We will continue to estimate forfeitures of share-based payments. It is anticipated that we will experience increased volatility of income tax expense upon adoption of this update.

In June 2016, the FASB issued an update that will change the way companies measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. The update will require companies to use an “expected loss” model for instruments measured at amortized cost and to record allowances for available-for-sale (AFS) debt securities rather than reduce the carrying amounts. The update will also require disclosure of information regarding how a company developed its allowance, including changes in the factors that influenced management’s estimate of expected credit losses and the reasons for those changes. Companies will apply this standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. The new standard is effective for interim and annual reporting periods beginning after December 15, 2019, although early adoption is permitted for annual reporting periods beginning after December 15, 2018. We are currently evaluating the potential impact of this authoritative guidance on our consolidated financial statements and will adopt this guidance by January 1, 2020.

In August 2016, the FASB issued an update intended to standardize the classification of certain transactions on the statement of cash flows. These transactions include contingent consideration payments made after a business combination, proceeds from the settlement of corporate-owned life insurance policies and distributions received from equity method investments. The new standard is effective for interim and annual reporting periods beginning after December 15, 2017, although early adoption is permitted, and requires application using a retrospective transition method. We are currently evaluating the potential impact of this authoritative guidance on our consolidated financial statements and will adopt this guidance by January 1, 2018.

In October 2016, the FASB issued an update that will require a reporting entity to recognize the tax expense from the sale of an asset in the seller’s tax jurisdiction when the transfer occurs, even though the pre-tax effects of that transaction are eliminated in consolidation. Any deferred tax asset that arises in the buyer’s jurisdiction would also be recognized at the time of the transfer. The new guidance will not apply to intra-entity transfers of inventory. The income tax consequences from the sale of inventory from one member of a consolidated entity to another will continue to be deferred until the inventory is sold to a third party. The new standard is effective for interim and annual reporting periods beginning after December 15, 2017, although early adoption is permitted. The modified retrospective method will be required for transition to the new guidance, with a cumulative-effect adjustment recorded in retained earnings as of the beginning of the period of adoption. We are currently evaluating the potential impact of this authoritative guidance on our consolidated financial statements and will adopt this guidance by January 1, 2018.

In October 2016, the FASB issued an update that will amend the consolidation guidance related to how a reporting entity that is the single decision maker of a VIE should treat indirect interests in the VIE held through related parties that are under common control with the reporting entity when determining whether it is the primary beneficiary of a VIE. A reporting entity has an indirect interest in a VIE if it has a direct interest in a related party that, in turn, has a direct interest in the VIE. The new standard is effective for interim and annual reporting periods beginning after December 15, 2016, although early adoption is permitted. Since we have already adopted a related update, we will be required to apply the amendments in this update retrospectively to all relevant prior periods beginning with the fiscal year in which the amendments in the prior update were initially applied. We will adopt this guidance on January 1, 2017, and the adoption of the update is not anticipated to have a significant impact on our consolidated financial statements or related disclosures.

 

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In November 2016, the FASB issued an update intended to standardize the classification of restricted cash and cash equivalents transactions on the statement of cash flows. The new standard is effective for interim and annual reporting periods beginning after December 15, 2017, although early adoption is permitted. The retrospective transition method will be required for this new guidance. We are currently evaluating the potential impact of this authoritative guidance on our consolidated financial statements and will adopt this guidance by January 1, 2018.

In January 2017, the FASB issued an update intended to clarify the definition of a business to assist entities with evaluation of whether transactions should be accounted for as acquisitions or disposals of assets or businesses. The new definition requires that when substantially all of the fair value of the gross assets acquired or disposed of is concentrated in a single identifiable asset or group of similar identifiable assets, the asset or group is not a business. The update will require that to be considered a business, a set of assets and activities must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create output. Additionally, the update will remove the evaluation of whether a market participant could replace missing elements in order to consider the set of assets and activities a business, will provide more stringent criteria for sets without outputs and will narrow the definition of output. The new standard is effective for interim and annual reporting periods beginning after December 15, 2017, although early adoption is permitted for certain transactions. The prospective transition method will be required for this new guidance. We are currently evaluating the potential impact of this authoritative guidance on our consolidated financial statements and will adopt this guidance by January 1, 2018.

Also in January 2017, the FASB issued an update intended to simplify the subsequent measurement of goodwill by eliminating the second step in the current two-step goodwill impairment test. The update will require an entity to perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity will recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, if applicable. Additionally, the update will eliminate the requirement that a reporting unit with a zero or negative carrying amount perform a qualitative assessment and the second step of the two-step goodwill impairment test and will instead require disclosure of the amount of goodwill allocated to each reporting unit with a zero or negative carrying amount of net assets. This update is effective for public entities for interim and annual reporting periods beginning after December 15, 2019, although early adoption is permitted for interim and annual goodwill impairment tests performed on testing dates after January 1, 2017. The prospective transition method will be required for this new guidance. We are currently evaluating the potential impact of this authoritative guidance on our consolidated financial statements and will adopt this guidance by January 1, 2020.

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 US GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities known to exist as of the date the consolidated financial statements are published and the reported amounts of revenues and expenses recognized during the periods presented. We review all significant estimates affecting our consolidated financial statements on a recurring basis and record the effect of any necessary adjustments prior to their publication. Judgments and estimates are based on our beliefs and assumptions derived from information available at the time such judgments and estimates are made. Uncertainties with respect to such estimates and assumptions are inherent in the preparation of financial statements. There can be no assurance that actual results will not differ from those estimates. Management has reviewed its development and selection of critical accounting estimates with the audit committee of our 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

Through our Electric Power Infrastructure Services and Oil and Gas Infrastructure Services segments, we design, install and maintain networks for customers in the electric power and oil and gas industries. These

 

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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 as 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, which may be measured in terms of units installed, hours expended, costs incurred to date compared to total estimated contract costs or some other measure of progress. Contract costs include all direct materials, labor and subcontract costs and those indirect costs related to contract performance, such as indirect labor, supplies, tools, repairs and depreciation costs. Much of the material associated with our work is owner-furnished and is therefore not included in contract revenues and costs. The cost estimation process is based on professional knowledge and experience of our engineers, project managers and financial professionals. Changes in job performance, job conditions and final contract settlements are factors that influence management’s assessment of total contract value and the total estimated costs to complete those contracts and therefore, our profit recognition.

Actual revenues and project costs can vary, sometimes substantially, from previous estimates due to changes in a variety of factors including unforeseen circumstances not included in our cost estimates or covered by our contracts for which we cannot obtain adequate compensation, including concealed or unknown environmental conditions; changes in the cost of equipment, commodities, materials or labor; unanticipated costs or claims due to customer-caused delays, customer failure to provide required materials or equipment, errors in engineering, specifications or designs, project modifications, or contract termination and our inability to obtain reimbursement for such costs or recover on such claims; weather conditions; and quality issues requiring rework or replacement. These factors, along with other risks inherent in performing fixed price contracts may cause actual revenues and gross profits for a project to differ from previous estimates and could result in reduced profitability or losses on projects. Changes in these factors may result in revisions to costs and income, and their effects are recognized in the period in which the revisions are determined. These factors are routinely evaluated on a project by project basis throughout the project term, and the impact of corresponding revisions in management’s estimates of contract value, contract cost and contract profit are recorded as necessary in the period in which the revisions are determined. Provisions for losses on uncompleted contracts are made in the period in which such losses are determined to be probable and the amount can be reasonably estimated.

During the years ended December 31, 2016 and 2015, we experienced performance issues on a power plant project in Alaska that resulted in an increase of the estimated total costs necessary to complete the project. During the construction and commissioning phases, the project experienced third party engineering deficiencies that changed our planned scope of work and performance failures by other contractors operating onsite. These issues resulted in higher than expected production costs associated with quality deficiencies and a related impact on production sequencing. Additionally, late in the second quarter of 2016, we experienced a claimed force majeure event that further disrupted project timing and provided the customer and its insurance providers with a notice of the event in order to seek schedule relief and cost recovery. During the years ended December 31, 2016 and 2015, we recognized project losses of $54.8 million and $44.9 million. We are in the process of developing potential claims for damages that may have resulted from the third party engineering and other contractor performance issues; however, no revenues or cost recovery has been reflected in our estimate of total project losses at December 31, 2016. This project had a contract value of $202 million at December 31, 2016 and was substantially completed during the fourth quarter of 2016. As this project continues through the final close out

 

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phase, it is possible that additional performance issues or other unforeseen circumstances could occur and result in the recognition of additional losses on this project; however, such amounts cannot currently be estimated.

Our operating results for the year ended December 31, 2016 were impacted by less than 5% as a result of aggregate changes in contract estimates related to projects that were in progress at December 31, 2015. Included in the operating results for the year ended December 31, 2016 were losses from the project described above, offset by the aggregate positive impact of numerous individually immaterial changes in project profitability generally due to better than expected performance for projects that were ongoing at December 31, 2015. Our operating results for the year ended December 31, 2015 and 2014 were impacted by numerous individually immaterial changes in contract estimates related to projects that were in progress at December 31, 2014 and 2013; however, the aggregate impact was less than 5%.

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.

We may incur costs subject 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 costs of contract performance in the period incurred if it is not probable that the costs will be recovered or will recognize revenue if it is probable that the contract price will be adjusted and can be reliably estimated.

As of December 31, 2016 and 2015, we had recognized revenues of approximately $137.8 million and $137.2 million related to change orders and/or claims that had been included as contract price adjustments on certain contracts which were in the process of being negotiated in the normal course of business.

These aggregate contract price adjustments represent management’s best estimate of additional contract revenues which have been earned and which management believes are probable of collection. The amounts ultimately realized by us upon final acceptance by our customers could be higher or lower than such estimated amounts; however, such amounts cannot currently be estimated.

Self-Insurance.

As discussed in Liquidity and Capital Resources — Self-Insurance, we are insured for employer’s liability, workers’ compensation, auto liability, general liability, and group health claims.

Losses under all of these insurance programs are accrued based upon our estimate of the ultimate liability for claims reported and an estimate of claims incurred but not reported, with assistance from third-party actuaries. These insurance liabilities are difficult to assess and estimate due to unknown factors, including the severity of an injury, the extent of damage, the determination of our liability in proportion to other parties and the number of incidents not reported. The accruals are based upon known facts and historical trends, and management believes such accruals are adequate. As of December 31, 2016 and 2015, the gross amount accrued for insurance claims totaled $218.2 million and $209.0 million, with $162.0 million and $153.5 million considered to be long-term and included in other non-current liabilities. Related insurance recoveries/receivables as of December 31, 2016 and 2015 were $8.7 million and $8.6 million, of which $0.4 million and $0.6 million were included in prepaid expenses and other current assets and $8.3 million and $8.0 million were included in other assets, net.

 

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Valuation of Goodwill.

We have recorded goodwill in connection with our historical acquisitions of companies. Upon acquisition, these companies were either combined into one of our existing operating units or managed on a stand-alone basis as an individual operating unit. Goodwill recorded in connection with these acquisitions is subject to an annual assessment for impairment, which we perform at the operating unit level for each operating unit that carries a balance of goodwill. Each of our operating units is organized into one of two internal divisions: the Electric Power Infrastructure Services Division and the Oil and Gas Infrastructure Services Division. As most of the companies acquired by us provide multiple types of services for multiple types of customers, these divisional designations are based on the predominant type of work performed by each operating unit at the point in time the divisional designation is made. Goodwill is required to be measured for impairment at the reporting unit level, which represents the operating segment level or one level below the operating segment level for which discrete financial information is available. We have determined that our individual operating units represent our reporting units for the purpose of assessing goodwill impairments.

We have the option to first assess qualitative factors to determine whether it is necessary to perform the two-step fair value-based impairment test described below. If we believe that, as a result of our qualitative assessment, it is more likely than not that the fair value of a reporting unit is less than its carrying amount, the quantitative impairment test is required. Otherwise, no further testing is required. We can choose to perform the qualitative assessment on none, some or all of our reporting units. We can also bypass the qualitative assessment for any reporting unit in any period and proceed directly to step one of the impairment test, and then resume the qualitative assessment in any subsequent period. Qualitative indicators including deterioration in macroeconomic conditions, declining financial performance, or a sustained decrease in share price, among other things, may trigger the need for annual or interim impairment testing of goodwill associated with one or all of the reporting units.

Our goodwill impairment assessment is performed at year-end, or more frequently if events or circumstances arise which indicate that goodwill may be impaired. For instance, a decrease in our market capitalization below book value, a significant change in business climate or loss of a significant customer, as well as the qualitative indicators referenced above, may trigger the need for interim impairment testing of goodwill for one or all of our reporting units. The first step of the two-step fair value-based test involves comparing the fair value of each of our reporting units with its carrying value, including goodwill. If the carrying value of the reporting unit exceeds its fair value, the second step is performed. The second step compares the carrying amount of the reporting unit’s goodwill to the implied fair value of its goodwill. If the implied fair value of goodwill is less than the carrying amount, an impairment loss would be recorded as a reduction to goodwill with a corresponding charge to operating expense.

We determine the fair value of our reporting units using a weighted combination of the discounted cash flow, market multiple and market capitalization valuation approaches, with heavier weighting on the discounted cash flow method, as in management’s opinion, this method currently results in the most accurate calculation of a reporting unit’s fair value. Determining the fair value of a reporting unit requires judgment and the use of significant estimates and assumptions. Such estimates and assumptions include revenue growth rates, operating margins, discount rates, weighted average costs of capital and future market conditions, among others. We believe the estimates and assumptions used in our impairment assessments are reasonable and based on available market information, but variations in any of the assumptions could result in materially different calculations of fair value and determinations of whether or not an impairment is indicated.

Under the discounted cash flow method, we determine fair value based on the estimated future cash flows of each reporting unit, discounted to present value using risk-adjusted industry discount rates, which reflect the overall level of inherent risk of a reporting unit and the rate of return an outside investor would expect to earn. Cash flow projections are derived from budgeted amounts and operating forecasts (typically a one-year model) plus an estimate of later period cash flows, all of which are evaluated by management. Subsequent period cash

 

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flows are developed for each reporting unit using growth rates that management believes are reasonably likely to occur, along with a terminal value derived from the reporting unit’s earnings before interest, taxes, depreciation and amortization (EBITDA). The EBITDA multiples for each reporting unit are based on trailing twelve-month comparable industry data.

Under the market multiple and market capitalization approaches, we determine the estimated fair value of each of our reporting units by applying transaction multiples to each reporting unit’s projected EBITDA and then averaging that estimate with similar historical calculations using either a one, two or three year average. For the market capitalization approach, we add a reasonable control premium, which is estimated as the premium that would be received in a sale of the reporting unit in an orderly transaction between market participants.

The projected cash flows and estimated levels of EBITDA by reporting unit were used to determine fair value under the three approaches discussed herein. The following table presents the significant estimates used by management in determining the fair values of our reporting units at December 31, 2016, 2015 and 2014:

 

     2016   2015   2014

Years of cash flows before terminal value

   5   5   5

Discount rates

   12.5% to 14.5%   12.0% to 16.0%   12.0% to 14.0%

EBITDA multiples

   5.5 to 7.0   5.0 to 6.5   5.0 to 6.0

Weighting of three approaches:

      

Discounted cash flows

   70%   70%   70%

Market multiple

   15%   15%   15%

Market capitalization

   15%   15%   15%

For recently acquired reporting units, a step one impairment test may indicate an implied fair value that is substantially similar to the reporting unit’s carrying value. Such similarities in value are generally an indication that management’s estimates of future cash flows associated with the recently acquired reporting unit remain relatively consistent with the assumptions that were used to derive its initial fair value.

During the fourth quarter of 2016, a two-step fair-value based goodwill impairment analysis was performed for each of our reporting units, and no reporting units were evaluated solely on a qualitative basis. Step one of the analysis indicated that the implied fair value of each of our reporting units, other than recently acquired reporting units and the reporting units that recorded goodwill impairment charges in 2015, was substantially in excess of its carrying value.

As discussed generally above, when evaluating the 2016 step one impairment test results, management considered many factors in determining whether or not an impairment of goodwill for any reporting unit was reasonably likely to occur in future periods, including future market conditions and the economic environment in which our reporting units were operating. Additionally, management considered the sensitivity of its fair value estimates to changes in certain valuation assumptions. After taking into account a 10% decrease in the fair value of each of our reporting units, two reporting units within our Oil and Gas Infrastructure Services Division had fair values below their respective carrying values. We recorded asset impairment charges for these reporting units in 2015. The fair values determined in 2016 for these reporting units were consistent with the fair values determined in 2015, accordingly the fair values approximate the current carrying values. Circumstances such as market declines, unfavorable economic conditions, the loss of a major customer or other factors could increase the risk of impairment of goodwill in future periods.

If an operating unit experiences prolonged periods of declining revenues, operating margins or both, it may be at risk of failing step one of the goodwill impairment test. Certain operating units have experienced declines over the short-term due to challenging macroeconomic conditions in certain geographic areas and low oil and natural gas prices, which have negatively impacted customer spending and resulted in project cancellations and delays. Additionally, customer capital spending has been constrained as a result of an increasingly complex

 

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regulatory and permitting environment. Certain operating units within our Oil and Gas Infrastructure Services Division that primarily operate within the midstream and smaller-scale transmission market have continued to be negatively impacted by these factors. Goodwill and intangible assets associated with the operating units within Quanta’s Oil and Gas Infrastructure Services Division that have been significantly impacted by the factors mentioned above were approximately $68.0 million and $11.9 million at December 31, 2016. We monitor these conditions and others to determine if it is necessary to perform step one of the fair-value based impairment test for one or more operating units prior to the annual impairment assessment. No impairment charges were recorded related to goodwill during the year ended December 31, 2016. Although we are not aware of circumstances that would lead to a goodwill impairment at a reporting unit currently, circumstances such as a continued market decline, the loss of a major customer or other factors could impact the valuation of goodwill in the future.

The goodwill analysis performed for each reporting unit was based on estimates and comparisons obtained from the electric power and oil and gas industries. We assigned a higher weighting to the discounted cash flow approach in all periods to reflect increased expectations of market value being determined from a “held and used” model. As stated previously, cash flows are derived from budgeted amounts and operating forecasts that have been evaluated by management. In connection with the 2016 assessment, reporting unit growth rates during the cash flow projection period varied from negative 2% to positive 24%.

Estimating future cash flows requires significant judgment, and our projections may vary from cash flows eventually realized. Changes in our judgments and projections could result in a significantly different estimate of the fair values of reporting units and intangible assets and could result in an impairment. Variances in the assessment of market conditions, projected cash flows, cost of capital, growth rates and acquisition multiples applied could have an impact on the assessment of impairments and the amount of any goodwill impairment charges recorded. For example, lower growth rates, lower acquisition multiples or higher costs of capital assumptions would all individually lead to lower fair value assessments and potentially increased frequency or size of goodwill impairments. Any goodwill or other intangible impairments would be included in the consolidated statements of operations.

Based on the first step of the goodwill impairment analysis, we compared the sum of fair values of our reporting units to our market capitalization at December 31, 2016 and determined that the excess of the aggregate fair value of all reporting units to our market capitalization reflected a reasonable control premium. Our market capitalization at December 31, 2016 was approximately $5.27 billion, and our total stockholders’ equity was approximately $3.34 billion. If the price of our common stock were to decline to a level that causes our market capitalization to be lower than the value of our stockholders’ equity, this would be another factor that could increase the risk of further impairment of goodwill in future periods. Increases in the carrying value of individual reporting units that may be indicated by our impairment tests are not recorded, therefore we may record goodwill impairments in the future, even when the aggregate fair value of our reporting units as a whole may increase.

Our goodwill is included in multiple reporting units. Due to the cyclical nature of our business, and the other factors described under Risk Factors in Item 1A, the profitability of our individual reporting units may suffer from downturns in customer demand and other factors. These factors may have a disproportionate impact on the individual reporting units as compared to Quanta as a whole and might adversely affect the fair value of individual reporting units. If material adverse conditions occur that impact our reporting units, our future estimates of fair value may not support the carrying amount of one or more of our reporting units, and the related goodwill would need to be written down to an amount considered recoverable.

During the fourth quarter of 2015, management concluded that goodwill was impaired at two reporting units in our Oil and Gas Infrastructure Services Division and recorded a $39.8 million non-cash charge for the impairment of goodwill, which primarily resulted from lower levels of expected activity in the U.S. Gulf of Mexico and, to a lesser extent, due to the extended low commodity price environment with respect to certain directional drilling operations in Australia.

 

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Valuation of Other Intangibles.

Our intangible assets include customer relationships, backlog, trade names, non-compete agreements, patented rights and developed technology, all subject to amortization. The value of customer relationships is estimated as of the date a business is acquired based on the value-in-use concept utilizing the income approach, specifically the excess earnings method. 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 and estimated customer attrition rates, the importance or lack thereof of existing customer relationships to our business plan, income taxes and required rates of return. We value backlog for acquired businesses as of the acquisition date 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. The value of trade names is estimated using the relief-from-royalty method of the income approach. This approach is based on the assumption that in lieu of ownership, a company would be willing to pay a royalty in order to exploit the related benefits of this intangible asset.

We amortize 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 otherwise be reliably estimated. Intangible assets subject to amortization are reviewed for impairment and are tested for recoverability whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. For instance, a significant change in business climate or a loss of a significant customer, among other things, may trigger the need for interim impairment testing of intangible assets. An impairment loss would be recognized if the carrying amount of an intangible asset is not recoverable and its carrying amount exceeds its fair value.

During the fourth quarter of 2015, we recorded an impairment charge of $12.1 million related to customer relationships, trade names and non-compete agreement intangible assets. These intangible asset impairments primarily resulted from lower levels of expected activity in the U.S. Gulf of Mexico and, to a lesser extent, due to the extended low commodity price environment with respect to certain directional drilling operations in Australia. The two reporting units impacted also had related goodwill impairments, as discussed above, and are in our Oil and Gas Infrastructure Services Division.

Valuation of Long-Lived Assets.

We review long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount may not be realizable. If an evaluation is required, the estimated future undiscounted cash flows associated with the asset group are compared to the asset group’s carrying amount to determine if an impairment of such asset group is necessary. This requires us to make long-term forecasts of the future revenues and costs related to the asset group subject to review. Forecasts require assumptions about demand for our products and future market conditions. Estimating future cash flows requires significant judgment, and our projections may vary from the cash flows eventually realized. When an impairment exists, the difference between the fair value of such asset group and its carrying value would be expensed and reflected in operating income (loss) in the consolidated statements of operations. In addition, we estimate the useful lives of our long-lived assets and periodically review these estimates to determine whether these lives are appropriate.

We also recorded asset impairments primarily related to certain international renewable energy services operations of $8.0 million in 2016 and $6.6 million in 2015. The 2016 impairment was primarily due to a pending disposition of certain international renewable energy services operations, and the 2015 impairment was based on the estimated future undiscounted cash flows for the asset group as compared to their carrying value.

Current and Long-Term Accounts and Notes Receivable and Allowance for Doubtful Accounts.

We provide an allowance for doubtful accounts when collection of an account or note receivable is considered doubtful, and receivables are written off against the allowance when deemed uncollectible. Inherent

 

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in the assessment of the allowance for doubtful accounts are certain judgments and estimates regarding, among other factors, our customer’s access to capital, our customer’s willingness or ability to pay, general economic and market conditions, the ongoing relationship with the customer and uncertainties related to the resolution of disputed matters. We consider accounts receivable delinquent after 30 days but do not generally include delinquent accounts in our analysis of the allowance for doubtful accounts unless the accounts receivable have been outstanding for at least 90 days. In addition to balances that have been outstanding for 90 days or more, we also include accounts receivable balances that relate to customers in bankruptcy or with other known difficulties in our analysis of the allowance for doubtful accounts. Material changes in our customers’ business or cash flows, which may be impacted by negative economic and market conditions, could affect our ability to collect amounts due from them. As of December 31, 2016 and 2015, we had allowances for doubtful accounts on current receivables of approximately $2.8 million and $5.2 million. Long-term accounts receivable are included within other assets, net on our consolidated balance sheets.

Should customers experience financial difficulties or file for bankruptcy, or should anticipated recoveries relating to receivables in existing bankruptcies or other workout situations fail to materialize, we could experience reduced cash flows and losses in excess of current allowances provided.

The balances billed but not paid by customers pursuant to retainage provisions in certain contracts are generally due upon completion of the contracts and acceptance by the customer. Based on our experience with similar contracts in recent years, the majority of the retainage balances at each balance sheet date are expected to be collected within the next twelve months. Current retainage balances as of December 31, 2016 and 2015 were approximately $231.0 million and $250.1 million and were included in accounts receivable. Retainage balances with settlement dates beyond the next twelve months were included in other assets, net, and as of December 31, 2016 and 2015 were $5.2 million and $4.5 million.

Within accounts receivable, we recognize unbilled receivables in circumstances such as when revenues have been earned and recorded but the amount cannot be billed under the terms of the contract until a later date; costs have been incurred but are yet to be billed under cost-reimbursement type contracts; or amounts arise from routine lags in billing (for example, work completed one month but not billed until the next month). These balances do not include revenues accrued for work performed under fixed-price contracts as these amounts are recorded as costs and estimated earnings in excess of billings on uncompleted contracts. At December 31, 2016 and 2015, the balances of unbilled receivables included in accounts receivable were approximately $206.8 million and $233.6 million.

Income Taxes.

We follow the liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recorded for future tax 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.

We record reserves for income taxes related to certain tax positions in those instances where we consider it more likely than not that additional taxes may be due in excess of amounts reflected on income tax returns filed. When recording reserves for expected tax consequences of uncertain positions, we assume that taxing authorities have full knowledge of the position and all relevant facts. We continually review exposure to additional tax

 

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obligations, and as further information is known or events occur, changes in tax reserves may be recorded. To the extent interest and penalties may be assessed by taxing authorities on any underpayment of income tax, such amounts have been accrued and included in the provision for income taxes.

As of December 31, 2016, the total amount of unrecognized tax benefits relating to uncertain tax positions was $35.2 million, a decrease from December 31, 2015 of $19.3 million. This decrease in unrecognized tax benefits resulted primarily from a $23.4 million decrease due to expiration of certain federal and state statute of limitations, partially offset by a $4.2 million increase due to tax positions to be taken for 2016. Although the IRS completed its examination related to tax years 2010, 2011 and 2012 during 2016, certain subsidiaries remain under examination by various U.S. state, Canadian and other foreign tax authorities for multiple periods. We believe it is reasonably possible that within the next 12 months unrecognized tax benefits may decrease by up to $12.3 million as a result of settlement of these examinations or as a result of the expiration of certain statute of limitations periods.

U.S. federal and state and foreign income tax laws and regulations are voluminous and are often ambiguous. As such, we are required to make many subjective assumptions and judgments regarding our tax positions that could materially affect amounts recognized in our future consolidated balance sheets and statements of operations and comprehensive income.

Outlook

We believe there are growth opportunities across all the industries we serve and continue to have a positive long-term outlook. Overall, favorable end-market drivers have spurred demand for infrastructure services in both our electric power infrastructure and oil and gas infrastructure segments, and we believe both segments are entering a renewed multiyear upcycle. We are focused on long-term growth and continuing to distinguish ourselves through safe execution and best-in-class field leadership. We will pursue opportunities designed to enhance Quanta’s core business and leadership position in the industry and provide innovative solutions to our customers. We believe Quanta’s unique operating model and entrepreneurial mindset will continue to provide us the foundation to generate long-term value for all of our stakeholders.

However, we and our customers continue to operate in a fluid business environment, with gradual improvement in the United States and Canadian economies yet continuing uncertainty in the marketplace overall. Certain of our end markets remain challenged but are showing signs of potential recovery as oil and natural gas prices and the broader energy market has recovered and largely stabilized from the significant decline that began in mid-2014. In particular, the Canadian economy has been affected due to the influence of the energy industry on the country’s economy, which in turn has adversely impacted both our electric power and oil and gas infrastructure services operations in Canada. However, we believe our Canadian operations have stabilized and there are signs of recovery. Our customers also face stringent regulatory and environmental requirements, which have resulted in construction delays in some cases, particularly for larger electric transmission and pipeline projects. While these various challenges have negatively affected our operations in the past and may in the future, we believe that our financial and operational strength will enable us to manage these challenges and uncertainties, and we remain optimistic about our near-term and long-term opportunities.

Electric Power Infrastructure Services Segment

Certain portions of the North American electric grid are aging and require significant upgrades, maintenance and expansion to meet current and future demands for reliable power delivery. Over the past several years, many utilities across North America have begun to implement plans to upgrade their transmission systems in order to improve reliability and reduce congestion. Among other things, these activities include new construction, structure change-outs, line upgrades and maintenance projects on many transmission systems. In addition, state renewable portfolio standards, which set required or voluntary standards for how much power is to be generated from renewable energy sources, can result in the need for additional transmission lines and substations to

 

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transport the power from these facilities, which are often in remote locations, to demand centers. Other factors, such as the reliability standards issued by the North American Electric Reliability Corporation and other regulatory actions, are also driving transmission system upgrades and expansions. We believe these factors create significant opportunities for our transmission infrastructure services.

Demand for electricity in North America is expected to grow over the long term. Certain segments of the North American electric power grid are not adequate to efficiently serve the power needs of the future. The electric power grid is aging and, in some cases, lacks redundancy. The increasing demand for electricity, coupled with these issues, has affected and will continue to affect reliability, requiring utilities to upgrade and expand their existing transmission and distribution systems. Current federal legislation also requires the power industry to meet federal reliability standards for its transmission and distribution systems. We expect these system upgrades will result in increased spending and increased demand for our services over the long term.

As demand for power grows, the need for new power generation facilities is expected to grow. The development of new traditional power generation facilities, as well as renewable energy sources such as solar, wind and certain types of natural gas generation facilities, requires new or expanded transmission infrastructure to transport power to demand centers. Renewable energy sources in particular often require significant transmission infrastructure due to their remote location. As a result, we anticipate that future development of new power generation will lead to increased demand over the long term for our electric transmission design and construction services, as well as our substation engineering and installation services.

The significant improvement in access to natural gas resources from unconventional shale formations in the United States and Canada, driven by technological advancements, has dramatically increased the near- and long-term supply of natural gas in North America. This increase in supply has also resulted in low natural gas prices for the past several years and the anticipation that natural gas prices will remain at lower levels going forward. As a result, it is anticipated that the amount of electricity generated by natural gas powered plants will increase and, for the foreseeable future, the majority of fossil fuel generation facilities built in North America will be fueled by natural gas. Further, the Environmental Protection Agency has implemented certain emissions regulations that are resulting in the development of natural gas generation facilities to replace coal generation plants that are being retired in order to comply with the new regulations. These dynamics are anticipated to result in the need for additional North American transmission and substation infrastructure to interconnect new natural gas fired generation facilities. It is also anticipated that modifications to and reengineering of existing transmission and substation infrastructure will be required in the event existing coal and nuclear generation facilities are retired or shut down.

We consider renewable energy, including solar and wind generation facilities, to be an ongoing opportunity for our engineering, project management and installation services. Concerns about greenhouse gas emissions, as well as the goal of reducing reliance on power generation from fossil fuels, are creating the demand for more renewable energy sources. Renewable portfolio standards, which mandate that renewable energy constitute a specified percentage of a utility’s power generation by a specified date, exist in many states. We believe that our comprehensive services, industry knowledge and experience in the design, installation and maintenance of renewable energy facilities will enable us to support our customers’ renewable energy efforts.

The economic feasibility of renewable energy projects, and therefore the attractiveness of investment in such projects, may depend on the availability of tax incentive programs or the ability of the project developer to take advantage of such incentives. There is no assurance that the government will extend existing tax incentives or create new incentive or funding programs. Although we see development of renewable energy projects, primarily utility-scale solar facilities, which could create increased demand for our engineering, procurement and construction services, we believe there is some uncertainty whether these projects will advance to award and construction.

 

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The Federal Energy Regulatory Commission (FERC) issued FERC Order No. 1000 to promote more efficient and cost-effective development of new transmission facilities. The order establishes transmission planning and cost allocation requirements intended to facilitate multi-state electric transmission lines and to encourage competition by removing, under certain conditions, federal rights of first refusal from FERC-approved tariffs and agreements. In the short-term, we believe implementation of and compliance with the order has created some confusion and uncertainty for utilities and regulators, which has adversely impacted the timing of some potential transmission projects and spending, and that modifications may be necessary to spur certain intended transmission investment. If these challenges are resolved, we believe FERC Order No. 1000 has the potential to favorably impact electric transmission line development over time, particularly for large, high-voltage electric transmission projects.

Several existing, pending or proposed legislative or regulatory actions may also positively affect demand for the services provided by this segment in the long term, particularly in connection with electric power infrastructure and renewable energy spending. For example, legislative or regulatory action that alleviates some of the siting and right-of-way challenges that impact transmission projects would potentially accelerate future transmission line construction. We also anticipate increased infrastructure spending by our customers as a result of regulation requiring the power industry to meet federal reliability standards for its transmission and distribution systems and providing incentives to the industry to invest in and improve maintenance on its systems.

We believe that utilities remain committed to the expansion and strengthening of their transmission infrastructure with planning, engineering and funding for many of their projects in place. The regulatory and environmental permitting processes remain a hurdle for some proposed transmission and renewable energy projects, and these factors continue to create uncertainty as to timing of this spending. In the near-term, our electric power infrastructure services operations have been impacted by regulatory delays, particularly for large transmission projects. However, we expect many of these projects to move forward over a multi-year period. The timing and scope of projects can also be affected by other factors such as siting, right-of-way and unfavorable economic and market conditions. We anticipate many of these issues to be overcome and spending on transmission projects to be active over the next few years. We currently have a number of these projects underway, and we expect this segment’s backlog to remain strong throughout 2017.

In the near-term, margins in our Electric Power Infrastructure Services segment have experienced pressure due to increased transmission contractor availability, as construction of several large, high-voltage transmission projects has been delayed due to the challenging regulatory approval and permitting environment. We believe these large transmission projects have been delayed and not canceled and that demand for our transmission services will remain strong over the next several years. As a result, we believe there have been excess transmission contractor resources in the small and medium size transmission marketplace due to the delay of large transmission projects, which has resulted in increased competition and pricing pressure for those services in some areas. These factors, in addition to challenging regional economic conditions, have impacted our Canadian operations in particular. Over the past few quarters, we believe these competitive pressures and Canadian economic conditions have begun to stabilize. We will remain focused on maintaining our pricing discipline and believe competitive pressures could recede further as large, high-voltage transmission projects move forward and the small and medium size transmission market continues to grow and/or contractors adjust further to the current environment.

We benefited from increases in distribution spending throughout the last several years, despite continued economic and political uncertainties. We believe there is an ongoing need for utilities to sustain investment in their distribution systems in order to properly maintain system reliability and capacity. In addition, a number of utilities are implementing system upgrades or “hardening” programs in response to severe weather events that have occurred over the past few years, which is also increasing distribution investment in some regions of the United States. We also anticipate that utilities will continue to integrate “smart grid” technologies into their distribution systems over time to improve grid management and create efficiencies.

 

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The need to ensure available specialized labor resources for projects also drives strategic relationships with customers. In addition, several industry and market trends are prompting customers to seek ongoing service arrangements. These trends include an aging utility workforce and labor availability issues, increasing pressure to reduce costs and improve reliability, and increasing duration and complexity of customer capital programs. Due to these and other factors, we believe customer demand for labor resources will continue to increase, possibly outpacing the supply of industry resources. As a result, we believe the number of opportunities for strategic partnerships is growing.

Certain international regions present significant opportunities for growth over time across many of our operations. We are evaluating ways in which we can strategically apply our expertise in various foreign countries where infrastructure enhancements are increasingly important. For example, we are actively pursuing opportunities in growth markets where we can leverage our technology or proprietary work methods, such as our energized services, to establish a presence. In Canada, we are leveraging our electric power infrastructure services resources, relationships and reputation to expand and grow our telecommunication infrastructure services operations. In addition, over the last several years we have successfully developed our telecommunication infrastructure services operations in several Latin American countries that offer attractive growth opportunities. We believe the success of these efforts could enable us to expand our infrastructure services to electric power and other services in Latin America.

Oil and Gas Infrastructure Services Segment

We continue to see growth opportunities in our Oil and Gas Infrastructure Services segment, primarily in the installation and maintenance of larger pipeline and related facilities, as well as pipeline integrity, natural gas distribution systems and specialty services such as horizontal directional drilling. In certain areas of North America, the existing pipeline system infrastructure is insufficient to support future development of unconventional shale formations and the Canadian oil sands. We believe that the development of such resources, though facing challenges in the near term, may continue over the long term and that building this infrastructure would take a number of years, which we expect should increase demand for our services over the long term.

Despite our positive long-term outlook, a challenging regulatory and permitting environment has caused delays of some larger pipeline projects during the past several years. These dynamics resulted in below average larger pipeline construction opportunities for us and the industry. The market for larger pipeline projects, in our view, began to improve in late 2013, though regulatory delays for some projects have moderated the pace of recovery. These project approval delays have negatively impacted our Oil and Gas Infrastructure Services segment margins, in part as a result of our inability to adequately cover certain fixed costs. Margins for larger pipeline projects are also subject to significant performance risk, which can arise from adverse weather conditions, challenging geography, customer decisions and crew productivity. Our specific opportunities in the larger pipeline business are sometimes difficult to predict because of the seasonality of the bidding and construction cycles within the industry.

A number of larger pipeline projects from the North American shale formations and Canadian oil sands to power plants, refineries and other demand centers are in various stages of development. Most of the larger pipeline projects we are working on, have in backlog or see as future potential opportunities are driven by natural gas production and demand. Further, the abundant natural gas supply combined with attractive prices should increase demand for natural gas in the future. The U.S. Energy Information Administration has stated that the number of natural gas-fired power plants built will increase significantly over the next two decades. Power generation from renewable energy sources also continues to increase and become a larger percentage of the overall power generation mix. We also believe natural gas will be the fuel of choice to provide backup power generation during times when renewable energy sources are not available. These factors are resulting in increased development of natural gas power generation and demand for natural gas production over the long term, which is creating a need for additional pipeline infrastructure to connect natural gas supplies to demand centers.

 

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In addition, the abundance, low price and long-term supply of North American natural gas has resulted in efforts to develop liquefied natural gas (LNG) export facilities in the United States, Canada and Australia, which could provide pipeline and related facilities development opportunities for us. Natural gas prices in various international markets are significantly higher than North American natural gas prices, making the economics of exporting North American natural gas to international markets attractive. A number of LNG export facilities are in various stages of planning, permitting and development in the United States and Canada. Although we cannot be certain how many of these projects will move forward, as they could be affected by changing pricing and economic conditions, we believe our comprehensive service offerings and broad geographic presence enable us to competitively pursue pipeline and related facilities infrastructure opportunities that become available.

We also see a number of larger oil pipeline project opportunities, particularly in Canada. Although many of these projects are still developing, a significant number of projects have been awarded to us and other pipeline contractors and are moving towards construction. Given the costs and time required to bring a larger pipeline project from conception to construction, we believe many of our customers view such projects as important, strategic pieces of infrastructure, have a long-term perspective regarding their needs, and are not primarily influenced by short term commodity price fluctuations.

In certain areas of North America, pipeline takeaway capacity is not sufficient to economically move oil from production areas to demand centers for current and/or anticipated future oil production. As a result, certain proposed larger oil pipeline projects are being developed and have secured producers under contractual arrangements, making these projects economically viable despite the decline in oil prices. Several of these projects are intended to move oil from the Canadian oil sands to the east and west coast of Canada in order to access demand markets in Europe, Asia and other areas.

While there is risk that these projects will not move forward or could be delayed, we are encouraged by the proposed larger pipeline development plans and the successful progression of certain larger pipeline projects, which is indicative of an improved and favorable large pipeline market over the next several years in North America. We expect to execute on a significant number of larger pipeline projects during 2017, though this activity could be more pronounced in the first half of 2017. However, if oil and natural gas prices decline further or remain at lower levels for a prolonged period, our outlook may change and demand for our oil and natural gas infrastructure services could be materially impacted.

We also believe there are growth opportunities for some of our other pipeline services, including pipeline integrity, rehabilitation and replacement services, over the long-term. The U.S. Department of Transportation has implemented regulatory legislation through the Pipeline and Hazardous Materials Safety Administration (PHMSA) relating to pipeline integrity requirements. PHMSA continues to develop, propose and implement additional safety and pipeline integrity regulation for liquid and natural gas pipelines. Once finalized and implemented, the proposed new regulations would strengthen requirements for safety, operation, inspection and maintenance of pipelines and provide pipeline operators with regulatory certainty.

Further, as pipeline integrity testing requirements increase in stringency and frequency, we believe more information will be gathered about the condition of pipeline infrastructure in the United States, which could result in an increase in spending by our customers on pipeline integrity initiatives. We also operate an engineering, research and development business that develops and owns pipeline inspection tools. We believe our ability to offer a complete pipeline integrity turnkey solution to pipeline companies and gas utilities positions us to take advantage of available opportunities.

We are also experiencing an increase in demand for our natural gas distribution services as a result of improved economic conditions, lower natural gas prices and a significant need to upgrade and replace aging infrastructure. A number of states, particularly states in the northeast United States that have cities and areas with older natural gas distribution infrastructure, have approved and are implementing regulations and multi-year programs to replace cast iron, wrought iron and bare steel natural gas infrastructure, which is prone to failure

 

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with age, with modern and safer pipe material. We expect this to take an extended period of time, which should provide attractive growth opportunities for this part of our business.

Over the past several years, we have expanded our service offerings into Canada and Australia, which have different market drivers and seasonality as compared to the United States. In addition, our previous acquisitions of companies that provide pipeline logistics services to the natural gas and oil industry in the United States and specialty services to the offshore oil and gas industry further enhance the segment’s service offerings, customer base and end markets.

The oil and gas industry is highly cyclical and subject to volatility as a result of fluctuations in natural gas, natural gas liquids and oil prices. In the past, sustained periods of low prices for these products negatively impacted the development of related natural resources and infrastructure. The challenging energy market environment over the past few years has adversely impacted demand for some of our services, primarily infrastructure services in Australia, Canada and the Gulf of Mexico. Exploration and production companies and midstream companies also significantly reduced capital spending in response to the decline in oil and natural gas prices. Even though prices have recovered to a limited degree since early 2016, another meaningful decline or increased uncertainty could result in additional reductions in capital spending. Reduced capital spending on larger pipeline, gas gathering and compressor systems and other related infrastructure would result in less demand for our services. In particular, the demand for infrastructure services in areas where the price of oil is influential, such as Australia, the Canadian Oil Sands, certain oil-driven shale formations in the United States and offshore oil resources in the Gulf of Mexico, has been materially and adversely impacted by low oil prices. These markets could remain challenged if oil prices remain at lower levels. We believe that, over the long term, the market will correct oversupply imbalances, and as a result, oil prices could continue to recover. The timing of any further recovery, however, is uncertain.

Overall, we remain optimistic about this segment’s operations going forward. From a near- and medium-term perspective, we continue to believe that larger pipeline opportunities can provide significant profitability, although these projects and the profits they generate are often subject to more cyclicality and execution risk than our other service offerings. We have also taken steps to diversify our operations in this segment through other services, such as pipeline integrity, pipeline logistics, and offshore specialty services.

Conclusion

Though not without risks and challenges, we believe there are growth opportunities across all the industries we serve and continue to have a positive long-term outlook. Favorable end market drivers continue to spur demand for our infrastructure services, and we believe both our electric power infrastructure and oil and gas infrastructure segments are entering a renewed multiyear upcycle.

We are benefiting from utilities’ increased spending on projects to upgrade and expand their electric power transmission infrastructure in order to improve system reliability and deliver renewable electricity from new generation sources to demand centers. Favorable industry legislation and regulations are also creating incentives and a positive environment for utilities to invest in their electrical infrastructure, particularly transmission infrastructure. Existing environmental regulations concerning fossil fuel power generation emissions create opportunities for transmission lines to be updated, rebuilt or replaced due to “coal to gas” facility replacements. We also expect utilities to outsource more of their work to companies like us, due in part to the challenges associated with their aging workforce. We believe that we remain the partner of choice for many utilities in need of broad infrastructure expertise, specialty equipment and workforce resources, particularly as capital budgets and infrastructure projects have become larger and more complex.

Though gradual recovery and stabilization of oil and natural gas prices has had a positive effect on our business, some of the markets and services in our Oil and Gas Infrastructure Services segment remain challenged. This dynamic could continue should natural gas and oil prices further decline or remain at lower levels. However, we believe long-term dynamics create growth opportunities going forward. We believe that our

 

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overall size and breadth of service offerings provide competitive advantages that allow us to leverage opportunities that arise in connection with development and production of resources from North American unconventional shale formations, the Canadian oil sands and coal seam gas and unconventional shale formations in Australia. We experienced backlog growth in 2016 primarily driven by new larger natural gas pipeline project awards and believe there could be additional larger pipeline project activity over the next several years. We also believe that our strategy to pursue midstream gathering system opportunities in certain unconventional shale formations in the United States, as well as the anticipated increase in demand for our pipeline integrity, rehabilitation and replacement services, and other services in adjacent markets, will create attractive growth potential for us and also further diversify our service offerings in both the near and long term.

Demand for our electric and natural gas distribution services has increased over the past several years as the economy has stabilized and spending on maintenance to improve reliability has returned. We are optimistic that continued implementation of electric distribution reliability programs and the potential for improvement in the housing market will facilitate continued growth in demand for our electric distribution services. Gas distribution spending has been driven primarily by improving economic conditions and the lower cost of natural gas, and more recently by efforts to replace cast iron, wrought iron and bare steel distribution pipeline systems.

For both our electric power and oil and gas infrastructure customers, we have the financial strength to selectively and strategically provide financing solutions that could help facilitate development of energy infrastructure projects and potentially create construction backlog for us. We believe changing regulations, industry trends and the increasing size of energy infrastructure projects and programs are creating and will continue to create such opportunities, and our ability to selectively partner with customers in this manner is a competitive advantage.

Competitive pricing environments, project delays and restrictive regulatory requirements have negatively impacted our margins in the past and could affect our margins in the future. Additionally, margins may be negatively impacted on a quarterly basis due to adverse weather conditions, as well as timing of project starts or completions and other factors as previously described in Understanding Margins. We continue to focus on the elements of the business that are largely within our control, including costs, the margins we accept on projects, collecting receivables, ensuring quality service, rightsizing initiatives as needed to match the markets we serve, and safely executing on the projects we are awarded.

Capital expenditures for 2017 related to continuing operations are expected to be between $210 million to $225 million. We expect 2017 capital expenditures to be funded substantially from cash on hand, internal cash flows and borrowings under our credit facility.

We also continue to evaluate potential strategic acquisitions and similar investments to broaden our customer base, expand our geographic area of operation, grow our portfolio of services and increase opportunities across our operations. 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 for liquidity. We also believe that our financial strength, entrepreneurial operating model and experienced management team are attractive to acquisition candidates.

We believe that we are well-positioned to capitalize upon opportunities and trends in the industries we serve because of our full-service operations with broad geographic reach, our financial strength and our technical expertise. Additionally, we believe the industry opportunities and trends discussed herein will increase the demand for our services over the long term, although the actual timing, magnitude and impact of these opportunities and trends on our results of operations, financial position and cash flows are difficult to predict.

 

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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:

 

    Projected revenues, net income, earnings per share, margins, weighted average shares outstanding, capital expenditures, tax rates and other projections of operating or financial results;

 

    Expectations regarding our business or financial outlook, growth or opportunities in particular markets;

 

    The expected value of contracts or intended contracts with customers;

 

    Future capital allocation initiatives, including the amount, timing, availability and strategy with respect to any future stock repurchases;

 

    The scope, services, term and results of any projects awarded or expected to be awarded for services to be provided by us;

 

    The development of larger electric transmission and oil and natural gas pipeline projects and their impact on our business or demand for our services;

 

    The level of oil, natural gas and natural gas liquids prices and their impact on our business or demand for our services;

 

    The impact of renewable energy initiatives, including mandated state renewable portfolio standards, the economic stimulus package and other existing or potential energy legislation;

 

    Potential opportunities that may be indicated by bidding activity or similar discussions with customers;

 

    The potential benefits from acquisitions;

 

    The expected outcome of pending or threatened litigation;

 

    Beliefs and assumptions about the collectability of receivables;

 

    The business plans or financial condition of our customers;

 

    Our plans and strategies;

 

    Possible recovery on pending or contemplated change orders or other claims against customers or third parties;

 

    The current economic and regulatory conditions and trends in the industries we serve; and

 

    The effects of the sale of our fiber optic licensing operations.

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. These forward-looking statements reflect our 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:

 

    Market conditions;

 

    The effects of industry, economic or political conditions outside our control;

 

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    Quarterly variations in our operating results;

 

    Adverse economic and financial conditions, including weakness in the capital markets;

 

    Trends and growth opportunities in relevant markets;

 

    Delays, reductions in scope or cancellations of anticipated, pending or existing projects, including as a result of weather, regulatory or environmental processes, project performance issues, claimed forced majeure events, or our customers’ capital constraints;

 

    The successful negotiation, execution, performance and completion of anticipated, pending and existing contracts, including the ability to obtain awards of projects on which we bid or are otherwise discussing with customers;

 

    Our dependence on suppliers, subcontractors, equipment manufacturers and other third party contractors;

 

    Our ability to attract skilled labor and retain key personnel and qualified employees;

 

    The potential shortage of skilled employees;

 

    Our dependence on fixed price contracts and the potential to incur losses with respect to these contracts;

 

    Estimates relating to our use of percentage-of-completion accounting;

 

    Adverse impacts from weather;

 

    Our ability to generate internal growth;

 

    Competition in our business, including our ability to effectively compete for new projects and market share;

 

    The effect of natural gas, natural gas liquids and oil prices on our operations and growth opportunities and on our customers’ capital programs and the resulting impact on demand for our services;

 

    The future development of natural resources in shale formations;

 

    The failure of renewable energy initiatives or other existing or potential legislative actions to result in increased demand for our services;

 

    Liabilities associated with multiemployer pension plans, including underfunding of liabilities and termination or withdrawal liabilities;

 

    The possibility of further increases in the liability associated with our withdrawal from a multiemployer pension plan;

 

    Liabilities for claims that are self-insured or not insured;

 

    Unexpected costs or liabilities that may arise from lawsuits or indemnity claims asserted against us;

 

    The outcome of pending or threatened litigation;

 

    Risks relating to the potential unavailability or cancellation of third party insurance, the exclusion of coverage for certain losses, and potential increases in premiums for coverage deemed beneficial to us;

 

    Cancellation provisions within our contracts and the risk that contracts expire and are not renewed or are replaced on less favorable terms;

 

    Loss of customers with whom we have long-standing or significant relationships;

 

    The potential that participation in joint ventures exposes us to liability and/or harm to our reputation for acts or omissions by our partners;

 

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    Our inability or failure to comply with the terms of our contracts, which may result in additional costs, unexcused delays, warranty claims, failure to meet performance guarantees, damages or contract terminations;

 

    The inability or refusal of our customers to pay for services;

 

    The failure to recover on payment claims against project owners or third party contractors or to obtain adequate compensation for customer-requested change orders;

 

    The failure of our customers to comply with regulatory requirements applicable to their projects, which may result in project delays and cancellations;

 

    Budgetary or other constraints that may reduce or eliminate tax incentives or government funding for projects, which may result in project delays or cancellations;

 

    Estimates and assumptions in determining our financial results and backlog;

 

    Our ability to realize our backlog;

 

    Risks associated with operating in international markets, including instability of foreign governments, currency fluctuations, tax and investment strategies and compliance with foreign legal systems and cultural practices, as well as the U.S. Foreign Corrupt Practices Act and other applicable anti-bribery and anti-corruption laws;

 

    Our ability to successfully identify, complete, integrate and realize synergies from acquisitions;

 

    The potential adverse impact resulting from uncertainty surrounding acquisitions, including the ability to retain key personnel from the acquired businesses and the potential increase in risks already existing in our operations;

 

    The adverse impact of impairments of goodwill, receivables and other intangible assets or investments;

 

    Our growth outpacing our decentralized management and infrastructure;

 

    Requirements relating to governmental regulation and changes thereto;

 

    Inability to enforce our intellectual property rights or the obsolescence of such rights;

 

    Risks related to the implementation of an information technology solution;

 

    The impact of our unionized workforce on our operations, including labor stoppages or interruptions due to strikes or lockouts;

 

    Potential liabilities relating to occupational health and safety matters;

 

    The failure to collect outstanding receivables;

 

    The cost of borrowing, availability of cash and credit, fluctuations in the price and volume of our common stock, debt covenant compliance, interest rate fluctuations and other factors affecting our financing and investing activities;

 

    Fluctuations of prices of certain materials used in our business;

 

    The ability to access sufficient funding to finance desired growth and operations;

 

    Our ability to obtain performance bonds;

 

    Potential exposure to environmental liabilities;

 

    Our ability to meet the regulatory requirements applicable to us and our subsidiaries, including the Sarbanes-Oxley Act of 2002;

 

    Rapid technological and structural changes that could reduce the demand for our services;

 

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    The impact of new or changed tax laws, treaties or regulations;

 

    The impact of increased healthcare costs arising from healthcare reform legislation or other legislative action;

 

    The impact of regulatory changes on labor costs;

 

    The impact of significant fluctuations in foreign currency exchange rates;

 

    The potential for claims, damages or injunctive relief associated with the disposition of our prior businesses;

 

    The terms of any transaction we enter into to facilitate the repurchase of shares under our stock repurchase program; and

 

    The other risks and uncertainties as are described elsewhere herein and in Item 1A. Risk Factors in this report on Form 10-K and as may be detailed from time to time in our other public filings with the SEC.

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.

 

ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk

Our primary exposure to market risk relates to unfavorable changes in concentration of credit risk, interest rates and currency exchange rates.

Credit Risk. We are subject to concentrations of credit risk related to our cash and cash equivalents and our net receivable position with customers, which includes amounts related to billed and unbilled accounts receivable and costs and estimated earnings in excess of billings on uncompleted contracts net of advanced billings with the same customer. Substantially all of our cash and cash equivalents are managed by what we believe to be high credit quality financial institutions. In accordance with our investment policies, these institutions are authorized to invest cash and cash equivalents in a diversified portfolio of what we believe to be high-quality investments, which primarily include interest-bearing demand deposits, money market investments and money market mutual funds with original maturities of three months or less. Although we do not currently believe the principal amounts of these investments are subject to any material risk of loss, changes in economic conditions could impact the interest income we receive from these investments. In addition, as we grant credit under normal payment terms, generally without collateral, 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 depressed economic and financial market conditions that have existed in recent years. However, we believe the concentration of credit risk related to billed and unbilled receivables and costs and estimated earnings in excess of billings on uncompleted contracts is limited because of the diversity of our customers. We perform ongoing credit risk assessments of our customers and financial institutions and in some cases we obtain collateral or other security from our customers.

Interest Rate Risk. As of December 31, 2016, we had no derivative financial instruments to manage interest rate risk. As such, we were exposed to earnings and fair value risk due to changes in interest rates with respect to our long-term obligations. As of December 31, 2016, the fair value of our variable rate debt of $352.8 million approximated book value. Our weighted average interest rate on our variable rate debt for the year ended December 31, 2016 was 2.1%. The annual effect on our pretax earnings of a hypothetical 50 basis point increase or decrease in variable interest rates would be approximately $1.8 million based on our December 31, 2016 balance of variable rate debt.

 

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Foreign Currency Risk. The U.S. dollar is the functional currency for the majority of our operations, which are primarily located within the United States. The functional currency for our foreign operations, which are primarily located in Canada and Australia, is typically the currency of the country in which the foreign operating unit is located. Accordingly, our financial performance is subject to fluctuation due to changes in foreign currency exchange rates relative to the U.S. dollar. During 2016, revenues from our foreign operations accounted for 20.8% of our consolidated revenues. Fluctuations in foreign exchange rates during the year ended December 31, 2016 caused an approximate decrease of $41 million in foreign revenues compared to the year ended December 31, 2015. Additionally, fluctuations in foreign exchange rates during the year ended December 31, 2015 caused an approximate decrease of $227 million in foreign revenues compared to the year ended December 31, 2014.

We are also subject to foreign currency risk with respect to sales, purchases and borrowings that are denominated in a currency other than the respective functional currencies of our operating units. To minimize the risk from changes in foreign currency exchange rates, we may enter into foreign currency derivative contracts to hedge our foreign currency risk on a cash flow basis. There were no outstanding foreign currency derivative contracts at December 31, 2016.

We also have foreign exchange risk related to cash and cash equivalents in foreign banks. Based on the balance of cash and cash equivalents in foreign banks of $92.7 million as of December 31, 2016, an assumed 5% adverse change to foreign exchange rates would result in a fair value decline of $4.6 million. Fluctuations in fair value are recorded in “Accumulated other comprehensive income (loss),” a separate component of stockholders’ equity.

 

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ITEM 8. Financial Statements and Supplementary Data

INDEX TO QUANTA SERVICES, INC.’S CONSOLIDATED FINANCIAL STATEMENTS

 

     Page  

Report of Management

     86   

Report of Independent Registered Public Accounting Firm

     88   

Consolidated Balance Sheets

     90   

Consolidated Statements of Operations

     91   

Consolidated Statements of Comprehensive Income

     92   

Consolidated Statements of Cash Flows

     93   

Consolidated Statements of Equity

     94   

Notes to Consolidated Financial Statements

     95   

 

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REPORT OF MANAGEMENT

Management’s Report on Financial Information and Procedures

The accompanying financial statements of Quanta Services, Inc. and its subsidiaries were prepared by management. These financial statements were prepared in accordance with accounting principles generally accepted in the United States, applying certain estimates and judgments as required.

Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls or our internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple errors or mistakes. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.

Management’s Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our consolidated financial statements for external purposes in accordance with U.S. generally accepted accounting principles. Internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we have conducted an evaluation of the effectiveness of our internal control over financial reporting based upon the criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, our management has concluded that our internal control over financial reporting was effective as of December 31, 2016 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, 2016 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in its report which appears herein.

 

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Management’s assessment of the effectiveness of our internal control over financial reporting as of December 31, 2016 excluded the five acquisitions we completed in 2016. Such exclusion was in accordance with SEC guidance that an assessment of recently acquired businesses may be omitted in management’s report on internal control over financial reporting, provided the acquisition took place within twelve months of management’s evaluation. These acquisitions comprised approximately 1.3% and 0.9% of our consolidated assets and revenues as of and for the year ended December 31, 2016.

 

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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, comprehensive income, cash flows and equity, present fairly, in all material respects, the financial position of Quanta Services, Inc. and its subsidiaries at December 31, 2016 and 2015, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2016 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, 2016, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s 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 Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express opinions on these financial statements and on the Company’s 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.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

As described in Management’s Report on Internal Control Over Financial Reporting, management has excluded its 2016 acquisitions from its assessment of internal control over financial reporting as of December 31, 2016 because these acquisitions were made by the Company through purchase business combinations during 2016. We have also excluded the Company’s 2016 acquisitions from our audit of internal control over financial reporting. The 2016 acquisitions of the Company and its related subsidiaries are wholly owned subsidiaries of the

 

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Company and have total assets and revenues which represent approximately 1.3% and 0.9%, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2016.

/s/ PricewaterhouseCoopers LLP

Houston, Texas

March 1, 2017

 

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QUANTA SERVICES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

     December 31,  
     2016     2015  
     (In thousands, except share
information)
 
ASSETS     

Current Assets:

    

Cash and cash equivalents

   $ 112,183      $ 128,771   

Accounts receivable, net of allowances of $2,752 and $5,226

     1,500,115        1,621,133   

Costs and estimated earnings in excess of billings on uncompleted contracts

     473,308        317,745   

Inventories

     88,548        75,285   

Prepaid expenses and other current assets

     114,591        134,585   
  

 

 

   

 

 

 

Total current assets

     2,288,745        2,277,519   

Property and equipment, net of accumulated depreciation of $862,825 and $755,272

     1,174,094        1,101,959   

Other assets, net

     101,028        76,333   

Other intangible assets, net of accumulated amortization of $297,313 and $264,674

     187,023        205,074   

Goodwill

     1,603,169        1,552,658   
  

 

 

   

 

 

 

Total assets

   $ 5,354,059      $ 5,213,543   
  

 

 

   

 

 

 
LIABILITIES AND EQUITY     

Current Liabilities:

    

Current maturities of long-term debt and short-term debt

   $ 7,563      $ 7,067   

Accounts payable and accrued expenses

     922,819        782,134   

Billings in excess of costs and estimated earnings on uncompleted contracts

     274,846        399,230   

Current liabilities of discontinued operations

     —          15,313   
  

 

 

   

 

 

 

Total current liabilities

     1,205,228        1,203,744   

Long-term debt and notes payable, net of current maturities

     353,562        475,364   

Deferred income taxes

     192,834        186,491   

Insurance and other non-current liabilities

     259,733        260,129   
  

 

 

   

 

 

 

Total liabilities

     2,011,357        2,125,728   

Commitments and Contingencies

    

Equity:

    

Common stock, $.00001 par value, 600,000,000 shares authorized, 144,710,773 and 227,898,509 shares issued, and 144,710,773 and 152,907,166 shares outstanding

     1        2   

Exchangeable Shares, no par value, 6,515,453 and 6,876,042 shares issued and outstanding

     —          —     

Series F Preferred Stock, $.00001 par value, 1 share authorized, issued and outstanding

     —          —     

Series G Preferred Stock, $.00001 par value, 1 share authorized, issued and outstanding

     —          —     

Additional paid-in capital

     1,749,306        3,497,740   

Retained earnings

     1,876,081        1,677,698   

Accumulated other comprehensive loss

     (271,673     (294,689

Treasury stock, 0 and 74,991,343 common shares

     (14,288     (1,795,257
  

 

 

   

 

 

 

Total stockholders’ equity

     3,339,427        3,085,494   

Non-controlling interests

     3,275        2,321   
  

 

 

   

 

 

 

Total equity

     3,342,702        3,087,815   
  

 

 

   

 

 

 

Total liabilities and equity

   $ 5,354,059      $ 5,213,543   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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QUANTA SERVICES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

 

     Year Ended December 31,  
     2016     2015     2014  
     (In thousands, except per share information)  

Revenues

   $ 7,651,319      $ 7,572,436      $ 7,747,229   

Cost of services (including depreciation)

     6,637,519        6,648,771        6,578,435   
  

 

 

   

 

 

   

 

 

 

Gross profit

     1,013,800        923,665        1,168,794   

Selling, general and administrative expenses

     653,338        592,863        705,477   

Amortization of intangible assets

     31,685        34,848        34,257   

Asset impairment charges

     7,964        58,451        —     
  

 

 

   

 

 

   

 

 

 

Operating income

     320,813        237,503        429,060   

Interest expense

     (14,887     (8,024     (4,765

Interest income

     2,423        1,493        3,736   

Equity in losses of unconsolidated affiliates

     (979     (466     (332

Other income (expense), net

     316        (1,831     (1,100
  

 

 

   

 

 

   

 

 

 

Income from continuing operations before income taxes

     307,686        228,675        426,599   

Provision for income taxes

     107,246        97,472        139,007   
  

 

 

   

 

 

   

 

 

 

Net income from continuing operations

     200,440        131,203        287,592   

Net income (loss) from discontinued operations

     (342     190,621        27,490   
  

 

 

   

 

 

   

 

 

 

Net income

     200,098        321,824        315,082   

Less: Net income attributable to non-controlling interests

     1,715        10,917        18,368   
  

 

 

   

 

 

   

 

 

 

Net income attributable to common stock

   $ 198,383      $ 310,907      $ 296,714   
  

 

 

   

 

 

   

 

 

 

Amounts attributable to common stock:

      

Net income from continuing operations

   $ 198,725      $ 120,286      $ 269,224   

Net income (loss) from discontinued operations

     (342     190,621        27,490   
  

 

 

   

 

 

   

 

 

 

Net income attributable to common stock

   $ 198,383      $ 310,907      $ 296,714   
  

 

 

   

 

 

   

 

 

 

Earnings per share attributable to common stock — basic and diluted:

      

Continuing operations

   $ 1.26      $ 0.62      $ 1.22   

Discontinued operations

     —          0.97        0.13   
  

 

 

   

 

 

   

 

 

 

Net income attributable to common stock

   $ 1.26      $ 1.59      $ 1.35   
  

 

 

   

 

 

   

 

 

 

Shares used in computing earnings per share:

      

Weighted average basic shares outstanding

     157,287        195,113        219,668   
  

 

 

   

 

 

   

 

 

 

Weighted average diluted shares outstanding

     157,288        195,120        219,690   
  

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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QUANTA SERVICES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

     Year Ended December 31,  
     2016     2015     2014  
     (In thousands)  

Net income

   $ 200,098      $ 321,824      $ 315,082   

Other comprehensive income (loss), net of tax provision:

      

Foreign currency translation adjustment, net of tax of $0, $0 and $0

     23,137        (171,458     (84,505

Other, net of tax of $46, $(28) and $486

     (121     59        (1,549
  

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

     23,016        (171,399     (86,054
  

 

 

   

 

 

   

 

 

 

Comprehensive income

     223,114        150,425        229,028   

Less: Comprehensive income attributable to non-controlling interests

     1,715        10,917        18,368   
  

 

 

   

 

 

   

 

 

 

Total comprehensive income attributable to Quanta stockholders

   $ 221,399      $ 139,508      $ 210,660   
  

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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QUANTA SERVICES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

     Year Ended December 31,  
     2016     2015     2014  
     (In thousands)  

Cash Flows from Operating Activities of Continuing Operations:

      

Net income

   $ 200,098     $ 321,824     $ 315,082  

Adjustments to reconcile net income to net cash provided by operating activities of continuing operations —

      

(Income) loss from discontinued operations

     342       (190,621     (27,490

Depreciation

     170,240       162,845       141,106  

Amortization of intangible assets

     31,685       34,848       34,257  

Asset impairment charges

     7,964       58,451       —    

Equity in losses of unconsolidated affiliates

     979       466       332  

Amortization of debt issuance costs

     1,356       1,251       1,094  

Gain on sale of property and equipment

     (734     (2,773     (1,803

Foreign currency loss

     880       2,490       1,244  

Provision for (recovery of) doubtful accounts

     (543     224       1,411  

Provision for contract receivable

     —         —         102,460  

Non-cash portion of arbitration expense

     —         —         10,518  

Deferred income tax provision (benefit)

     (15,695     (19,403     22,906  

Non-cash stock-based compensation

     42,843       36,939       37,449  

Tax impact of stock-based equity awards

     (671     (669     (1,563

Changes in operating assets and liabilities, net of non-cash transactions

     (57,568     212,311       (389,261
  

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities of continuing operations

     381,176       618,183       247,742  
  

 

 

   

 

 

   

 

 

 

Cash Flows from Investing Activities of Continuing Operations:

      

Proceeds from sale of property and equipment

     21,975       26,178       14,448  

Additions of property and equipment

     (212,555     (209,968     (247,216

Cash paid for acquisitions, net of cash acquired

     (68,788     (112,914     (262,218

Investments in and return of equity from unconsolidated affiliates

     (10,309     (6,074     (3,127

Cash received from (paid for) other investments, net

     4,752       (4,338     6,214  

Cash withdrawn from (deposited to) restricted cash

     (1,119     214       3,565  

Cash paid for intangible assets

     —         (211     (252
  

 

 

   

 

 

   

 

 

 

Net cash used in investing activities of continuing operations

     (266,044     (307,113     (488,586
  

 

 

   

 

 

   

 

 

 

Cash Flows from Financing Activities of Continuing Operations:

      

Borrowings under credit facility

     2,744,453       3,349,385       938,047  

Payments under credit facility

     (2,860,673     (2,935,752     (866,224

Borrowings of other long-term debt

     —         —         394  

Payments on other long-term debt

     (6,959     (2,683     (30,448

Borrowings of short-term debt

     2,754       4,872       5,056  

Payments on short-term debt

     (4,711     (5,170     —    

Debt issuance and amendment costs

     —         (3,795     —    

Contributions from non-controlling interests

     —         2,313       —    

Distributions to non-controlling interests

     (761     (21,228     (14,432

Tax impact of stock-based equity awards

     671       669       1,563  

Exercise of stock options

     401       372       1,179  

Repurchase of common stock, including accelerated stock repurchases

     —         (1,606,361     (93,482
  

 

 

   

 

 

   

 

 

 

Net cash used in financing activities of continuing operations

     (124,825     (1,217,378     (58,347
  

 

 

   

 

 

   

 

 

 

Discontinued operations:

      

Net cash provided by (used in) operating activities

     (1,035     22,342       63,082  

Net cash provided by provided by (used in) investing activities

     (6,080     825,376       (54,280
  

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) discontinued operations

     (7,115     847,718       8,802  
  

 

 

   

 

 

   

 

 

 

Effect of foreign exchange rate changes on cash and cash equivalents

     220       (3,154     (7,873

Net decrease in cash and cash equivalents

     (16,588     (61,744     (298,262

Cash and cash equivalents, beginning of year

     128,771       190,515       488,777  
  

 

 

   

 

 

   

 

 

 

Cash and cash equivalents, end of year

   $ 112,183     $ 128,771     $ 190,515  
  

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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QUANTA SERVICES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EQUITY

 

    Common Stock     Exchangeable
Shares
    Series F
Preferred Stock
    Series G
Preferred Stock
    Additional
Paid-In

Capital
    Retained
Earnings
    Accumulated
Other
Comprehensive

Income (Loss)
    Treasury
Stock
    Total
Stockholders’

Equity
    Non-controlling
Interests
    Total
Equity
 
    Shares     Amount     Shares     Amount     Shares     Amount     Shares     Amount                
    (In thousands, except share information)  

Balance, December 31, 2013

    212,942,767     $ 2       3,500,000     $ —         1     $ —         —       $ —       $ 3,416,585     $ 1,070,077     $ (37,236   $ (215,240   $ 4,234,188     $ 7,131     $ 4,241,319  

Other comprehensive loss

    —         —         —         —         —         —         —         —         —         —         (86,054     —         (86,054     —         (86,054

Acquisitions

    686,382       —         3,825,971       —         —         —         1       —         134,538       —         —         —         134,538       —         134,538  

Restricted stock and restricted stock unit activity

    95,475       —         —         —         —         —         —         —         39,030       —         —         (12,340     26,690       —         26,690  

Stock options exercised

    91,444       —         —         —         —         —         —         —         1,179       —         —         —         1,179       —         1,179  

Income tax impact of long-term incentive plans

    —         —         —         —         —         —         —         —         700       —         —         —         700       —         700  

Common stock repurchases

    (2,996,278     —         —         —         —         —         —         —         —         —         —         (93,482     (93,482     —         (93,482

Vests in deferred compensation plan

    —         —         —         —         —         —         —         —         874       —         —         (874     —         —         —    

Distributions to non-controlling interests

    —         —         —         —         —         —         —         —         —         —         —         —         —         (14,432     (14,432

Net income

    —         —         —         —         —         —         —         —         —         296,714       —         —         296,714       18,368       315,082  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, December 31, 2014

    210,819,790       2       7,325,971       —         1       —         1       —         3,592,906       1,366,791       (123,290     (321,936     4,514,473       11,067       4,525,540  

Other comprehensive loss

    —         —         —         —         —         —         —         —         —         —         (171,399     —         (171,399     —         (171,399

Acquisitions

    461,037       —         —         —         —         —         —         —         10,127       —         —         —         10,127       (748     9,379  

Restricted stock and restricted stock unit activity

    395,427       —         —         —         —         —         —         —         37,309       —         —         (10,368     26,941       —         26,941  

Stock options exercised

    32,390       —         —         —         —         —         —         —         431       —         —         —         431       —         431  

Exchange of exchangeable shares

    449,929       —         (449,929     —         —         —         —         —         —         —         —         —         —         —         —    

Income tax impact of long-term incentive plans

    —         —         —         —         —         —         —         —         375       —         —         —         375       —         375  

Common stock repurchases

    (59,251,407     —         —         —         —         —         —         —         —         —         —         (1,456,361     (1,456,361     —         (1,456,361

Accelerated stock repurchases not yet settled

    —         —         —         —         —         —         —         —         (150,000     —         —         —         (150,000     —         (150,000

Vests in deferred compensation plan

    —         —         —         —         —         —         —         —         6,592       —         —         (6,592     —         —         —    

Contributions from non-controlling interests

    —         —         —         —         —         —         —         —         —         —         —         —         —         2,313       2,313  

Distributions to non-controlling interests

    —         —         —         —         —         —         —         —         —         —         —         —         —         (21,228     (21,228

Net income

    —         —         —         —         —         —         —         —         —         310,907       —         —         310,907       10,917       321,824  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, December 31, 2015

    152,907,166       2       6,876,042       —         1       —         1       —         3,497,740       1,677,698       (294,689     (1,795,257     3,085,494       2,321       3,087,815  

Other comprehensive income

    —         —         —         —         —         —         —         —         —         —         23,016       —         23,016       —         23,016  

Acquisitions

    70,840       —         —         —         —         —         —         —         1,508       —         —         —         1,508       —         1,508  

Restricted stock and restricted stock unit activity

    760,395       —         —         —         —         —         —         —         42,843       —         —         (8,338     34,505       —         34,505  

Stock options exercised

    25,423       —         —         —         —         —         —         —         425       —         —         —         425       —         425  

Exchange of exchangeable shares

    360,589       —         (360,589     —         —         —         —         —         —         —         —         —         —         —         —    

Income tax impact of long-term incentive plans

    —         —         —         —         —         —         —         —         (3,904     —         —         —         (3,904     —         (3,904

Settlement of accelerated stock repurchases

    (9,413,640     —         —         —         —         —         —         —         150,000       —         —         (150,000     —         —         —    

Vests in deferred compensation plan

    —         —         —         —         —         —         —         —         6,822       —         —         (6,822     —         —         —    

Retirement of treasury stock

    —         (1     —         —         —         —         —         —         (1,946,128     —         —         1,946,129       —         —         —    

Distributions to non-controlling interests

    —         —         —         —         —         —         —         —         —         —         —         —         —         (761     (761

Net income

    —         —         —         —         —         —         —         —         —         198,383       —         —         198,383       1,715       200,098  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, December 31, 2016

    144,710,773     $ 1       6,515,453     $ —         1     $ —         1     $ —       $ 1,749,306     $ 1,876,081     $ (271,673   $ (14,288   $ 3,339,427     $ 3,275     $ 3,342,702  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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QUANTA SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

1. BUSINESS AND ORGANIZATION:

Quanta Services, Inc. (Quanta) is a leading provider of specialty contracting services, offering infrastructure solutions primarily to the electric power and oil and gas industries in the United States, Canada and Australia and select other international markets. Quanta reports its results under two reportable segments: (1) Electric Power Infrastructure Services and (2) Oil and Gas Infrastructure Services.

Electric Power Infrastructure Services Segment

The Electric Power Infrastructure Services segment provides comprehensive network solutions to customers in the electric power industry. Services performed by the Electric Power Infrastructure Services segment generally include the design, installation, upgrade, repair and maintenance of electric power transmission and distribution infrastructure and substation facilities along with other engineering and technical services. This segment also provides emergency restoration services, including the repair of infrastructure damaged by inclement weather, the energized installation, maintenance and upgrade of electric power infrastructure utilizing unique bare hand and hot stick methods and Quanta’s proprietary robotic arm technologies, and the installation of “smart grid” technologies on electric power networks. In addition, this segment designs, installs and maintains renewable energy generation facilities, consisting of solar, wind and certain types of natural gas generation facilities, and related switchyards and transmission infrastructure. To a lesser extent, this segment provides services such as the construction of electric power generation facilities, the design, installation, maintenance and repair of commercial and industrial wiring, the installation of traffic networks and cable and control systems for light rail lines and ancillary telecommunication infrastructure services.

Oil and Gas Infrastructure Services Segment

The Oil and Gas Infrastructure Services segment provides comprehensive network solutions to customers involved in the development and transportation of natural gas, oil and other pipeline products. Services performed by the Oil and Gas Infrastructure Services segment generally include the design, installation, repair and maintenance of pipeline transmission and distribution systems, gathering systems, production systems, storage systems and compressor and pump stations, as well as related trenching, directional boring and mechanized welding services. In addition, this segment’s services include pipeline protection, integrity testing, rehabilitation and replacement, and fabrication of pipeline support systems and related structures and facilities. We also serve the offshore and inland water energy markets, primarily providing services to oil and gas exploration platforms, including mechanical installation (or “hook-ups”), electrical and instrumentation, pre-commissioning and commissioning, coatings, fabrication and marine asset repair. To a lesser extent, this segment designs, installs and maintains fueling systems, as well as water and sewer infrastructure.

Acquisitions

During 2016, Quanta completed five acquisitions. The results of four of the acquired companies are generally included in Quanta’s Electric Power Infrastructure Services segment. These companies included an electrical infrastructure services company located in Australia, a utility contracting company located in Canada, a full service medium- and high-voltage powerline contracting company located in the United States and a telecommunications company located in Canada. Quanta also acquired a pipeline service contractor located in the United States, the results of which are generally included in Quanta’s Oil and Gas Infrastructure Services segment. As these transactions were effective during 2016, the results have been included in Quanta’s consolidated financial statements beginning on the respective dates of acquisition. These acquisitions should enable Quanta to further enhance its service offerings in the United States, Australia and Canada.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

During 2015, Quanta acquired 11 companies. The results of eight of the acquired companies are generally included in Quanta’s Electric Power Infrastructure Services segment. These companies include a foundation services company located in the United States, an electrical contracting company located in the United States, an electrical engineering company located in Australia, a powerline construction company located in the United States, an engineering company located in Canada, an engineering, procurement and construction services company based in the United States, an underground construction contracting company located in Canada, and a supplier and material procurement specialist for the power and utility industry in Canada. The results of the remaining three acquired companies are generally included in Quanta’s Oil and Gas Infrastructure Services segment. These companies include a company that services above-ground storage tanks in the United States, an underground utility distribution contractor that provides services to gas and electric utilities in Canada, and a company that specializes in the engineering, procurement, construction, and commissioning of compression and surface facilities for the high pressure gas industry in Australia.

During 2014, Quanta completed nine acquisitions, which enabled Quanta to further enhance its electric power and oil and gas infrastructure service offerings in the United States and Canada and expand its capabilities in Australia to include electric power infrastructure service offerings. These acquisitions included four electric power infrastructure services companies located in Canada; two oil and gas infrastructure services businesses located in Canada; an electric power infrastructure services company located in Australia; a U.S. based general engineering and construction company specializing in hydrant fueling, waterfront and utility construction for the U.S. Department of Defense the results of which are generally included in Quanta’s Oil and Gas Infrastructure Services segment; and a geotechnical and geological engineering services company based in the United States the results of which are generally included in Quanta’s Electric Power Infrastructure Services segment.

Disposition — Fiber Optic Licensing Operations

On April 29, 2015, Quanta entered into a stock purchase agreement with Crown Castle International Corp. (Crown Castle) pursuant to which Quanta agreed to sell its fiber optic licensing operations. The purchase agreement contained customary representations and warranties, covenants and indemnities. On August 4, 2015, Quanta completed the sale for a purchase price of approximately $1 billion in cash, resulting in after-tax net proceeds of approximately $848 million. In the third quarter of 2015, Quanta recognized a net of tax gain of approximately $171 million. Quanta has presented the results of operations, financial position, cash flows and disclosures of the fiber optic licensing operations as discontinued operations for all periods in the accompanying consolidated financial statements. These results were included in Quanta’s Fiber Optic Licensing and Other segment prior to the second quarter of 2015.

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Principles of Consolidation

The consolidated financial statements of Quanta include the accounts of Quanta Services, Inc. and its wholly owned subsidiaries, which are also referred to as its operating units. The consolidated financial statements also include the accounts of certain of Quanta’s investments in joint ventures, which are either consolidated or proportionately consolidated, as discussed in the following summary of significant accounting policies. Investments in affiliated entities in which Quanta does not have a controlling financial interest, but over which Quanta has significant influence, usually because Quanta holds a voting interest of between 20% and 50%, are accounted for using the equity method. All significant intercompany accounts and transactions have been eliminated in consolidation. Unless the context requires otherwise, references to Quanta include Quanta Services, Inc. and its consolidated subsidiaries.

 

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QUANTA SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Use of Estimates and Assumptions

The preparation of financial statements in conformity with US GAAP requires the use of estimates and assumptions by management in determining the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities known to exist as of the date the financial statements are published, and the reported amounts of revenues and expenses recognized during the periods presented. Quanta reviews all significant estimates affecting its consolidated financial statements on a recurring basis and records the effect of any necessary adjustments prior to their publication. Judgments and estimates are based on Quanta’s beliefs and assumptions derived from information available at the time such judgments and estimates are made. Uncertainties with respect to such estimates and assumptions are inherent in the preparation of financial statements. Estimates are primarily used in Quanta’s assessment of the allowance for doubtful accounts, valuation of inventory, useful lives of assets, fair value assumptions in analyzing goodwill, other intangibles and long-lived asset impairments, equity and other investments, loan receivables, purchase price allocations, liabilities for self-insured and other claims and guarantees, multiemployer pension plan withdrawal liabilities, revenue recognition for construction contracts inclusive of contractual change orders and claims, share-based compensation, operating results of reportable segments, as well as the provision for income taxes and the calculation of uncertain tax positions.

Cash and Cash Equivalents

Quanta had cash and cash equivalents of $112.2 million and $128.8 million as of December 31, 2016 and 2015. Cash consisting of interest-bearing demand deposits is carried at cost, which approximates fair value. Quanta considers all highly liquid investments with an original maturity of three months or less at the time of purchase to be cash equivalents, which are carried at fair value. At December 31, 2016 and 2015, cash equivalents were $8.8 million and $1.4 million and consisted primarily of money market investments and money market mutual funds and are discussed further in Fair Value Measurements below. As of December 31, 2016 and 2015, cash and cash equivalents held in domestic bank accounts were approximately $19.5 million and $16.1 million, and cash and cash equivalents held in foreign bank accounts were approximately $92.7 million and $112.7 million. As of December 31, 2016 and 2015, cash and cash equivalents held by Quanta’s investments in joint ventures, which are either consolidated or proportionately consolidated, were approximately $11.5 million and $24.9 million, of which $10.0 million and $11.9 million related to domestic joint ventures. Cash and cash equivalents held by the joint ventures are available to support the operations of the related joint ventures, and Quanta does not have access to that cash for its other operations. Under the terms of the partnership agreements, Quanta generally has no right to the joint ventures’ cash other than participating in distributions and in the event of dissolution.

Current and Long-Term Accounts and Notes Receivable and Allowance for Doubtful Accounts

Quanta provides an allowance for doubtful accounts when collection of an account or note receivable is considered doubtful, and receivables are written off against the allowance when deemed uncollectible. Inherent in the assessment of the allowance for doubtful accounts are certain judgments and estimates regarding, among other factors, the customer’s access to capital, the customer’s willingness or ability to pay, general economic and market conditions, the ongoing relationship with the customer and uncertainties related to the resolution of disputed matters. Quanta considers accounts receivable delinquent after 30 days but does not generally include delinquent accounts in its analysis of the allowance for doubtful accounts unless the accounts receivable have been outstanding for at least 90 days. In addition to balances that have been outstanding for 90 days or more, Quanta also includes accounts receivable balances that relate to customers in bankruptcy or with other known difficulties in its analysis of the allowance for doubtful accounts. Material changes in Quanta’s customers’ business or cash flows, which may be impacted by negative economic and market conditions, could affect

 

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QUANTA SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Quanta’s ability to collect amounts due from them. As of December 31, 2016 and 2015, Quanta had allowances for doubtful accounts on current receivables of approximately $2.8 million and $5.2 million. Long-term accounts receivable are included within other assets.

Should customers experience financial difficulties or file for bankruptcy, or should anticipated recoveries relating to receivables in existing bankruptcies or other workout situations fail to materialize, Quanta could experience reduced cash flows and losses in excess of current allowances provided.

The balances billed but not paid by customers pursuant to retainage provisions in certain contracts are generally due upon completion of the contracts and acceptance by the customer. Based on Quanta’s experience with similar contracts in recent years, the majority of the retainage balances at each balance sheet date are expected to be collected within the next twelve months. Current retainage balances as of December 31, 2016 and 2015 were approximately $231.0 million and $250.1 million and were included in accounts receivable. Retainage balances with settlement dates beyond the next twelve months were included in other assets, net, and as of December 31, 2016 and 2015 were $5.2 million and $4.5 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