filings.toolsItem 8. Financial Statements and Supplementary Data
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Item 8. Financial Statements and Supplementary Data
INDEX TO QUANTA SERVICES, INC.’S CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF MANAGEMENT
Management’s Report on Financial Information and Procedures
The accompanying financial statements of Quanta Services, Inc. and its subsidiaries were prepared by management. These financial statements were prepared in accordance with accounting principles generally accepted in the United States, applying certain estimates and judgments as required.
Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls or our internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple errors or mistakes. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our consolidated financial statements for external purposes in accordance with U.S. generally accepted accounting principles. Internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we have conducted an evaluation of the effectiveness of our internal control over financial reporting based upon the criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, our management has concluded that our internal control over financial reporting was effective as of December 31, 2022 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, 2022 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in its report which appears herein.
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Quanta Services, Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Quanta Services, Inc. and its subsidiaries (the “Company”) as of December 31, 2022 and 2021, and the related consolidated statements of operations, of comprehensive income, of equity and of cash flows for each of the three years in the period ended December 31, 2022, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company’s internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022 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, 2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Basis for Opinions
The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Revenue Recognition - Determination of Total Estimated Contract Costs and Revenue Related to Estimated Change Orders and Claims for Contracts Recognized Over Time
As described in Note 4 to the consolidated financial statements, the Company recognizes certain revenue over time as it performs its obligations because there is a continuous transfer of control of the deliverable to the customer. Under unit-price contracts with more than an insignificant amount of partially completed units and fixed price contracts, the Company recognizes revenue as performance obligations are satisfied over time, with the percentage of completion generally measured as the percentage of costs incurred to total estimated costs for such performance obligation. During the year ended December 31, 2022, approximately 51.6% of the Company’s revenues recognized were associated with this revenue recognition method. Contract costs include all direct materials, labor and subcontract costs and indirect costs related to contract performance, such as indirect labor, supplies, tools, repairs and depreciation costs. Actual revenues and project costs can vary, sometimes substantially, from previous estimates due to changes in a variety of factors, including unforeseen or changed circumstances not included in management’s cost estimates or covered by the contracts. Changes in cost estimates on certain contracts may result in the issuance of change orders, which can be approved or unapproved by the customer, or the assertion of contract claims. Management determines the probability that costs associated with change orders and claims will be recovered based on, among other things, contractual entitlement, past practices with the customer, specific discussions or preliminary negotiations with the customer and verbal approvals by the customer. The Company recognizes amounts associated with change orders and claims as revenue if it is probable that the contract price will be adjusted and the amount of any such adjustment can be reasonably estimated. As of December 31, 2022, the Company had recognized revenues of $549.3 million related to change orders and claims included as contract price adjustments that were in the process of being negotiated in the normal course of business.
The principal considerations for our determination that performing procedures relating to revenue recognition for contracts recognized over time is a critical audit matter are (i) the significant judgment by management when determining the total estimated contract costs and revenue related to estimated change orders and claims and (ii) the high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating audit evidence relating to management’s estimate of the total estimated contract costs and revenue related to estimated change orders and claims.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the revenue recognition process, including controls related to the determination of total estimated contract costs and revenue related to estimated change orders and claims. These procedures also included, among others, for a sample of contracts, (i) testing management’s process for determining the total estimated contract costs, which included evaluating the contracts and other documents that support those estimates, and testing the underlying contract costs; (ii) evaluating management’s ability to reasonably estimate total contract costs by performing a comparison of the total estimated contract costs as compared with prior period estimates, including evaluating the timely identification of circumstances that may warrant a modification to the total estimated contract costs; (iii) testing management’s process for determining the revenue related to estimated change orders and claims, which included evaluating management’s assessment of whether it is probable that the contract price will be adjusted, and testing the amount of any such adjustment for the change order or claim; and (iv) evaluating management’s methodologies and the consistency of management’s methodologies over the lives of contracts.
/s/ PricewaterhouseCoopers LLP
Houston, Texas
February 23, 2023
We have served as the Company’s auditor since 2002.
QUANTA SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share information)
| December 31, | ||||||||||||||
| 2022 | 2021 | |||||||||||||
| ASSETS | ||||||||||||||
| Current Assets: | ||||||||||||||
| Cash and cash equivalents | $ | 428,505 | $ | 229,097 | ||||||||||
| Accounts receivable, net | 3,674,525 | 3,400,318 | ||||||||||||
| Contract assets | 1,080,206 | 803,453 | ||||||||||||
| Inventories | 103,265 | 84,659 | ||||||||||||
| Prepaid expenses and other current assets | 249,569 | 215,050 | ||||||||||||
| Total current assets | 5,536,070 | 4,732,577 | ||||||||||||
| Property and equipment, net | 2,030,464 | 1,919,697 | ||||||||||||
| Operating lease right-of-use assets | 229,691 | 240,605 | ||||||||||||
| Other assets, net | 622,736 | 632,244 | ||||||||||||
| Other intangible assets, net | 1,458,631 | 1,801,180 | ||||||||||||
| Goodwill | 3,586,745 | 3,528,886 | ||||||||||||
| Total assets | $ | 13,464,337 | $ | 12,855,189 | ||||||||||
| LIABILITIES AND EQUITY | ||||||||||||||
| Current Liabilities: | ||||||||||||||
| Current maturities of long-term debt and short-term debt | $ | 37,495 | $ | 29,166 | ||||||||||
| Current portion of operating lease liabilities | 74,052 | 78,251 | ||||||||||||
| Accounts payable and accrued expenses | 2,153,129 | 2,254,671 | ||||||||||||
| Contract liabilities | 1,141,518 | 802,872 | ||||||||||||
| Total current liabilities | 3,406,194 | 3,164,960 | ||||||||||||
| Long-term debt, net of current maturities | 3,692,432 | 3,724,474 | ||||||||||||
| Operating lease liabilities, net of current portion | 171,512 | 170,427 | ||||||||||||
| Deferred income taxes | 227,861 | 191,098 | ||||||||||||
| Insurance and other non-current liabilities | 567,519 | 487,309 | ||||||||||||
| Total liabilities | 8,065,518 | 7,738,268 | ||||||||||||
| Commitments and Contingencies | ||||||||||||||
| Equity: | ||||||||||||||
| Common stock, $0.00001 par value, 600,000,000 shares authorized, 170,638,525 and 168,546,513 shares issued, and 142,930,598 and 142,633,934 shares outstanding | 2 | 2 | ||||||||||||
| Additional paid-in capital | 2,718,988 | 2,615,410 | ||||||||||||
| Retained earnings | 4,163,212 | 3,714,843 | ||||||||||||
| Accumulated other comprehensive loss | (310,677) | (237,689) | ||||||||||||
| Treasury stock, 27,707,927 and 25,912,579 common shares | (1,188,061) | (980,265) | ||||||||||||
| Total stockholders’ equity | 5,383,464 | 5,112,301 | ||||||||||||
| Non-controlling interests | 15,355 | 4,620 | ||||||||||||
| Total equity | 5,398,819 | 5,116,921 | ||||||||||||
| Total liabilities and equity | $ | 13,464,337 | $ | 12,855,189 |
The accompanying notes are an integral part of these consolidated financial statements.
QUANTA SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share information)
| Year Ended December 31, | ||||||||||||||||||||
| 2022 | 2021 | 2020 | ||||||||||||||||||
| Revenues | $ | 17,073,903 | $ | 12,980,213 | $ | 11,202,672 | ||||||||||||||
| Cost of services | 14,544,748 | 11,026,954 | 9,541,825 | |||||||||||||||||
| Gross profit | 2,529,155 | 1,953,259 | 1,660,847 | |||||||||||||||||
| Equity in earnings of integral unconsolidated affiliates | 52,466 | 44,061 | 11,303 | |||||||||||||||||
| Selling, general and administrative expenses | (1,336,711) | (1,155,956) | (975,074) | |||||||||||||||||
| Amortization of intangible assets | (353,973) | (165,366) | (76,704) | |||||||||||||||||
| Asset impairment charges | (14,457) | (5,743) | (8,282) | |||||||||||||||||
| Change in fair value of contingent consideration liabilities | (4,422) | (6,734) | (719) | |||||||||||||||||
| Operating income | 872,058 | 663,521 | 611,371 | |||||||||||||||||
| Interest and other financing expenses | (124,363) | (68,899) | (45,013) | |||||||||||||||||
| Interest income | 2,606 | 3,194 | 2,449 | |||||||||||||||||
| Other (expense) income, net | (46,415) | 25,085 | 2,539 | |||||||||||||||||
| Income before income taxes | 703,886 | 622,901 | 571,346 | |||||||||||||||||
| Provision for income taxes | 192,243 | 130,918 | 119,387 | |||||||||||||||||
| Net income | 511,643 | 491,983 | 451,959 | |||||||||||||||||
| Less: Net income attributable to non-controlling interests | 20,454 | 6,027 | 6,363 | |||||||||||||||||
| Net income attributable to common stock | $ | 491,189 | $ | 485,956 | $ | 445,596 | ||||||||||||||
| Earnings per share attributable to common stock: | ||||||||||||||||||||
| Basic | $ | 3.42 | $ | 3.45 | $ | 3.15 | ||||||||||||||
| Diluted | $ | 3.32 | $ | 3.34 | $ | 3.07 | ||||||||||||||
| Shares used in computing earnings per share: | ||||||||||||||||||||
| Weighted average basic shares outstanding | 143,488 | 140,824 | 141,380 | |||||||||||||||||
| Weighted average diluted shares outstanding | 147,992 | 145,373 | 145,247 |
The accompanying notes are an integral part of these consolidated financial statements.
QUANTA SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
| Year Ended December 31, | ||||||||||||||||||||
| 2022 | 2021 | 2020 | ||||||||||||||||||
| Net income | $ | 511,643 | $ | 491,983 | $ | 451,959 | ||||||||||||||
| Other comprehensive (loss) income, net of taxes: | ||||||||||||||||||||
| Foreign currency translation adjustment | (72,632) | (5,877) | 11,439 | |||||||||||||||||
| Other (loss) income | (356) | 1,185 | (2,618) | |||||||||||||||||
| Other comprehensive (loss) income, net of taxes | (72,988) | (4,692) | 8,821 | |||||||||||||||||
| Comprehensive income | 438,655 | 487,291 | 460,780 | |||||||||||||||||
| Less: Comprehensive income attributable to non-controlling interests | 20,454 | 6,027 | 6,363 | |||||||||||||||||
| Total comprehensive income attributable to common stock | $ | 418,201 | $ | 481,264 | $ | 454,417 |
The accompanying notes are an integral part of these consolidated financial statements.
QUANTA SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
| Year Ended December 31, | ||||||||||||||||||||
| 2022 | 2021 | 2020 | ||||||||||||||||||
| Cash Flows from Operating Activities: | ||||||||||||||||||||
| Net income | $ | 511,643 | $ | 491,983 | $ | 451,959 | ||||||||||||||
| Adjustments to reconcile net income to net cash provided by operating activities — | ||||||||||||||||||||
| Depreciation | 290,647 | 255,529 | 225,256 | |||||||||||||||||
| Amortization of intangible assets | 353,973 | 165,366 | 76,704 | |||||||||||||||||
| Asset impairment charges | 14,457 | 5,743 | 8,282 | |||||||||||||||||
| Equity in (earnings) losses of unconsolidated affiliates, net of distributions | (19,238) | (28,682) | (1,309) | |||||||||||||||||
| Unrealized loss from mark-to-market adjustment on investment | 91,500 | — | — | |||||||||||||||||
| Gains on sales of investments | (32,572) | — | — | |||||||||||||||||
| Impairment of non-marketable equity security | — | — | 9,311 | |||||||||||||||||
| Amortization of discounts and deferred financing costs | 12,712 | 8,405 | 5,126 | |||||||||||||||||
| Gain on sale of property and equipment | (14,803) | (9,116) | (3,056) | |||||||||||||||||
| Increase in provision for credit losses | 350 | 34,890 | 3,656 | |||||||||||||||||
| Deferred income tax expense (benefit) | 42,053 | 26,071 | (60,016) | |||||||||||||||||
| Non-cash stock-based compensation | 105,600 | 88,259 | 91,641 | |||||||||||||||||
| Foreign currency gain | (654) | (5,110) | (5,159) | |||||||||||||||||
| Change in fair value of contingent consideration liabilities | 4,422 | 6,734 | 719 | |||||||||||||||||
| Payments for contingent consideration liabilities recorded in earnings | (63) | — | (14,506) | |||||||||||||||||
| Changes in assets and liabilities, net of non-cash transactions | (229,715) | (457,682) | 327,369 | |||||||||||||||||
| Net cash provided by operating activities | 1,130,312 | 582,390 | 1,115,977 | |||||||||||||||||
| Cash Flows from Investing Activities: | ||||||||||||||||||||
| Capital expenditures | (427,630) | (385,852) | (260,052) | |||||||||||||||||
| Proceeds from sale of property and equipment | 62,058 | 49,186 | 35,390 | |||||||||||||||||
| Proceeds from insurance settlements related to property and equipment | 2,065 | 535 | 542 | |||||||||||||||||
| Cash paid for acquisitions, net of cash, cash equivalents and restricted cash acquired | (195,087) | (2,451,703) | (292,573) | |||||||||||||||||
| Proceeds from disposition of businesses | — | — | 18,785 | |||||||||||||||||
| Investments in unconsolidated affiliates and other | (78,084) | (139,021) | (14,856) | |||||||||||||||||
| Proceeds from the sale or settlement of certain investments | 20,639 | 29,109 | 13,963 | |||||||||||||||||
| Cash paid for intangible assets | (1,152) | (867) | (522) | |||||||||||||||||
| Net cash used in investing activities | (617,191) | (2,898,613) | (499,323) | |||||||||||||||||
| Cash Flows from Financing Activities: | ||||||||||||||||||||
| Borrowings under credit facility and commercial paper program | 9,300,142 | 5,316,002 | 2,983,529 | |||||||||||||||||
| Payments under credit facility and commercial paper program | (9,323,507) | (4,265,478) | (4,187,645) | |||||||||||||||||
| Proceeds from notes offerings | — | 1,487,450 | 990,130 | |||||||||||||||||
| Payments on other long-term debt | (8,954) | (3,635) | (2,970) | |||||||||||||||||
| Net (repayments) borrowings of short-term debt | (15,657) | 11,391 | (4,846) | |||||||||||||||||
| Payments of financing costs | (452) | (12,568) | (11,089) | |||||||||||||||||
| Payments for contingent consideration liabilities recorded at acquisition date | (1,514) | (263) | (61,483) | |||||||||||||||||
| Distributions to non-controlling interests, net of contributions received | (9,719) | (6,357) | (5,404) | |||||||||||||||||
| Payments related to tax withholding for stock-based compensation | (82,590) | (64,956) | (25,447) | |||||||||||||||||
| Payments of dividends | (41,058) | (34,022) | (28,891) | |||||||||||||||||
| Repurchase of common stock | (127,762) | (66,687) | (247,249) | |||||||||||||||||
| Net cash (used in) provided by financing activities | (311,071) | 2,360,877 | (601,365) | |||||||||||||||||
| Effect of foreign exchange rate changes on cash, cash equivalents and restricted cash | (723) | 425 | 1,774 | |||||||||||||||||
| Net increase in cash, cash equivalents and restricted cash | 201,327 | 45,079 | 17,063 | |||||||||||||||||
| Cash, cash equivalents and restricted cash, beginning of year | 231,887 | 186,808 | 169,745 | |||||||||||||||||
| Cash, cash equivalents and restricted cash, end of year | $ | 433,214 | $ | 231,887 | $ | 186,808 |
The accompanying notes are an integral part of these consolidated financial statements.
QUANTA SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY
(In thousands, except share information)
| Accumulated | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common Stock | Exchangeable Shares | Additional | Other | Total | Non- | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Shares | Paid-In | Retained | Comprehensive | Treasury | Stockholders’ | Controlling | Total | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Outstanding | Amount | Outstanding | Amount | Capital | Earnings | Income (Loss) | Stock | Equity | Interests | Equity | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2019 | 142,324,318 | $ | 2 | 36,183 | $ | — | $ | 2,024,610 | $ | 2,854,271 | $ | (241,818) | $ | (586,773) | $ | 4,050,292 | $ | 3,539 | $ | 4,053,831 | |||||||||||||||||||||||||||||||||||||||||||||
| Credit loss cumulative effect adjustment | — | — | — | — | — | (3,841) | — | — | (3,841) | — | (3,841) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | — | — | 8,821 | — | 8,821 | — | 8,821 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Acquisitions | 1,338,746 | — | — | — | 57,289 | — | — | — | 57,289 | — | 57,289 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation activity | 1,280,489 | — | — | — | 88,127 | — | — | (21,095) | 67,032 | — | 67,032 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Exchange of exchangeable shares | 36,183 | — | (36,183) | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common stock repurchases | (6,679,545) | — | — | — | — | — | — | (249,949) | (249,949) | — | (249,949) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Dividends declared ($0.21 per share) | — | — | — | — | — | (30,543) | — | — | (30,543) | — | (30,543) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Distributions to non-controlling interests | — | — | — | — | — | — | — | — | — | (5,404) | (5,404) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other | — | — | — | — | — | (516) | — | — | (516) | 293 | (223) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | 445,596 | — | — | 445,596 | 6,363 | 451,959 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2020 | 138,300,191 | 2 | — | — | 2,170,026 | 3,264,967 | (232,997) | (857,817) | 4,344,181 | 4,791 | 4,348,972 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | — | — | (4,692) | — | (4,692) | — | (4,692) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Acquisitions | 3,514,048 | — | — | — | 362,344 | — | — | — | 362,344 | — | 362,344 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation activity | 1,540,259 | — | — | — | 83,040 | — | — | (58,460) | 24,580 | — | 24,580 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common stock repurchases | (720,564) | — | — | — | — | — | — | (63,988) | (63,988) | — | (63,988) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Dividends declared ($0.25 per share) | — | — | — | — | — | (36,080) | — | — | (36,080) | — | (36,080) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Distributions to non-controlling interests | — | — | — | — | — | — | — | — | — | (6,357) | (6,357) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other | — | — | — | — | — | — | — | — | — | 159 | 159 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | 485,956 | — | — | 485,956 | 6,027 | 491,983 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2021 | 142,633,934 | 2 | — | — | 2,615,410 | 3,714,843 | (237,689) | (980,265) | 5,112,301 | 4,620 | 5,116,921 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | — | — | (72,988) | — | (72,988) | — | (72,988) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation activity | 1,357,661 | — | — | — | 103,578 | — | — | (80,049) | 23,529 | — | 23,529 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common stock repurchases | (1,060,997) | — | — | — | — | — | — | (127,747) | (127,747) | — | (127,747) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Dividends declared ($0.29 per share) | — | — | — | — | — | (42,820) | — | — | (42,820) | — | (42,820) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Distributions to non-controlling interests | — | — | — | — | — | — | — | — | — | (9,946) | (9,946) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Contributions from non-controlling interests | — | — | — | — | — | — | — | — | — | 227 | 227 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | 491,189 | — | — | 491,189 | 20,454 | 511,643 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2022 | 142,930,598 | $ | 2 | — | $ | — | $ | 2,718,988 | $ | 4,163,212 | $ | (310,677) | $ | (1,188,061) | $ | 5,383,464 | $ | 15,355 | $ | 5,398,819 |
The accompanying notes are an integral part of these consolidated financial statements.
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TABLE OF CONTENTS
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**1.**DESCRIPTION OF BUSINESS:
Quanta Services, Inc. (together with its subsidiaries, Quanta) is a leading provider of comprehensive infrastructure solutions for the electric and gas utility, renewable energy, communications, pipeline and energy industries in the United States, Canada, Australia and select other international markets. We provide engineering, procurement, construction, upgrade and repair and maintenance services for infrastructure within each of these industries, including electric power transmission and distribution networks; substation facilities; wind and solar generation and transmission and battery storage facilities; communications and cable multi-system operator networks; gas utility systems; pipeline transmission systems and facilities; and downstream industrial facilities.
**2.**BASIS OF PRESENTATION AND 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 companies. 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 accounting policies. Unless the context requires otherwise, references to Quanta include Quanta Services, Inc. and its consolidated subsidiaries.
Quanta holds interests in various joint venture entities that provide infrastructure-related services under specific customer contracts, either directly or through subcontracting relationships, and other equity investments in partially owned entities that own and operate certain infrastructure assets, including investments entered into through the partnership structure Quanta formed with certain infrastructure investors. Quanta has determined that certain of these joint ventures are variable interest entities (VIE). If the entity is determined to be a VIE, then management determines if Quanta is the primary beneficiary of the entity and whether or not consolidation of the VIE is required. The primary beneficiary consolidating the VIE must normally have both (i) the power to direct the activities that most significantly affect the VIE’s economic performance and (ii) the obligation to absorb significant losses of, or the right to receive significant benefits from, the VIE. When Quanta is deemed to be the primary beneficiary, the VIE is consolidated and the equity interest in the VIE held by a third party is accounted for as a non-controlling interest. See Note 13 for additional information on non-controlling interests and Note 16 for additional information on joint venture liabilities.
Use of Estimates and Assumptions
The preparation of financial statements in conformity with 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 revenue recognition for construction contracts, including contractual change orders and claims; allowance for credit losses; valuation of inventory; useful lives of assets; fair value assumptions in analyzing goodwill, other intangibles and long-lived asset impairments; fair value assumptions in analyzing equity and other investment impairments; purchase price allocations; acquisition-related contingent consideration liabilities; multiemployer pension plan withdrawal liabilities; contingent liabilities associated with, among other things, legal proceedings and claims, parent guarantees and indemnity obligations; estimated insurance claims and recoveries; stock-based compensation; operating results of reportable segments; provision for income taxes; and uncertain tax positions.
Revenue Recognition
See Note 4 for Quanta’s accounting policy related to revenue recognition and related balance sheet accounts.
Cash and Cash Equivalents
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. Quanta’s cash equivalents are categorized as Level 1 assets, as all values are based on unadjusted quoted prices for identical assets in an active market.
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Inventories
Inventories consist primarily of parts and supplies held for use in the ordinary course of business, which are valued at the lower of cost or net realizable value. Cost is determined by using either the first-in, first-out (FIFO) method or the average costing method. Inventories also include certain job specific materials not yet installed, which are valued using the specific identification method.
Property and Equipment
Property and equipment are stated at cost, and depreciation is computed using the straight-line method, net of estimated salvage values, over the estimated useful lives of the assets. Leasehold improvements are capitalized and amortized over the lesser of the life of the lease or the estimated useful life of the asset.
Expenditures for repairs and maintenance are charged to expense when incurred. Expenditures for major renewals and betterments, which extend the useful lives of existing equipment, are capitalized and depreciated over the remaining useful lives of the assets. Upon retirement or disposition of property and equipment, the cost and related accumulated depreciation are removed from the accounts and any resulting gain or loss is reflected in selling, general and administrative expenses.
Management reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount may not be realizable. When an evaluation is required, the estimated future undiscounted cash flows associated with the asset group are compared to the asset group’s carrying amount to determine if an impairment is necessary. The effect of any impairment involves expensing the difference between the fair value of the asset group and its carrying amount in the period incurred.
Goodwill
Goodwill represents the excess of cost over the fair market value of net tangible and identifiable intangible assets of acquired businesses and is stated at cost. Quanta has recorded goodwill in connection with certain of its historical acquisitions of businesses. 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.
Goodwill is tested for impairment annually in the fourth quarter of the fiscal year, or more frequently if events or circumstances arise which indicate that the fair value of a reporting unit with goodwill is below its carrying amount. Quanta assesses qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. Qualitative factors assessed for each reporting unit include, among other things, deterioration in macroeconomic conditions; declining financial performance; deterioration in the operational environment; an expectation of selling or disposing of a portion of a reporting unit; a significant change in market, management, business strategy or business climate; a loss of a significant customer; increased competition; a sustained decrease in share price; or a decrease in Quanta’s market capitalization below book value.
If Quanta believes that, as a result of its qualitative assessment, it is more likely than not that the fair value of a reporting unit is less than its carrying amount, the quantitative impairment test is required. If the carrying amount of a reporting unit exceeds its fair value, an impairment loss is recorded to “Asset impairment charges” in the consolidated statements of operations.
Quanta generally determines the fair value of its reporting units using a weighted combination of the income approach (discounted cash flow method) and market multiple valuation techniques (market guideline transaction method and market guideline public company method).
Under the discounted cash flow method, Quanta determines fair value based on the estimated future cash flows for each reporting unit, discounted to present value using a risk-adjusted industry weighted average cost of capital, which reflects the overall level of inherent risk for each reporting unit and the rate of return an outside investor would expect to earn.
Under the market guideline transaction and market guideline public company methods, Quanta determines the estimated fair value for each of its reporting units by applying transaction multiples and public company multiples, respectively, to each reporting unit’s historical and projected results. The transaction multiples are based on observed purchase transactions for similar businesses adjusted for size, volatility and risk. The public company multiples are based on peer group multiples adjusted for size, volatility and risk. For the market guideline public company method, Quanta adds a reasonable control premium, which is estimated as the premium that would be appropriate to convert the reporting unit value to a controlling interest basis.
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Other Intangible Assets
Quanta’s identifiable intangible assets include customer relationships; backlog; trade names; non-compete agreements; patented rights, developed technology, process certifications and other; and curriculum, all of which are subject to amortization, as well as an engineering license, which is not subject to amortization.
Definite-lived intangible assets are amortized based upon the estimated consumption of their economic benefits, or on a straight-line basis if the pattern of economic benefit cannot otherwise be reliably estimated. Quanta evaluates identifiable intangible assets with the associated long-lived asset group for impairment whenever impairment indicators are present. If the carrying amount of an identifiable intangible asset exceeds its fair value, an impairment loss is recorded to “Asset impairment charges” in the consolidated statements of operations.
Leases
Leases with terms longer than 12 months are recorded on the consolidated balance sheets as lease assets and lease liabilities. If at inception of a contract a lease is identified, Quanta recognizes a lease asset and corresponding liability based on the present value of the future minimum lease payments over the lease term as of the commencement date. Lease assets also include any initial direct costs incurred less any lease incentives received.
Finance leases are leases that meet any of the following criteria: the lease transfers ownership of the underlying asset at the end of the lease term; the lessee is reasonably certain to exercise an option to purchase the underlying asset; the lease term is for the major part of the remaining economic life of the underlying asset; the present value of the sum of the lease payments and any additional residual value guarantee by the lessee equals or exceeds substantially all of the fair value of the underlying asset; or the underlying asset is of such a specialized nature that it is expected to have no alternative use to the lessor at the end of the lease term. A lease that does not meet any of these criteria is considered an operating lease. After the commencement date, lease cost for an operating lease is recognized over the remaining lease term on a straight-line basis, while lease cost for a finance lease is based on the depreciation of the lease asset and interest on the lease liability. Lease expense for leases with an initial term of 12 months or less is recognized on a straight-line basis over the lease term.
The terms of Quanta’s lease arrangements vary, and certain leases include one or more of the following: a renewal option, a cancellation option, a residual value guarantee, a purchase option or an escalation clause. An option to extend or terminate a lease is accounted for when assessing a lease term when it is reasonably certain that Quanta will exercise such option. Additionally, certain of Quanta’s real estate and equipment arrangements contain both lease and non-lease components (e.g., maintenance services). Quanta made a policy election that allows an entity to not separate lease components from their associated non-lease components under arrangements with both components. Accordingly, Quanta accounts for both lease and non-lease components of such arrangements under the lease accounting guidance.
Determinations with respect to lease term, discount rate, variable lease cost and future minimum lease payments require the use of judgment based on the facts and circumstances related to each lease. Quanta considers various factors, including economic incentives, penalties, and business need, to determine the likelihood that a renewal option will be exercised. Unless a renewal option is reasonably certain to be exercised, which is typically at Quanta’s sole discretion, the initial non-cancelable lease term is used. Quanta generally uses its incremental borrowing rates to determine the present value of future minimum lease payments.
Investments in Affiliates and Other
In the normal course of business, Quanta enters into various types of investment arrangements, each having unique terms and conditions. These investments may include equity interests held by Quanta in business entities, including general or limited partnerships, contractual joint ventures, or other forms of equity or profit participation. Quanta also enters into strategic partnerships with customers and infrastructure investors to provide fully integrated infrastructure solutions on certain projects, including planning and feasibility analyses, engineering, design, procurement, construction and project operation and maintenance. These projects include public-private partnerships and concessions, along with private infrastructure projects such as build, own, operate (and in some cases transfer) and build-to-suit arrangements. In cases where Quanta determines that it is not the primary beneficiary but has an undivided interest in the assets, liabilities, revenues and profits of an unincorporated VIE (e.g., a general partnership interest), such amounts are consolidated on a basis proportional to Quanta’s ownership interest in the unincorporated entity.
Equity Method Investments
Investments in affiliated entities in which Quanta does not have a controlling financial interest, but over which Quanta has the ability to exercise significant influence, usually because Quanta holds a voting interest of between 20% and 50% in the affiliated entity, are accounted for using the equity method. Under the equity method of accounting, investments are stated initially at cost and are adjusted for subsequent additional investments and Quanta’s proportionate share of profit or loss and
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distributions. Certain of Quanta’s equity method investments are equity interests in private equity funds. These underlying private equity funds are carried at fair value. Quanta’s profit or loss is determined by its share of the change in fair value.
Quanta’s equity method investments are reported in “Other assets, net” in the accompanying consolidated balance sheets. Quanta’s share of net income or losses of these investments is reported as “Equity in earnings of integral unconsolidated affiliates” within operating income when the investee is integral to the operations of Quanta, and is reported as “Other income (expense), net” when the investee is not considered integral to the business.
Quanta recognizes impairments on equity method investments if there are sufficient indicators that the fair value of the investment is less than its carrying value and considered other-than-temporary. Any impairment losses related to integral unconsolidated affiliates are included in “Equity in earnings of integral unconsolidated affiliates,” while any impairments related to non-integral unconsolidated affiliates are included in “Other (expense) income, net” in the accompanying consolidated statement of operations.
Marketable and Non-Marketable Equity Securities
Investments in entities over which Quanta does not have the ability to exercise significant influence are either considered marketable securities or non-marketable equity securities. The carrying value of Quanta’s marketable and non-marketable equity securities is reported in “Other assets, net” in the accompanying consolidated balance sheets.
Marketable equity securities are equity securities with a readily determinable fair value (RDFV) that are measured and recorded at fair value on a recurring basis with changes in fair value, whether realized or unrealized, recorded in “Other (expense) income, net” in the accompanying consolidated statement of operations. Since the RDFV of marketable equity securities is determined utilizing quoted market prices, the level of input used for these fair value measurements is the highest level (Level 1).
Non-marketable equity securities are equity securities without a RDFV that are measured and recorded using a measurement alternative that measures the securities at cost minus impairment, if any, plus or minus observable price changes in orderly transactions for an identical or similar investment in the same company. Non-marketable equity securities are measured on a nonrecurring basis and recorded at fair value only if an impairment or observable price adjustment is recognized in the reporting period. Quanta recognizes impairments on non-marketable equity securities if there are sufficient indicators that the fair value of the investment is less than its carrying value.
Changes in fair value and any impairments of non-marketable equity securities are reported in “Other (expense) income, net” in the accompanying consolidated statements of operations.
Income Taxes
Quanta follows the liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recorded based on future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that are expected to be in effect when the underlying assets or liabilities are recovered or settled.
Quanta regularly evaluates valuation allowances established for deferred tax assets for which future realization is uncertain, including in connection with changes in tax laws. The estimation of required valuation allowances includes estimates of future taxable income. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Quanta considers projected future taxable income and tax planning strategies in making this assessment. If actual future taxable income differs from these estimates, Quanta may not realize deferred tax assets to the extent estimated.
Quanta records reserves for income taxes related to certain tax positions when management considers it more likely than not that additional taxes may be due in excess of amounts reflected on income tax returns filed. When recording these reserves, Quanta assumes that taxing authorities have full knowledge of the position and all relevant facts. Quanta continually reviews exposure to additional tax obligations, and as further information is known or events occur, changes in tax reserves may be recorded. Quanta adjusts its tax contingencies accrual and income tax provision in the period in which matters are effectively settled with tax authorities at amounts different from Quanta’s established accrual, when the statute of limitations expires for the relevant taxing authority to examine the tax position or when more information becomes available. 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.
U.S. federal and state and foreign income tax laws and regulations are voluminous and often ambiguous. As such, Quanta is required to make many subjective assumptions and judgments regarding its tax positions that could materially affect amounts recognized in future consolidated balance sheets, statements of operations and statements of comprehensive income.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Deferred Financing Costs
Capitalized deferred financing costs related to Quanta’s senior credit facility (other than deferred financing costs related to the term loan, which are recorded along with deferred financing costs related to the senior notes in a contra account to long-term debt) are included in “Other assets, net” in the accompanying consolidated balance sheets and are amortized to “Interest and other financing expenses” on a straight-line basis over the terms of the respective agreements giving rise to the costs, which Quanta believes approximates the effective interest rate method.
Earnings Per Share
Basic and diluted earnings per share attributable to common stock are computed using the weighted average number of shares of common stock outstanding during the applicable period. Diluted earnings per share attributable to common stock is computed using the weighted average number of shares of common stock outstanding during the period adjusted for all potentially dilutive common stock equivalents, except in cases where the effect of the common stock equivalents would be antidilutive.
Insurance
Quanta is insured for, among other things, employer’s liability, workers’ compensation, auto liability, aviation and general liability claims. Quanta manages and maintains a portion of its casualty risk indirectly through its wholly-owned captive insurance company, which insures all claims up to the amount of the applicable deductible of its third-party insurance programs, as well as with respect to certain other amounts. In connection with Quanta’s casualty insurance programs, Quanta is required to issue letters of credit to secure its obligations. Quanta also maintains employee health care benefit plans for most employees not subject to collective bargaining agreements.
Losses under all of these insurance programs are accrued based upon Quanta’s estimate of the ultimate liability for claims reported and an estimate of claims incurred but not reported, with assistance from third-party actuaries. These insurance liabilities are difficult to assess and estimate due to unknown factors, including the severity of an injury, the extent of damage, the determination of Quanta’s liability in proportion to other parties and the number of incidents not reported. The accruals are based upon known facts and historical trends, and management believes such accruals are adequate.
Stock-Based Compensation
Restricted Stock Units to be Settled in Stock
Quanta recognizes compensation expense for restricted stock units (RSUs) to be settled in common stock based on the grant date fair value of the awards, which is the number of RSUs granted multiplied by the closing price of Quanta’s common stock on the date of grant, net of estimated forfeitures. The resulting compensation expense for time-based RSU awards is recognized on a straight-line basis over the requisite service period, which is generally the vesting period, and the resulting compensation expense for performance-based RSU awards is recognized using the graded vesting method over the requisite service period. The non-cash stock compensation expense related to RSUs to be settled in common stock is included in “Selling, general and administrative expenses.”
RSU awards to be settled in common stock are subject to forfeiture, restrictions on transfer and certain other conditions until vesting, which generally occurs in three equal annual installments following the date of grant or over a period of five to ten years following the date of grant. Holders of RSUs to be settled in common stock awarded under the Quanta Services, Inc. 2019 Omnibus Equity Incentive Plan (the 2019 Plan) are entitled to cash dividend equivalent payments in an amount equal to any cash dividend payable on account of the underlying Quanta common stock; however, payment of such amounts is not made until the RSUs vest, such that the dividend equivalent payments are subject to forfeiture.
Payments made by Quanta to satisfy employee tax withholding obligations associated with awards settled in common stock are classified as financing cash flows.
Performance Stock Units to be Settled in Stock
Quanta recognizes compensation expense for performance stock units (PSUs) to be settled in common stock based on the fair value of the awards, net of estimated forfeitures. The resulting compensation expense for PSU awards is recognized on a straight-line basis over the requisite service period, which is generally the vesting period. Non-cash stock compensation expense related to PSUs to be settled in common stock is included in “Selling, general and administrative expenses.”
PSUs provide for the issuance of shares of common stock upon vesting, which occurs following a three-year performance period based on achievement of performance metrics established by the Compensation Committee of Quanta’s Board of Directors, including financial and operational goals and Quanta’s total shareholder return as compared to a predetermined group of peer companies. The final number of shares of common stock issuable upon vesting of PSUs can range from 0% to 200% of
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
the number of PSUs initially granted, depending on the level of achievement. Holders of PSUs are entitled to cash dividend equivalent payments in an amount equal to any cash dividend payable on account of the underlying Quanta common stock that ultimately vests; however, payment of such amounts is not made until the PSUs vest, such that the dividend equivalent payments are subject to forfeiture.
The grant date fair value of the PSUs is determined as follows: (i) for the portion of the awards based on company financial and operational performance metrics, by multiplying the number of units granted by the closing price of Quanta’s common stock on the date of grant and (ii) for the portion of the awards based on relative total shareholder return compared to a defined peer group, by utilizing a Monte Carlo simulation valuation methodology. Quanta recognizes compensation expense for PSUs, net of estimated forfeitures, based on the forecasted achievement of the company financial and operational performance metrics and forecasted performance with respect to relative total shareholder return, multiplied by the fair value of the total number of shares of common stock that Quanta anticipates will be issued based on such achievement for the completed portion of the three-year period. The compensation expense related to outstanding PSUs can vary from period to period based on changes in forecasted achievement of established performance metrics, the total number of shares of common stock that Quanta anticipates will be issued upon vesting of such PSUs and changes in forfeiture estimates.
Payments made by Quanta to satisfy employee tax withholding obligations associated with awards settled in common stock are classified as financing cash flows.
Restricted Stock Units to be Settled in Cash
Certain RSUs granted by Quanta are settled solely in cash and are intended to provide plan participants with cash performance incentives that are substantially equivalent to the risks and rewards of stock ownership in Quanta. These cash-settled RSUs typically vest in three equal annual installments following the date of grant and are subject to forfeiture under certain conditions. For RSUs settled in cash, the holders receive for each vested RSU an amount in cash equal to the fair market value of one share of Quanta common stock on the settlement date, as specified in the applicable award agreement. Compensation expense associated with RSUs that are expected to or may settle in cash is recognized based on a remeasurement of the fair value of the award at the end of each reporting period and is included in “Selling, general and administrative expenses.” Holders of RSUs to be settled in cash are entitled to cash dividend equivalent payments in an amount equal to any cash dividend that would be payable on a like-number of shares of Quanta common stock. However, payment of such amounts is not made until the RSUs vest, such that the dividend equivalents are subject to forfeiture.
Functional Currency and Translation of Financial Statements
The U.S. dollar is the functional currency for the majority of Quanta’s operations, which are primarily located within the United States. The functional currency for Quanta’s foreign operations, which are primarily located in Canada and Australia, is typically the currency of the country where the foreign operating company is located and transacts the majority of its activities, including billings, financing, payroll and other expenditures. When preparing its consolidated financial statements, Quanta translates the financial statements of its foreign operating companies from their functional currency into U.S. dollars. Statements of operations, comprehensive income and cash flows are translated at average monthly rates, while balance sheets are translated at month-end exchange rates. The translation of the balance sheet results in translation gains or losses that are included as a separate component of equity under “Accumulated other comprehensive income (loss).” Gains and losses arising from transactions not denominated in functional currencies are included within “Other (expense) income, net” in the accompanying consolidated statements of operations.
Fair Value Measurements
Quanta categorizes assets and liabilities, measured at fair value, into one of three different levels depending on the observability of the inputs employed in the measurement. Level 1 inputs are quoted prices for identical instruments in active markets. Level 2 inputs are quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs or significant value-drivers are observable. Level 3 inputs are model-derived valuations in which one or more significant inputs or significant value-drivers are unobservable. Fair value measurements are classified according to the lowest level input or value-driver that is significant to the valuation.
Inputs, valuation techniques to estimate the fair value and levels are disclosed within the notes to these consolidated financial statements.
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**3.**NEW ACCOUNTING PRONOUNCEMENTS:
Recently Adopted Guidance
There were no new standards or Accounting Standard Updates (ASUs) adopted during the years ended December 31, 2022 and 2021 that had a significant impact on Quanta’s consolidated financial statements.
New Accounting Pronouncement Not Yet Adopted
In October 2021, the Financial Accounting Standards Board (FASB) issued an update that requires an entity to recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with FASB ASC 606 (Revenue from Contracts with Customers). At the acquisition date, an acquirer should account for the related contract revenue in accordance with FASB ASC 606. This update is effective for interim and annual periods beginning after December 15, 2022, with amendments generally applied prospectively. Quanta adopted this update effective January 1, 2023, and it has not had a material impact on Quanta’s consolidated financial statements.
In June 2022, the FASB issued an update that clarifies the guidance in FASB ASC 820 (Fair Value Measurement) for equity securities subject to contractual sale restrictions. The update prohibits entities from taking into account contractual restrictions on the sale of equity securities when estimating fair value and introduces required disclosures for such transactions. This update is effective for interim and annual periods after December 15, 2023. Early adoption is permitted. This guidance will increase the fair market value of the consideration paid in equity securities in a business combination, and therefore it may increase the amount allocated to goodwill. Quanta will adopt this update by January 1, 2024, and it is not expected to have a material impact on Quanta’s consolidated financial statements.
4. REVENUE RECOGNITION AND RELATED BALANCE SHEET ACCOUNTS:
Contracts
Quanta’s services include the design, new construction, upgrade and repair and maintenance of infrastructure primarily in the utility, renewable energy, communications and pipeline and energy industries. These services are generally provided pursuant to master service agreements (MSAs), repair and maintenance contracts, and fixed price and non-fixed price construction contracts. These contracts are classified into three categories based on the methods by which transaction prices are determined and revenue is recognized: unit-price contracts, cost-plus contracts and fixed price contracts. Transaction prices for unit-price contracts are determined on a per unit basis, transaction prices for cost-plus contracts are determined by applying a profit margin to costs incurred on the contracts and transaction prices for fixed price contracts are determined on a lump-sum basis. All of Quanta’s revenues are recognized from contracts with its customers. In addition to the considerations described below, revenue is not recognized unless collectability under the contract is considered probable, the contract has commercial substance and the contract has been approved. Additionally, the contract must contain payment terms, as well as the rights and commitments of both parties.
Performance Obligations
A performance obligation is a promise in a contract with a customer to transfer a distinct good or service. Most of Quanta’s contracts are considered to have a single performance obligation whereby Quanta is required to integrate complex activities and equipment into a deliverable for a customer. For contracts with multiple performance obligations, Quanta allocates a portion of the total transaction price to each performance obligation using its best estimate of the standalone selling price of the distinct good or service associated with each performance obligation. Standalone selling price is estimated using the expected costs plus a margin.
As of December 31, 2022 and 2021, the aggregate transaction price allocated to unsatisfied or partially satisfied performance obligations was approximately $8.80 billion and $5.90 billion, with 72.1% and 81.8% expected to be recognized in the subsequent twelve months. These amounts represent management’s estimates of the consolidated revenues that are expected to be realized from the remaining portion of firm orders under fixed price contracts not yet completed or for which work had not yet begun as of such dates. For purposes of calculating remaining performance obligations, Quanta includes all estimated revenues attributable to consolidated joint ventures and VIEs, revenues from funded and unfunded portions of government contracts to the extent they are reasonably expected to be realized and revenues from change orders and claims to the extent management believes additional contract revenues will be earned and are deemed probable of collection. Excluded from remaining performance obligations are potential orders under MSAs and non-fixed price contracts expected to be completed within one year.
Recognition of Revenue Upon Satisfaction of Performance Obligations
A transaction price is determined for each contract, and that amount is allocated to each performance obligation within the
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contract and recognized as revenue when, or as, the performance obligation is satisfied. Quanta recognizes certain revenue over time as it performs its obligations because there is a continuous transfer of control of the deliverable to the customer. Under unit-price contracts with an insignificant amount of partially completed units, Quanta recognizes revenue as units are completed based on contractual pricing amounts. Under unit-price contracts with more than an insignificant amount of partially completed units and fixed price contracts, Quanta recognizes revenues as performance obligations are satisfied over time, with the percentage of completion generally measured as the percentage of costs incurred to total estimated costs for such performance obligation. Under cost-plus contracts, Quanta recognizes revenue on an input basis, as labor hours are incurred, materials are utilized and services are performed.
Under contracts where Quanta has a right to consideration in an amount that directly corresponds to the value of completed performance, Quanta recognizes revenue in such amount and does not include such performance as a remaining performance obligation. Also, contract consideration is not adjusted for a significant financing component if payment is expected to be collected less than one year from when the services are performed.
Contract costs include all direct materials, labor and subcontract costs and indirect costs related to contract performance, such as indirect labor, supplies, tools, repairs and depreciation costs. The majority of the materials associated with Quanta’s work are owner-furnished, and therefore not included in contract revenues and costs. Additionally, Quanta may incur incremental costs to obtain certain contracts, such as selling and marketing costs, bid and proposal costs, sales commissions, and legal fees or initial set-up or mobilization costs, certain of which can be capitalized. There were no significant capitalized costs during the years ended December 31, 2022, 2021 and 2020.
Quanta provides limited warranties to customers for work performed under its contracts that typically extend for a limited duration following substantial completion of its work on a project. Such warranties are not sold separately and do not provide customers with a service other than the assurance of compliance with agreed-upon specifications. Accordingly, these types of warranties are not considered to be separate performance obligations, but any costs incurred by Quanta in connection with these warranties are included in contract costs. During the years ended December 31, 2022, 2021 and 2020, Quanta has not been subject to a significant number of material warranty claims in connection with its services.
Contract Estimates and Changes in Estimates
Actual revenues and project costs can vary, sometimes substantially, from previous estimates due to changes in a variety of factors, including unforeseen or changed circumstances not included in Quanta’s cost estimates or covered by its contracts. Some of the factors that can result in positive changes in estimates on projects include successful execution through project risks, reduction of estimated project costs or increases of estimated revenues. Some of the factors that can result in negative changes in estimates include concealed or unknown site conditions; changes to or disputes with customers regarding the scope of services; changes in estimates related to the length of time to complete a performance obligation; changes or delays with respect to permitting and regulatory requirements and materials; changes in the cost of equipment, commodities, materials or skilled labor; unanticipated costs or claims due to delays or failure to perform by customers or third parties; customer failure to provide required materials or equipment; errors in engineering, specifications or designs; project modifications; adverse weather conditions, natural disasters, and other emergencies (including the COVID-19 pandemic); and performance and quality issues causing delay (including payment of liquidated damages) or requiring rework or replacement. These factors, along with other risks inherent in performing services under fixed price contracts, are routinely evaluated by management. Any changes in estimates could result in changes to profitability or losses associated with the related performance obligations. For example, estimated costs for a performance obligation may increase from an original estimate, and contractual provisions may not allow for adequate compensation or reimbursement for such additional costs. Changes in estimated revenues, costs and profit are recorded in the period they are determined to be probable and can be reasonably estimated. Contract losses are recognized in full when they are determined to be probable and can be reasonably estimated.
Additionally, changes in cost estimates on certain contracts may result in the issuance of change orders, which can be approved or unapproved by the customer, or the assertion of contract claims. Quanta determines the probability that costs associated with change orders and claims will be recovered based on, among other things, contractual entitlement, past practices with the customer, specific discussions or preliminary negotiations with the customer and verbal approvals by the customer. Quanta recognizes amounts associated with change orders and claims as revenue if it is probable that the contract price will be adjusted and the amount of any such adjustment can be reasonably estimated. Most of Quanta’s change orders are for services that are not distinct from an existing contract and are accounted for as part of an existing contract on a cumulative catch-up basis. Quanta accounts for a change order as a separate contract if the additional goods or services are distinct from and increase the scope of the contract, and the price of the contract increases by an amount commensurate to Quanta’s standalone selling price for the additional goods or services.
As of December 31, 2022 and 2021, Quanta had recognized revenues of $549.3 million and $367.8 million related to change orders and claims included as contract price adjustments primarily in “Contract assets” in the accompanying consolidated balance sheets. These change orders and claims were in the process of being negotiated in the normal course of
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business and represent management’s estimates of additional contract revenues that have been earned and are probable of collection.
The largest component of the revenues recognized related to change orders and claims as of December 31, 2022 and of the increase relative to December 31, 2021 is associated with a large renewable transmission project in Canada, on which decreased productivity and additional costs arose from delays, administrative requirements and labor issues due to the COVID-19 pandemic in 2021 and the first and second quarters of 2022, including incremental governmental requirements and worksite restrictions. Additionally a wildfire in the region and the remote location of the project exacerbated the operational challenges related to labor force and project efficiency. Due to these challenges, Quanta and the customer agreed on a revised timeline and plan for the project, which requires an additional winter season of work through the spring of 2024. The largest component of change orders and claims outstanding as of December 31, 2021 related primarily to an electric infrastructure project in Canada that has been completed in 2022. Quanta collected the majority of the amounts associated with the aforementioned change orders and claims from the electric infrastructure project during 2022.
Variable consideration amounts, including performance incentives, early pay discounts and penalties, may also cause changes in contract estimates. The amount of variable consideration is estimated based on the most likely amount that is deemed probable of realization. Contract consideration is adjusted for variable consideration when it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur once the uncertainty related to the variable consideration is resolved.
Changes in estimates can result in the recognition of revenue in a current period for performance obligations that were satisfied or partially satisfied in prior periods or the reversal of previously recognized revenue if the currently estimated revenue is less than the previous estimate. The impact of a change in contract estimate is measured as the difference between the revenue or gross profit recognized in the prior period as compared to the revenue or gross profit which would have been recognized had the revised estimate been used as the basis of recognition in the prior period. Changes in estimates can also result in contract losses, which are recognized in full when they are determined to be probable and can be reasonably estimated.
Revenues were positively impacted by 0.7%, 1.0% and 0.2% during the years ended December 31, 2022, 2021 and 2020 as a result of changes in estimates associated with performance obligations on fixed price contracts partially satisfied prior to December 31, 2021, 2020 and 2019.
Operating results for the year ended December 31, 2022 were impacted by less than 5% of gross profit as a result of aggregate changes in contract estimates related to projects that were in progress as of the corresponding prior year end. There were no material changes in estimates on any individual project.
Operating results for the year ended December 31, 2021, were favorably impacted by $111.5 million or 5.7% of gross profit as a result of aggregate changes in contract estimates related to projects that were in progress as of the year ended December 31, 2020. The net favorable impacts resulted from net positive changes in estimates across a large number of projects, primarily as a result of favorable performance and successful mitigation of risks and contingencies as the projects progressed to completion.
Operating results for the year ended December 31, 2020 were impacted by less than 5% as a result of aggregate changes in contract estimates related to projects that were in progress as of the corresponding prior year end. However, certain individual projects were materially impacted by changes to estimated contract revenues and/or project costs during this period. During the year ended December 31, 2020, revenues and gross profit were favorably impacted by $20.8 million as a result of successful execution through project risks and close-out activities on a large transmission project in the United States. Revenues and gross profit were also favorably impacted as a result of successful execution through project risks and close-out activities on certain larger pipeline projects in the United States. The favorable impact related to these larger pipeline projects was offset by increased costs on two larger pipeline projects in Canada that experienced severe weather conditions during the year ended December 31, 2020, both of which were substantially completed as of December 31, 2020. With respect to all of these large pipeline projects, the aggregate net negative impact on gross profit related to work performed in prior periods was $10.0 million during the year ended December 31, 2020.
Additionally, during the year ended December 31, 2020, Quanta was in the process of exiting its Latin American operations. These operations had been adversely impacted by the COVID-19 pandemic, and as a result Quanta accelerated various contract terminations and other activities in order to expedite cessation of operations in the region, which resulted in changes in estimates on several projects and negatively impacted gross profit related to work performed in prior periods by $35.5 million. As of December 31, 2020, substantially all of the projects in Latin America that were active at the beginning of 2020 had been completed.
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Revenues by Category
The following tables present Quanta’s revenue disaggregated by contract type and by geographic location, as determined by the job location (in thousands):
| Year Ended December 31, | ||||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | 2020 | ||||||||||||||||||||||||||||||||||||
| By contract type: | ||||||||||||||||||||||||||||||||||||||
| Fixed price contracts | $ | 7,282,537 | 42.7 | % | $ | 4,849,038 | 37.4 | % | $ | 4,380,539 | 39.1 | % | ||||||||||||||||||||||||||
| Unit-price contracts | 5,927,335 | 34.7 | % | 5,029,100 | 38.7 | % | 4,172,363 | 37.2 | % | |||||||||||||||||||||||||||||
| Cost-plus contracts | 3,864,031 | 22.6 | % | 3,102,075 | 23.9 | % | 2,649,770 | 23.7 | % | |||||||||||||||||||||||||||||
| Total revenues | $ | 17,073,903 | 100.0 | % | $ | 12,980,213 | 100.0 | % | $ | 11,202,672 | 100.0 | % |
| Year Ended December 31, | ||||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | 2020 | ||||||||||||||||||||||||||||||||||||
| By primary geographic location: | ||||||||||||||||||||||||||||||||||||||
| United States | $ | 14,390,237 | 84.3 | % | $ | 11,068,493 | 85.3 | % | $ | 9,618,951 | 85.8 | % | ||||||||||||||||||||||||||
| Canada | 2,020,853 | 11.8 | % | 1,557,117 | 12.0 | % | 1,252,365 | 11.2 | % | |||||||||||||||||||||||||||||
| Australia | 428,321 | 2.5 | % | 221,038 | 1.7 | % | 200,664 | 1.8 | % | |||||||||||||||||||||||||||||
| Others | 234,492 | 1.4 | % | 133,565 | 1.0 | % | 130,692 | 1.2 | % | |||||||||||||||||||||||||||||
| Total revenues | $ | 17,073,903 | 100.0 | % | $ | 12,980,213 | 100.0 | % | $ | 11,202,672 | 100.0 | % |
As described above, under fixed price contracts, as well as unit-price contracts with more than an insignificant amount of partially completed units, revenue is recognized as performance obligations are satisfied over time, with the percentage completion generally measured as the percentage of costs incurred to total estimated costs for such performance obligation. Approximately 51.6%, 45.9% and 47.9% of Quanta’s revenues recognized during the years ended December 31, 2022, 2021 and 2020 were associated with this revenue recognition method.
Contract Assets and Liabilities
With respect to Quanta’s contracts, interim payments are typically received as work progresses in accordance with agreed-upon contractual terms, either at periodic intervals or upon achievement of contractual milestones. As a result, under fixed price contracts and unit-price contracts with more than an insignificant amount of partially completed units, the timing of revenue recognition and contract billings results in contract assets and contract liabilities. Contract assets represent revenues recognized in excess of amounts billed and are current assets that are transferred to accounts receivable when billed or the billing rights become unconditional. Contract assets are not considered a significant financing component as they are intended to protect the customer in the event Quanta does not perform on its obligations under the contract.
Conversely, contract liabilities represent billings in excess of revenues. These arise under certain contracts that allow for upfront payments from the customer or contain contractual billing milestones, which result in billings that exceed the amount of revenues recognized for certain periods. Contract liabilities are current liabilities and are not considered to have a significant financing component, as they are used to meet working capital requirements that are generally higher in the early stages of a contract and are intended to protect Quanta from the other party failing to meet its obligations under the contract. Contract assets and liabilities are recorded on a performance obligation basis at the end of each reporting period.
Contract assets and liabilities consisted of the following (in thousands):
| December 31, 2022 | December 31, 2021 | December 31, 2020 | ||||||||||||||||||
| Contract assets | $ | 1,080,206 | $ | 803,453 | $ | 453,832 | ||||||||||||||
| Contract liabilities | $ | 1,141,518 | $ | 802,872 | $ | 528,864 |
As referenced previously, contract assets and liabilities fluctuate period to period based on various factors, including, among others, changes in the number and size of projects in progress at period end; variability in billing and payment terms, such as up-front or advance billings, interim or milestone billings, or deferred billings; and unapproved change orders and contract claims recognized as revenues. The increase in contract assets from December 31, 2021 to December 31, 2022 was primarily due to unapproved change orders and claims related to the large renewable transmission project in Canada described above and increased working capital requirements, including the timing of billings. The increase in contract assets from
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December 31, 2020 to December 31, 2021 was primarily due to increased working capital requirements related to progress and recognition of certain change orders and claims on the same two large transmission projects in Canada discussed above, as well as the timing of certain project billings. The increase in contract liabilities from December 31, 2021 to December 31, 2022 was primarily due to higher billings on a renewable transmission project resulting from project acceleration by the customer and on several solar and wind projects after receipt of full notices to proceed from the customers. The increase in contract liabilities from December 31, 2020 to December 31, 2021 was primarily due to the acquisition of Blattner Holding Company and its operating subsidiaries (collectively, Blattner), which had $227.0 million of contract liabilities as of the date of acquisition.
During the years ended December 31, 2022, 2021 and 2020, Quanta recognized revenue of approximately $695.1 million, $433.3 million and $491.5 million related to contract liabilities outstanding as of the end of the prior year.
Accounts Receivable, Allowance for Credit Losses and Concentrations of Credit Risk
Quanta determines its allowance for credit losses based on an estimate of expected credit losses for financial instruments, primarily accounts receivable and contract assets. The assessment of the allowance for credit losses involves certain judgments and estimates. Management estimates the allowance balance using relevant available information from internal and external sources relating to past events, current conditions and reasonable and supportable forecasts. Expected credit losses are estimated by evaluating trends in historical write-off experience and applying historical loss ratios to pools of financial assets with similar risk characteristics. Quanta has determined that it has one pool for the purpose of calculating its historical credit loss experience.
Quanta’s historical loss ratio and its determination of its risk pool, which are used to calculate expected credit losses, may be adjusted for changes in customer credit concentrations within its portfolio of financial assets, its customers’ ability to pay, and other considerations, such as economic and market changes, changes to regulatory or technological environments affecting customers and the consistency between current and forecasted economic conditions and historical economic conditions used to derive historical loss ratios. At the end of each quarter, management reassesses these and other relevant factors, including the impact of uncertainty and challenges in the overall economy and in Quanta’s industries and markets, which currently include inflationary pressure, supply chain and other logistical challenges and increased interest rates.
Additional allowance for credit losses is established for financial asset balances with specific customers where collectability has been determined to be improbable based on customer specific facts and circumstances. Quanta considers accounts receivable delinquent after 30 days but does not generally consider such amounts delinquent in its credit loss analysis unless the accounts receivable are at least 120 days past due, unless there are specific considerations. In addition, management monitors the credit quality of its receivables by, among other things, obtaining credit ratings of significant customers, assessing economic and market conditions and evaluating material changes to a customer’s business, cash flows and financial condition. Should anticipated recoveries relating to receivables fail to materialize, including anticipated recoveries relating to bankruptcies or other workout situations, Quanta could experience reduced cash flows and losses in excess of current allowances provided.
Accounts receivable are written-off against the allowance for credit losses if deemed uncollectible.
Activity in Quanta’s allowance for credit losses consisted of the following (in thousands):
| Year Ended December 31, | ||||||||||||||||||||
| 2022 | 2021 | 2020 | ||||||||||||||||||
| Balance at beginning of year | $ | 49,749 | $ | 16,546 | $ | 9,398 | ||||||||||||||
| Cumulative effect of adoption of new credit loss standard | — | — | 5,067 | |||||||||||||||||
| Increase in provision for credit losses | 350 | 34,890 | 3,656 | |||||||||||||||||
| Write-offs charged against the allowance net of recoveries of amounts previously written off | (34,455) | (1,687) | (1,575) | |||||||||||||||||
| Balance at end of year | $ | 15,644 | $ | 49,749 | $ | 16,546 |
Provision for credit losses is included in “Selling, general and administrative expenses” in the consolidated statements of operations. During the year ended December 31, 2022, Quanta determined that $31.7 million of receivables that were fully reserved in the year ended December 31, 2021 were uncollectible, and as such wrote off the receivables against their related allowances. The receivables were from Limetree Bay Refining, LLC, which filed for bankruptcy in July 2021, and its affiliate, customers within Quanta’s Underground Utility and Infrastructure Solutions segment. Provisions for such receivables were recognized in the year ended December 31, 2021.
Quanta is subject to concentrations of credit risk related primarily to its receivable position with customers, which includes amounts related to billed and unbilled accounts receivable and contract assets for services Quanta has performed for customers. Quanta grants credit under normal payment terms, generally without collateral. One customer within the Renewable
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Energy Infrastructure Solutions segment represented 13% and 11% of Quanta’s consolidated receivable position as of December 31, 2022 and 2021. Another customer, primarily within the Electric Power Infrastructure Solutions and Renewable Energy Infrastructure Solutions segments, also represented 11% of Quanta’s consolidated receivable position as of December 31, 2021. No customer represented 10% or more of Quanta’s consolidated revenues for the years ended December 31, 2022, 2021 or 2020.
Certain contracts allow customers to withhold a small percentage of billings pursuant to retainage provisions, and such amounts are generally due upon completion of the contract and acceptance of the project by the customer. Based on Quanta’s experience in recent years, the majority of these retainage balances are expected to be collected within one year. Retainage balances with expected settlement dates within one year of December 31, 2022 and 2021 were $397.6 million and $406.7 million, which are included in “Accounts receivable.” Retainage balances as of December 31, 2022 and 2021 with expected settlement dates beyond one year were $136.2 million and $93.9 million and are included in “Other assets, net.”
Quanta recognizes unbilled receivables for non-fixed price contracts within “Accounts receivable” in certain circumstances, such as when revenues have been earned and recorded but the amount cannot be billed under the terms of the contract until a later date or when amounts arise from routine lags in billing. These balances do not include revenues recognized for work performed under fixed-price contracts and unit-price contracts with more than an insignificant amount of partially completed units, as these amounts are recorded as “Contract assets.” As of December 31, 2022, 2021 and 2020, unbilled receivables included in “Accounts receivable” were $823.9 million, $679.0 million and $472.3 million. The increases in unbilled receivables were primarily due to significant increases in work and certain delays in billing related to certain large customers. Quanta also recognizes unearned revenues for non-fixed price contracts when cash is received prior to recognizing revenues for the related performance obligation. Unearned revenues, which are included in “Accounts payable and accrued expenses,” were $59.6 million, $51.8 million and $53.6 million as of December 31, 2022, 2021 and 2020.
5. SEGMENT INFORMATION:
Quanta reports its results under three reportable segments: Electric Power Infrastructure Solutions, Renewable Energy Infrastructure Solutions and Underground Utility and Infrastructure Solutions.
Electric Power Infrastructure Solutions. Quanta’s Electric Power Infrastructure Solutions segment provides comprehensive services for the electric power and communications markets. Services include, but are not limited to, the design, procurement, new construction, upgrade and repair and maintenance services for electric power transmission and distribution infrastructure, both overhead and underground, and substation facilities, along with other engineering and technical services, including services that support the implementation of upgrades by utilities to modernize and harden the electric power grid in order to ensure its safety and enhance reliability and to accommodate increased residential and commercial use of electric vehicles. In addition, this segment provides emergency restoration services, including the repair of infrastructure damaged by fire and inclement weather and the installation of “smart grid” technologies on electric power networks. This segment also provides comprehensive design and construction solutions to wireline and wireless communications companies, cable multi-system operators and other customers within the communications industry, as well as other related services.
Renewable Energy Infrastructure Solutions. Quanta’s Renewable Energy Infrastructure Solutions segment provides comprehensive infrastructure solutions to customers that are involved in the renewable energy industry. Services include, but are not limited to, engineering, procurement, new construction, repowering and repair and maintenance services for renewable generation facilities, such as utility-scale wind, solar and hydropower generation facilities and battery storage facilities, and engineering and construction services for transmission and other electrical infrastructure needed to interconnect and transmit electricity from renewable energy generation and battery storage facilities.
Underground Utility and Infrastructure Solutions. Quanta’s Underground Utility and Infrastructure Solutions segment provides comprehensive infrastructure solutions to customers involved in the transportation, distribution, storage, development and processing of natural gas, oil and other products. Services include, but are not limited to design, engineering, procurement, new construction, upgrade and repair and maintenance services for natural gas systems for gas utility customers; and pipeline protection, integrity testing, rehabilitation and replacement services. Additionally, Quanta serves the midstream and downstream industrial energy markets through catalyst replacement services, high-pressure and critical-path turnaround services, instrumentation and electrical services, piping, fabrication and storage tank services.
Corporate and Non-allocated Costs include corporate facility costs; non-allocated corporate salaries, benefits and incentive compensation; acquisition and integration costs; non-cash stock-based compensation; amortization related to intangible assets; asset impairment related to goodwill and intangible assets; and change in fair value of contingent consideration liabilities.
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Quanta’s segment results are derived from the types of services provided across its operating companies in each of its end user markets. Quanta’s entrepreneurial business model allows multiple operating companies to serve the same or similar customers and to provide a range of services across end user markets. Reportable segment information, including revenues and operating income by type of work, is gathered from each operating company. Classification of operating company revenues by type of work for segment reporting purposes can require judgment on the part of management. Quanta’s operating companies may perform joint projects for customers in multiple industries, deliver multiple types of services under a single customer contract or provide service offerings to various industries. For example, Quanta performs joint trenching projects to install distribution lines for electric power and natural gas customers.
In addition, integrated operations and common administrative support for Quanta’s operating companies require that certain allocations be made to determine segment profitability, including allocations of corporate shared and indirect operating costs as well as general and administrative costs.
The following table sets forth segment revenues and segment operating income (loss) for the years ended December 31, 2022, 2021 and 2020. The following table shows dollars in thousands:
| Year Ended December 31, | ||||||||||||||||||||
| 2022 | 2021 | 2020 | ||||||||||||||||||
| Revenues: | ||||||||||||||||||||
| Electric Power Infrastructure Solutions | $ | 8,940,276 | $ | 7,624,240 | $ | 6,468,192 | ||||||||||||||
| Renewable Energy Infrastructure Solutions | 3,778,560 | 1,825,259 | 1,305,151 | |||||||||||||||||
| Underground Utility and Infrastructure Solutions | 4,355,067 | 3,530,714 | 3,429,329 | |||||||||||||||||
| Consolidated revenues | $ | 17,073,903 | $ | 12,980,213 | $ | 11,202,672 | ||||||||||||||
| Operating income (loss): | ||||||||||||||||||||
| Electric Power Infrastructure Solutions (1)(2) | $ | 958,798 | $ | 865,409 | $ | 648,405 | ||||||||||||||
| Renewable Energy Infrastructure Solutions (3) | 304,308 | 181,908 | 177,920 | |||||||||||||||||
| Underground Utility and Infrastructure Solutions | 317,543 | 150,147 | 170,074 | |||||||||||||||||
| Corporate and Non-Allocated Costs (4) | (708,591) | (533,943) | (385,028) | |||||||||||||||||
| Consolidated operating income | $ | 872,058 | $ | 663,521 | $ | 611,371 |
(1) Includes $74.0 million of operating losses related to Latin American operations for the year ended December 31, 2020. See Legal Proceedings — Peru Project Dispute in Note 16 for additional information on this matter. As of December 31, 2020, Quanta had substantially completed the exit of its operations in Latin America.
(2) Includes equity in earnings of integral unconsolidated affiliates of $52.5 million, $44.1 million and $11.3 million for the years ended December 31, 2022, 2021 and 2020, primarily related to Quanta’s equity interest in LUMA.
(3) Additionally, Quanta recorded $11.7 million of asset impairment charges related to a software implementation project at an acquired company, which commenced prior to Quanta’s acquisition and was discontinued in the fourth quarter of 2022. The fair value of this software was zero at December 31, 2022.
(4) Includes amortization expense of $354.0 million, $165.4 million and $76.7 million and non-cash stock-based compensation of $105.6 million, $88.3 million and $91.6 million for the years ended December 31, 2022, 2021 and 2020.
Separate measures of Quanta’s assets and cash flows by reportable segment, including capital expenditures, are not produced or utilized by management to evaluate segment performance. Quanta’s fixed assets, which are primarily held at the operating company level, include operating machinery, equipment and vehicles, office equipment, buildings and leasehold improvements, and are generally used on an interchangeable basis across its reportable segments. As such, for reporting
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purposes, total depreciation expense is allocated each quarter among Quanta’s reportable segments based on the ratio of each reportable segment’s revenue contribution to consolidated revenues. The following table shows dollars in thousands:
| Year Ended December 31, | ||||||||||||||||||||
| 2022 | 2021 | 2020 | ||||||||||||||||||
| Depreciation: | ||||||||||||||||||||
| Electric Power Infrastructure Solutions | $ | 149,151 | $ | 141,093 | $ | 112,663 | ||||||||||||||
| Renewable Energy Infrastructure Solutions | 40,535 | 14,020 | 9,185 | |||||||||||||||||
| Underground Utility and Infrastructure Solutions | 83,117 | 83,720 | 85,981 | |||||||||||||||||
| Corporate and Non-Allocated Costs | 17,844 | 16,696 | 17,427 | |||||||||||||||||
| Consolidated depreciation | $ | 290,647 | $ | 255,529 | $ | 225,256 |
Foreign Operations
During 2022, 2021, and 2020, Quanta derived $2.68 billion, $1.91 billion and $1.58 billion of its revenues from foreign operations. Of Quanta’s foreign revenues, 75%, 81% and 79% were earned in Canada during the years ended December 31, 2022, 2021 and 2020. In addition, Quanta held property and equipment, net of $298.0 million and $338.1 million in foreign countries, primarily Canada, as of December 31, 2022 and 2021.
6. ACQUISITIONS:
The results of operations of acquired businesses have been included in Quanta’s consolidated financial statements since their respective acquisition dates.
In July 2022, Quanta acquired a business located in the United States that provides construction contracting services to utilities, specializing in trenching and underground pipeline and electrical conduit installation. Consideration for this acquisition included $22.0 million paid or payable in cash (subject to certain adjustments). Additionally, the former owners of this business are eligible to receive a potential payment of contingent consideration to the extent the acquired business achieves certain financial performance targets over a five-year period. The results of the acquired business are included in the Electric Power Infrastructure Solutions segment.
On October 13, 2021, Quanta completed the acquisition of Blattner, a large and leading utility-scale renewable energy infrastructure solutions provider that is located in and primarily operates in North America. Blattner provides comprehensive solutions to customers in the renewable energy industry, which generally include front-end engineering, procurement, project management and construction services for wind, solar and energy storage projects. Consideration for this acquisition included $2.43 billion paid in cash and 3,326,955 shares of Quanta common stock, which had a fair value of $345.4 million as of the date of the acquisition. Additionally, the former owners of Blattner are eligible to receive potential payment of up to $300.0 million of contingent consideration, payable to the extent the acquired business achieves certain financial performance targets. The contingent consideration payment is calculated based on a cumulative three-year performance period ending on December 31, 2024. As of December 31, 2022, the fair value of the contingent consideration liability was $134.5 million. Blattner’s results are included in the Renewable Energy Infrastructure Solutions segment.
During the year ended December 31, 2021, Quanta also acquired the following businesses: three businesses located in the United States that provide electric power construction and related services; a communications services business located in the United States that performs data center connection services; a business located in the United States that designs, develops and holds a certification for the manufacture of personal protective breathing equipment and related monitoring devices primarily used in the refining and petrochemical industries, including in connection with catalyst services; a business that provides turnaround and catalyst change-out services to the refining and petrochemical industries primarily in the United States and Canada; a business located in Canada that provides front-end land services for infrastructure development projects in Canada and the United States; a business located in the United States that primarily provides horizontal directional drilling services; and a communications services business located in the United States. The aggregate consideration for these acquisitions was $328.2 million paid or payable in cash and 187,093 shares of Quanta common stock, which had an aggregate fair value of $16.9 million as of the applicable acquisition dates. The results of the manufacturing business and the turnaround and catalyst change-out business are primarily included in the Underground Utility and Infrastructure Solutions segment and the results of the remaining businesses are primarily included in the Electric Power Infrastructure Solutions segment.
During the year ended December 31, 2020, Quanta acquired a contractor located in the United States that provides electric power distribution, transmission and substation maintenance and construction, directional boring and emergency restoration
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services; a professional engineering business located in the United States that provides infrastructure engineering and design services to electric utilities, gas utilities and communications services companies, as well as permitting and utility locating services; a business located in the United States that provides aviation services primarily for the utility industry; an electric power infrastructure business located in the United States that primarily provides underground conduit services; a business located in the United States that specializes in the deployment of short- and long-haul fiber optic cable and utilities; an industrial services business located in Canada that performs catalyst handling services, including changeover and shutdown maintenance, for customers in the refining and chemical industries; and a business located in the United States that provides heavy, civil, industrial and energy related services and specializes in the construction and maintenance of pipelines and metering stations. The aggregate consideration for these acquisitions was $359.6 million paid in cash and 1,334,469 shares of Quanta common stock, which had a fair value of $57.1 million as of the respective acquisition dates. Additionally, one of the acquisitions includes the potential payment of contingent consideration, payable if the acquired business achieves certain performance objectives over a five-year post-acquisition period. The results of the industrial services business and the business specializing in construction and maintenance of pipelines and metering stations are primarily included in the Underground Utility and Infrastructure Solutions segment and the results of the remaining businesses are primarily included in the Electric Power Infrastructure Solutions segment.
Purchase Price Allocation
Purchase price allocations require significant use of estimates and are based on information that was available to management at the time these consolidated financial statements were prepared. Quanta uses a variety of information to estimate fair values, including quoted market prices, carrying amounts and valuation techniques such as discounted cash flows. When deemed appropriate, third-party appraisal firms are engaged to assist in fair value determination of fixed assets, intangible assets and certain other assets and liabilities.
Quanta is finalizing its purchase price allocations related to the business acquired during 2022, and further adjustments to the purchase price allocations may occur, with possible updates primarily related to tax estimates and the finalization of closing working capital adjustments. The following table summarizes the fair value of total consideration transferred or estimated to be transferred and the fair value of assets acquired and liabilities assumed as of the their respective acquisition dates, inclusive of any purchase price adjustments as of December 31, 2022 for acquisitions completed in the years shown below (in thousands).
| Acquisitions Closed in the Year Ended December 31, | ||||||||||||||||||||
| 2022 | 2021 | |||||||||||||||||||
| Blattner | All Others | |||||||||||||||||||
| Consideration: | ||||||||||||||||||||
| Cash paid or payable | $ | 21,990 | $ | 2,434,877 | $ | 328,155 | ||||||||||||||
| Value of Quanta common stock issued | — | 345,422 | 16,922 | |||||||||||||||||
| Contingent consideration | 2,600 | 125,632 | — | |||||||||||||||||
| Fair value of total consideration transferred or estimated to be transferred | $ | 24,590 | $ | 2,905,931 | $ | 345,077 | ||||||||||||||
| Cash and cash equivalents | $ | 101 | $ | 171,950 | $ | 9,911 | ||||||||||||||
| Accounts receivable | 1,755 | 411,835 | 63,033 | |||||||||||||||||
| Contract assets | — | 13,622 | 8,322 | |||||||||||||||||
| Other current assets | 72 | 57,803 | 6,262 | |||||||||||||||||
| Property and equipment | 2,266 | 179,530 | 71,736 | |||||||||||||||||
| Other assets | — | 191 | 230 | |||||||||||||||||
| Identifiable intangible assets | 13,109 | 1,425,000 | 104,143 | |||||||||||||||||
| Current maturities of long-term debt and short-term debt | — | (2,304) | — | |||||||||||||||||
| Accounts payable and accrued liabilities | (1,408) | (481,047) | (29,481) | |||||||||||||||||
| Contract liabilities | (3,530) | (227,040) | (384) | |||||||||||||||||
| Deferred tax liabilities, net | — | — | (2,424) | |||||||||||||||||
| Other long-term liabilities | — | (7,764) | — | |||||||||||||||||
| Total identifiable net assets | 12,365 | 1,541,776 | 231,348 | |||||||||||||||||
| Goodwill | 12,225 | 1,364,155 | 113,729 | |||||||||||||||||
| Fair value of net assets acquired | $ | 24,590 | $ | 2,905,931 | $ | 345,077 | ||||||||||||||
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Goodwill included in the Renewable Energy Infrastructure Solutions Segment increased by $64.9 million during the year ended December 31, 2022 as a result of certain post-closing consideration adjustments associated with Quanta’s acquisition of Blattner. As of December 31, 2022, approximately $12.2 million, $1.49 billion, and $72.6 million of goodwill is expected to be deductible for income tax purposes related to acquisitions completed in 2022, 2021 and 2020.
The following table summarizes the estimated fair values of identifiable intangible assets for the acquisitions completed in 2022 and 2021 as of the acquisition dates and the related weighted average amortization periods by type (in thousands, except for weighted average amortization periods, which are in years).
| Acquisitions Closed in the Year Ended December 31, | ||||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | |||||||||||||||||||||||||||||||||||||
| Blattner | All Others | |||||||||||||||||||||||||||||||||||||
| Estimated Fair Value | Weighted Average Amortization Period in Years | Estimated Fair Value | Weighted Average Amortization Period in Years | Estimated Fair Value | Weighted Average Amortization Period in Years | |||||||||||||||||||||||||||||||||
| Customer relationships | $ | 11,565 | 6.0 | $ | 1,045,000 | 7.0 | $ | 77,563 | 6.7 | |||||||||||||||||||||||||||||
| Backlog | 557 | 0.5 | 130,000 | 0.7 | 6,431 | 1.2 | ||||||||||||||||||||||||||||||||
| Trade names | 850 | 15.0 | 250,000 | 15.0 | 5,298 | 14.9 | ||||||||||||||||||||||||||||||||
| Non-compete agreements | 137 | 5.0 | — | N/A | 5,823 | 5.0 | ||||||||||||||||||||||||||||||||
| Patented rights, developed technology, and process certifications | — | N/A | — | N/A | 9,028 | 3.5 | ||||||||||||||||||||||||||||||||
| Total intangible assets subject to amortization | $ | 13,109 | 6.4 | $ | 1,425,000 | 7.8 | $ | 104,143 | 6.4 |
The fair value of customer relationships is estimated as of the date a business is acquired based on the value-in-use concept utilizing the income approach, specifically the multi-period excess earnings method. This method discounts to present value the projected cash flows attributable to the customer relationships, with consideration given to customer contract renewals and estimated customer attrition rates.
The significant estimates used by management in determining the fair values of customer relationship intangible assets include future revenues, discount rates and customer attrition rates. The following table includes the discount rates and customer attrition rates used to determine the fair value of customer relationship intangible assets for businesses acquired during the years ended December 31, 2022 and 2021 as of the respective acquisition dates:
| 2022 | 2021 | |||||||||||||||||||||||||
| Rate | Range | Weighted Average | ||||||||||||||||||||||||
| Discount rates | 22% | 18% to 26% | 18% | |||||||||||||||||||||||
| Customer attrition rates | 20% | 8% to 30% | 10% |
Quanta values backlog for acquired businesses as of the acquisition date based upon the contractual nature of the backlog, discounted to present value. The values of trade names and curriculum are estimated using the relief-from-royalty method of the income approach, which is based on the assumption that in lieu of ownership, a company would be willing to pay a royalty for use of the trade name or curriculum. The value of a non-compete agreement is estimated based on the difference between the present value of the prospective cash flows with the agreement in place and the present value of the prospective cash flows without the agreement in place. The level of inputs used for these identifiable intangible asset fair value measurements is Level
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Contingent Consideration
As described above, certain business acquisitions have contingent consideration liabilities associated with the transactions. The aggregate fair value of these outstanding contingent consideration liabilities and their classification in the accompanying consolidated balance sheets is as follows (in thousands):
| December 31, 2022 | December 31, 2021 | |||||||||||||
| Accounts payable and accrued expenses | $ | 5,000 | $ | 2,591 | ||||||||||
| Insurance and other non-current liabilities | 143,517 | 140,482 | ||||||||||||
| Total contingent consideration liabilities | $ | 148,517 | $ | 143,073 |
Quanta’s aggregate contingent consideration liabilities can change due to additional business acquisitions, settlement of outstanding liabilities, accretion in present value and changes in the estimated fair value of amounts and the performance of acquired businesses in post-acquisition periods. These changes are reflected in “Change in fair value of contingent consideration liabilities” in the accompanying consolidated statements of operations. The fair values of these liabilities were primarily determined using a Monte Carlo simulation valuation methodology based on probability-weighted performance projections and other inputs, including a weighted average cost of capital and an expected volatility factor for each acquisition. The expected volatility factors are based on historical asset volatility of selected guideline public companies. Performance projections are discounted using a risk-adjusted weighted average cost of capital which reflects the overall level of inherent risk of the business acquired. Depending on contingent consideration payment terms, the present values of the estimated payments are discounted based on a risk-free rate and/or Quanta’s cost of debt. The weighted averages of these inputs are based on the fair value of the contingent consideration at the dates of the respective acquisitions. The fair value determinations incorporate significant inputs not observable in the market. Accordingly, the level of inputs used for these fair value measurements is Level 3. Significant changes in any of these assumptions could result in a significantly higher or lower potential liability.
The following table includes the volatility factors, weighted average costs of capital and discount rates used to determine the fair value of contingent consideration liabilities during the years ended December 31, 2022 and 2021:
| 2022 | 2021 | |||||||||||||||||||||||||
| Range | Weighted Average | Range | Weighted Average | |||||||||||||||||||||||
| Volatility factors | 35.0% to 50.0% | 42.5% | 50% | 50% | ||||||||||||||||||||||
| Weighted average cost of capital | 14.5% to 17.5% | 16.0% | 16.5% to 17.0% | 16.8% | ||||||||||||||||||||||
| Discount rates | 1.71% to 6.30% | 4.5% | 0.04% to 2.18% | 1.4% |
The majority of Quanta’s outstanding contingent consideration liabilities are subject to a maximum payment amount, and the aggregate maximum payment amount of these liabilities totaled $326.6 million as of December 31, 2022. During the years ended December 31, 2022, 2021 and 2020, Quanta settled certain contingent consideration liabilities with cash payments of $1.6 million, $0.3 million and $76.0 million. Quanta also settled certain contingent consideration liabilities with the issuance of 4,277 shares of Quanta common stock during the year ended December 31, 2020.
Pro Forma Results of Operations
The following unaudited supplemental pro forma results of operations for Quanta, which incorporate the acquisitions completed in 2022, 2021 and 2020, have been provided for illustrative purposes only and may not be indicative of the actual results that would have been achieved by the combined companies for the periods presented or that may be achieved by the combined companies in the future (in thousands).
| Year Ended December 31, | ||||||||||||||||||||
| 2022 | 2021 | 2020 | ||||||||||||||||||
| Revenues | $ | 17,083,551 | $ | 15,527,934 | $ | 14,082,275 | ||||||||||||||
| Net income attributable to common stock | $ | 489,014 | $ | 619,304 | $ | 414,742 | ||||||||||||||
The pro forma combined results of operations for the years ended December 31, 2022 and 2021 were prepared by adjusting the historical results of Quanta to include the historical results of the business acquired in 2022 as if such acquisition had occurred January 1, 2021. The pro forma combined results of operations for the year ended December 31, 2021 and 2020 were prepared by adjusting the historical results of Quanta to include historical results of the businesses acquired in 2021 as if such acquisitions had occurred January 1, 2020. The pro forma combined results of operations for the year ended December 31,
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
2020 were prepared by adjusting the historical results of Quanta to include the historical results of the businesses acquired in 2020 as if such acquisitions occurred January 1, 2019.
These pro forma combined historical results were adjusted for the following: a reduction of interest and other financing expenses as a result of the repayment of outstanding indebtedness of the acquired businesses; an increase in interest and other financing expenses as a result of the cash consideration paid and debt incurred by Quanta for the purpose of financing the acquisition of Blattner; an increase in amortization expense due to the intangible assets recorded; elimination of inter-company sales; changes in depreciation expense to adjust acquired property and equipment to the acquisition date fair value and to conform with Quanta’s accounting policies; an increase in the number of outstanding shares of Quanta common stock; and elimination of certain transaction costs incurred by Blattner and directly related to the acquisition of the business by Quanta. The pro forma combined results of operations do not include any adjustments to eliminate the impact of acquisition-related costs incurred by Quanta or any cost savings or other synergies that resulted or may result from the acquisitions.
Results of Operations
Revenues of $15.5 million and income before income taxes of $2.0 million, which includes $1.4 million of amortization expense and $0.6 million of acquisition-related costs, related to the acquisition completed in 2022 are included in Quanta’s consolidated results of operations for the year ended December 31, 2022. Revenues of $499.6 million and a loss before income taxes of $71.6 million, which included $80.3 million of amortization expense and $41.5 million of acquisition-related costs, related to acquisitions completed in 2021 are included in Quanta’s consolidated results of operations for the year ended December 31, 2021. Revenues of $133.5 million and a loss before income taxes of $1.3 million, which included $6.4 million of amortization expense and $17.5 million of acquisition-related costs, related to the acquisitions completed in 2020 are included in Quanta’s consolidated results of operations for the year ended December 31, 2020.
Acquisitions Subsequent to Year-End
In January 2023, Quanta acquired three businesses located in the United States including: a business that provides services related to high-voltage transmission lines, overhead and underground distribution, emergency restoration and industrial and commercial wiring and lighting; a business that procures parts, assembles kits for sale, manages logistics and installs solar tracking equipment for utility and development customers; and a business that provides solutions to Quanta’s concrete construction services. The consideration for these transactions consisted of approximately $465.0 million paid in cash on the dates of the acquisitions and 1,018,952 shares of Quanta common stock, which had a fair value of $123.5 million as of the dates of the acquisitions. The final amount of consideration for these acquisitions remains subject to certain post-closing adjustments, including with respect to net working capital. The results of the business that designs, supplies and installs solar tracking technology and installs and assembles solar panel systems will be primarily included in the Renewable Energy Infrastructure Solutions segment and the results of the other two businesses will be primarily included in the Electric Power Infrastructure Solutions segment. Quanta is in the process of performing procedures to determine the fair value of assets acquired and liabilities assumed related to these acquisitions.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
7. GOODWILL AND OTHER INTANGIBLE ASSETS:
Goodwill
The changes in the carrying amount of goodwill of each of Quanta’s reportable segments were as follows (in thousands):
| Electric Power Infrastructure Solutions Segment | Renewable Energy Infrastructure Solutions Segment | Underground Utility and Infrastructure Solutions Segment | Total | |||||||||||||||||||||||
| Balance at December 31, 2020: | ||||||||||||||||||||||||||
| Goodwill | $ | 1,449,774 | $ | — | $ | 768,868 | $ | 2,218,642 | ||||||||||||||||||
| Accumulated impairment | — | — | (97,628) | (97,628) | ||||||||||||||||||||||
| 1,449,774 | — | 671,240 | 2,121,014 | |||||||||||||||||||||||
| Goodwill related to acquisitions completed in 2021(1) | 100,121 | 1,299,280 | 12,066 | 1,411,467 | ||||||||||||||||||||||
| Purchase price allocation adjustments | (1,791) | — | — | (1,791) | ||||||||||||||||||||||
| Foreign currency translation adjustments | 1,226 | — | (3,030) | (1,804) | ||||||||||||||||||||||
| Reorganization of reporting units (1) | (161,912) | 161,912 | — | — | ||||||||||||||||||||||
| Balance at December 31, 2021: | ||||||||||||||||||||||||||
| Goodwill | 1,387,418 | 1,461,192 | 777,136 | 3,625,746 | ||||||||||||||||||||||
| Accumulated impairment | — | — | (96,860) | (96,860) | ||||||||||||||||||||||
| 1,387,418 | 1,461,192 | 680,276 | 3,528,886 | |||||||||||||||||||||||
| Goodwill related to the acquisition completed in 2022 | 12,225 | — | 12,225 | |||||||||||||||||||||||
| Purchase price allocation adjustments | 962 | 64,874 | 580 | 66,416 | ||||||||||||||||||||||
| Foreign currency translation adjustments | (4,464) | (7,917) | (8,401) | (20,782) | ||||||||||||||||||||||
| Balance at December 31, 2022: | ||||||||||||||||||||||||||
| Goodwill | 1,396,141 | 1,518,149 | 768,516 | 3,682,806 | ||||||||||||||||||||||
| Accumulated impairment | — | — | (96,061) | (96,061) | ||||||||||||||||||||||
| $ | 1,396,141 | $ | 1,518,149 | $ | 672,455 | $ | 3,586,745 |
(1) The Renewable Energy Infrastructure Solutions segment was added due to the acquisition of Blattner in the fourth quarter of 2021. In conjunction with this change, Quanta reorganized its reporting units.
In connection with the 2022 annual goodwill assessment, management performed a qualitative impairment assessment of Quanta’s reporting units, which indicated that the fair value of its reporting units was greater than their carrying value including goodwill. Accordingly, a quantitative goodwill impairment test was not required, and no goodwill impairment was recognized in 2022. In connection with the 2021 annual goodwill assessment, management performed qualitative and quantitative impairment assessments of its reporting units, which indicated the fair value of its reporting units was greater than their carrying value including goodwill, and no goodwill impairment was recognized.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Other Intangible Assets
Quanta’s identifiable intangible assets and the remaining weighted average amortization periods related to its intangible assets subject to amortization were as follows (in thousands except for weighted average amortization periods, which are in years):
| As of December 31, 2022 | As of December 31, 2021 | |||||||||||||||||||||||||||||||||||||||||||
| Remaining Weighted Average Amortization Period in Years | Intangible Assets | Accumulated Amortization | Intangible Assets, Net | Intangible Assets | Accumulated Amortization | Intangible Assets, Net | ||||||||||||||||||||||||||||||||||||||
| Customer relationships | 5.5 | $ | 1,741,679 | $ | (600,841) | $ | 1,140,838 | $ | 1,738,813 | $ | (379,417) | $ | 1,359,396 | |||||||||||||||||||||||||||||||
| Backlog | 0.1 | 282,483 | (282,397) | 86 | 286,120 | (192,140) | 93,980 | |||||||||||||||||||||||||||||||||||||
| Trade names | 13.5 | 355,855 | (63,190) | 292,665 | 357,103 | (41,642) | 315,461 | |||||||||||||||||||||||||||||||||||||
| Non-compete agreements | 3.1 | 52,356 | (44,570) | 7,786 | 54,022 | (41,409) | 12,613 | |||||||||||||||||||||||||||||||||||||
| Patented rights, developed technology, process certifications and other | 2.1 | 32,969 | (26,281) | 6,688 | 31,520 | (23,458) | 8,062 | |||||||||||||||||||||||||||||||||||||
| Curriculum | 5.6 | 13,488 | (5,920) | 7,568 | 13,100 | (4,432) | 8,668 | |||||||||||||||||||||||||||||||||||||
| Total intangible assets subject to amortization | 7.0 | 2,478,830 | (1,023,199) | 1,455,631 | 2,480,678 | (682,498) | 1,798,180 | |||||||||||||||||||||||||||||||||||||
| Engineering license | 3,000 | — | 3,000 | 3,000 | — | 3,000 | ||||||||||||||||||||||||||||||||||||||
| Total intangible assets | $ | 2,481,830 | $ | (1,023,199) | $ | 1,458,631 | $ | 2,483,678 | $ | (682,498) | $ | 1,801,180 |
Amortization expense for intangible assets was $354.0 million, $165.4 million and $76.7 million for the years ended December 31, 2022, 2021 and 2020.
The estimated future aggregate amortization expense of intangible assets subject to amortization as of December 31, 2022 is set forth below (in thousands):
| Year Ending December 31: | ||||||||
| 2023 | $ | 252,316 | ||||||
| 2024 | 239,640 | |||||||
| 2025 | 224,901 | |||||||
| 2026 | 218,568 | |||||||
| 2027 | 202,587 | |||||||
| Thereafter | 317,619 | |||||||
| Total | $ | 1,455,631 |
8. INVESTMENTS IN AFFILIATES AND OTHER ENTITIES:
The following table presents Quanta’s equity investments by type (in thousands):
| December 31, 2022 | December 31, 2021 | |||||||||||||
| Equity method investments - integral unconsolidated affiliates | $ | 101,251 | $ | 67,820 | ||||||||||
| Equity method investments - non-integral unconsolidated affiliates | 55,833 | 33,372 | ||||||||||||
| Marketable equity securities | — | — | ||||||||||||
| Non-marketable equity securities | 54,134 | 130,233 | ||||||||||||
| Total investments | $ | 211,218 | $ | 231,425 |
Equity Method Investments
Quanta’s integral equity method investment balance includes Quanta’s 50% interest in LUMA. During 2020, the LUMA joint venture was selected for a 15-year operation and maintenance agreement to operate, maintain and modernize the
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
approximately 18,000-mile electric transmission and distribution system in Puerto Rico. Under the operation and maintenance agreement, LUMA will be entitled to reimbursement of specific costs and expenses and receive a fixed annual management fee, with the opportunity to receive additional annual performance-based incentive fees. LUMA will not assume ownership of the electric transmission and distribution system assets or be responsible for operation of the associated power generation assets. The 15-year term under the operation and maintenance agreement is scheduled to begin upon satisfaction or waiver of several remaining conditions precedent, including the emergence from a Title III debt restructuring process of the utility that owns the electric transmission and distribution system, which have yet to occur. In June 2021, under the terms of an interim services agreement, LUMA took over operation and maintenance of the system from the utility, and during this interim period, LUMA receives a fixed annual management fee, payable in monthly installments, and is reimbursed for specific costs and expenses. In November 2022, LUMA, the utility and the administrator agreed to extend the interim services agreement until the utility’s emergence from its Title III debt restructuring process.
Also included within the integral equity method investment balances described above is Quanta’s 44% interest in an entity that provides right-of-way solutions, including site preparation and clearing, materials delivery and installation and management of permitting requirements and traffic control, which Quanta acquired in October 2021, and Quanta’s 44% interest in an entity that provides design/build, construction management, power and gas utility engineering, subsurface utility engineering, structural engineering, highway and road design, program management and surveying services, which Quanta acquired in November 2022 for a purchase price of $30.7 million.
As of December 31, 2022 and 2021, Quanta had receivables of $96.9 million and $60.2 million from its integral unconsolidated affiliates and payables of $9.3 million and $56.3 million to them. During the years ended December 31, 2022 and 2021, Quanta recognized revenues of $154.7 million and $74.1 million primarily for services provided to LUMA at cost. In addition, during the years ended December 31, 2022 and 2021, Quanta recognized costs of sales of $134.5 million and $116.2 million for services provided by other affiliates.
During the fourth quarter of 2022, Quanta entered into an agreement to sell one of its non-integral equity method investments for total consideration of $58.4 million. The transaction was subject to certain customary closing conditions that were satisfied in early 2023. As a result, a $25.9 million gain was recognized in the fourth quarter that was recorded as “Other (expense) income, net,” of which $10.4 million is attributable to a non-controlling interest.
Total equity in earnings from integral unconsolidated affiliates were $52.5 million, $44.1 million, and $11.3 million for the years ended December 31, 2022, 2021 and 2020. Total equity in earnings from non-integral unconsolidated affiliates were earnings of $20.3 million, earnings of $2.1 million and a loss of $10.0 million for the years ended December 31, 2022, 2021 and 2020. At December 31, 2022, retained earnings included $47.0 million related to the undistributed earnings of unconsolidated affiliates.
The difference between Quanta’s carrying value and the underlying equity in the net assets of its equity investments is assigned to the assets and liabilities of the investment, giving rise to a basis difference, which was $37.8 million and $11.5 million as of December 31, 2022 and 2021. The amortization of the basis difference included in “Equity in earnings of integral unconsolidated affiliates” in the accompanying consolidated statements of operations for the years ended December 31, 2022, 2021 and 2020, was $1.9 million, $0.5 million and zero.
Marketable and Non-Marketable Equity Securities
In March 2021, Quanta acquired a preferred non-controlling interest in a broadband technology provider for $90.0 million. This investment was classified as a non-marketable equity security as of December 31, 2021. In March 2022, pursuant to the terms of an agreement and plan of merger with a special purpose acquisition company, the broadband technology provider became Starry Group Holdings, Inc. (Starry), a publicly traded company, and Quanta’s preferred equity interest converted to a common equity interest, without preferential liquidation rights, in the publicly traded company. At that time, Quanta began classifying this investment as a marketable equity security rather than a non-marketable equity security. Additionally, in March 2022, Quanta acquired an additional common equity interest in Starry for $1.5 million. As of December 31, 2022, the fair value of Starry’s common stock was zero, which resulted in a $91.5 million impairment recorded during 2022, and in February 2023, Starry filed for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code, as amended.
In November 2022, Quanta acquired a 6% equity interest in an energy storage solution provider for $25.0 million. The investment is considered a non-marketable equity security.
Investment in Real Property
During the year ended December 31, 2021, Quanta purchased, through its wholly-owned captive insurance company, certain real property, including associated buildings and facilities, which Quanta has utilized it as its corporate headquarters since September 2022. A portion of this property is currently leased to third-party lessees and is expected to continue to be
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
leased to third-party lessees for the foreseeable future. As a result, an investment in real estate is recognized at cost for the third-party leased portion of the property. Its carrying amount of $27.5 million and $23.3 million at December 31, 2022 and 2021 is included in “Other assets, net” in the accompanying consolidated balance sheets.
See Note 15 for information related to Quanta’s investments associated with its deferred compensation plan.
9. PER SHARE INFORMATION:
The amounts used to compute basic and diluted earnings per share attributable to common stock consisted of the following (in thousands):
| Year Ended December 31, | ||||||||||||||||||||
| 2022 | 2021 | 2020 | ||||||||||||||||||
| Amounts attributable to common stock: | ||||||||||||||||||||
| Net income attributable to common stock | $ | 491,189 | $ | 485,956 | $ | 445,596 | ||||||||||||||
| Weighted average shares: | ||||||||||||||||||||
| Weighted average shares outstanding for basic earnings per share attributable to common stock | 143,488 | 140,824 | 141,380 | |||||||||||||||||
| Effect of dilutive unvested non-participating stock-based awards | 4,504 | 4,549 | 3,867 | |||||||||||||||||
| Weighted average shares outstanding for diluted earnings per share attributable to common stock | 147,992 | 145,373 | 145,247 |
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
10. DEBT OBLIGATIONS:
Quanta’s long-term debt obligations consisted of the following (in thousands):
| December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| 0.950% Senior Notes due October 2024 | $ | 500,000 | $ | 500,000 | |||||||
| 2.900% Senior Notes due October 2030 | 1,000,000 | 1,000,000 | |||||||||
| 2.350% Senior Notes due January 2032 | 500,000 | 500,000 | |||||||||
| 3.050% Senior Notes due October 2041 | 500,000 | 500,000 | |||||||||
| Borrowings under senior credit facility | 786,910 | 1,199,841 | |||||||||
| Borrowings under commercial paper program | 373,000 | — | |||||||||
| Other long-term debt | 92,907 | 64,800 | |||||||||
| Finance leases | 3,542 | 2,546 | |||||||||
| Unamortized discount and financing costs | (26,432) | (29,295) | |||||||||
| Total long-term debt obligations | 3,729,927 | 3,737,892 | |||||||||
| Less — Current maturities of long-term debt | 37,495 | 13,418 | |||||||||
| Total long-term debt obligations, net of current maturities | $ | 3,692,432 | $ | 3,724,474 |
As of December 31, 2022, principal payments required to be made during the next five years are set forth in the table below. The payments required under finance leases and lease financing transactions are provided in Note 11.
| 2023 | $ | 21,028 | ||||||
| 2024 | $ | 539,436 | ||||||
| 2025 | $ | 77,591 | ||||||
| 2026 | $ | 1,029,829 | ||||||
| 2027 | $ | 1,345 |
Short-term debt was zero and $15.7 million at December 31, 2022 and 2021.
Senior Notes
On September 23, 2021, Quanta issued $1.50 billion aggregate principal amount of senior notes consisting of: $500.0 million aggregate principal amount of 0.950% senior notes due October 2024 (the 2024 notes); $500.0 million aggregate principal amount of 2.350% senior notes due January 2032 (the 2032 notes); and $500.0 million aggregate principal amount of 3.050% senior notes due October 2041 (the 2041 notes). The cumulative proceeds received from the public offering of the 2024 notes, the 2032 notes and the 2041 notes were $1.48 billion, net of the original issue discount, underwriting discounts and deferred financing costs, which were used, along with drawings under Quanta’s senior credit facility, as amended, to acquire Blattner. On September 22, 2020, Quanta issued $1.00 billion aggregate principal amount of 2.900% senior notes due October 2030 (the 2030 notes, and together with the 2024 notes, the 2032 notes and the 2041 notes, collectively, the Senior Notes) and received proceeds of $986.7 million from the offering, net of the original issue discount, underwriting discounts and deferred financing costs, and used such proceeds, together with cash on hand, to voluntarily prepay the $1.21 billion of term loans then-outstanding under Quanta’s credit agreement for its senior credit facility.
The interest amounts due on Quanta’s senior notes on each payment date are set forth below (dollars in thousands):
| Title of the Notes | Interest Amount | Payment Dates | Commencement Date | |||||||||||||||||
| 0.950% Senior Notes due October 2024 | $ | 2,375 | April 1 and October 1 | April 1, 2022 | ||||||||||||||||
| 2.900% Senior Notes due October 2030 | $ | 14,500 | April 1 and October 1 | April 1, 2021 | ||||||||||||||||
| 2.350% Senior Notes due January 2032 | $ | 5,875 | January 15 and July 15 | July 15, 2022 | ||||||||||||||||
| 3.050% Senior Notes due October 2041 | $ | 7,625 | April 1 and October 1 | April 1, 2022 |
In each case as further specified by the terms of the senior notes and the indenture and supplemental indentures governing the senior notes (collectively, the indenture), Quanta may redeem all or a portion of (i) the 2024 notes at a price equal to 100% of the principal amount plus accrued and unpaid interest; (ii) the 2030 notes at any time prior to July 1, 2030 at a price equal to 100% of the principal amount plus a make-whole premium and accrued and unpaid interest, and at any time on or after July 1,
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
2030 at a price equal to 100% of the principal amount plus accrued and unpaid interest; (iii) the 2032 notes at any time prior to October 15, 2031 at a price equal to 100% of the principal amount plus a make-whole premium and accrued and unpaid interest, and at any time on or after October 15, 2031 at a price equal to 100% of the principal amount plus accrued and unpaid interest; and (iv) the 2041 notes at any time prior to April 1, 2041 at a price equal to 100% of the principal amount plus a make-whole premium and accrued and unpaid interest, and at any time on or after April 1, 2041 at a price equal to 100% of the principal amount plus accrued and unpaid interest.
Upon the occurrence of a Change of Control Triggering Event (as defined in the indenture), unless Quanta has exercised its right to redeem the applicable series of Senior Notes in full by giving irrevocable notice to the trustee, each holder of such Senior Notes will have the right to require Quanta to purchase all or a portion of such holder’s Senior Notes of such series at a purchase price equal to 101% of the principal amount thereof plus accrued and unpaid interest.
The indenture contains covenants that, among other things, limit Quanta’s ability to incur liens securing certain indebtedness, to engage in certain sale and leaseback transactions with respect to certain properties and to sell all or substantially all of Quanta’s assets or merge or consolidate with or into other companies. The indenture also contains customary events of default.
The fair value of Quanta’s Senior Notes was $2.00 billion at December 31, 2022, compared to a carrying value of $2.48 billion net of unamortized bond discount, underwriting discounts and deferred financing costs of $23.8 million. The fair value of the Senior Notes is based on the quoted market prices for the same issue, and the senior notes are categorized as Level 1 liabilities.
Senior Credit Facility
The credit agreement for Quanta’s senior credit facility (as amended, the credit agreement) provides for a $750.0 million term loan facility and aggregate revolving commitments of $2.64 billion, with a maturity date of October 8, 2026. Subject to the conditions specified in the credit agreement, Quanta has the option to increase the capacity of the credit facility, in the form of an increase in the revolving commitments, term loans or a combination thereof, from time to time, upon receipt of additional commitments from new or existing lenders by up to an additional (i) $400.0 million plus (ii) additional amounts so long as the Incremental Leverage Ratio Requirement (as defined in the credit agreement) is satisfied at the time of such increase. The Incremental Leverage Ratio Requirement requires, among other things, after giving pro forma effect to such increase and the use of proceeds therefrom, compliance with the credit agreement’s financial covenants as of the most recent fiscal quarter end for which financial statements were required to be delivered. Borrowings under the senior credit facility and the applicable interest rates were as follows (dollars in thousands):
| Year Ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| Maximum amount outstanding | $ | 1,684,783 | $ | 1,463,667 | $ | 2,023,326 | |||||||||||
| Average daily amount outstanding | $ | 1,250,493 | $ | 591,114 | $ | 1,091,091 | |||||||||||
| Weighted-average interest rate | 3.0 | % | 1.9 | % | 2.1 | % |
On August 23, 2022 Quanta entered into an amendment to the credit agreement, which among other things, permits proceeds of revolving loans to be used to provide credit support for Quanta’s commercial paper program, as described further below; established Term Secured Overnight Financing Rate (Term SOFR) (as defined in the credit agreement) as the benchmark rate for the senior credit facility (including both the term loan facility and the revolving credit facility) in replacement of London Interbank Offered Rate (LIBOR) (as defined therein prior to giving effect to the amendment) as further described below, effective as of the date of the amendment; and revised certain other terms and provisions.
The credit agreement contains certain covenants, including, as of the end of any fiscal quarter of Quanta, (i) a maximum Consolidated Leverage Ratio (as defined in the credit agreement) of 3.5 to 1.0 (except that in connection with certain permitted acquisitions in excess of $200.0 million, such ratio is 4.0 to 1.0 for the fiscal quarter in which the acquisition is completed and the four subsequent fiscal quarters) and (ii) a minimum Consolidated Interest Coverage Ratio (as defined in the credit agreement) of 3.0 to 1.0. As of December 31, 2022, Quanta was in compliance with all of the financial covenants under the credit agreement.
The Consolidated Leverage Ratio is the ratio of Quanta’s total funded debt to Consolidated EBITDA (as defined in the credit agreement). For purposes of calculating the Consolidated Leverage Ratio, total funded debt is reduced by available cash and Cash Equivalents (as defined in the credit agreement) in excess of $25.0 million. Consolidated Interest Coverage Ratio is the ratio of (i) Consolidated EBIT (as defined in the credit agreement) for the four fiscal quarters most recently ended to (ii) Consolidated Interest Expense (as defined in the credit agreement) for such period (excluding all interest expense attributable to capitalized loan costs and the amount of fees paid in connection with the issuance of letters of credit on behalf of
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Quanta during such period).
The credit agreement also limits certain acquisitions, mergers and consolidations, indebtedness, asset sales and prepayments of indebtedness and, subject to certain exceptions, prohibits liens on Quanta’s assets. These limits include a limit on surety-backed letters of credit issued separate from the senior credit facility, which are not to exceed $300.0 million at any one time outstanding. The credit agreement allows cash payments for dividends and stock repurchases subject to compliance with the following requirements (including after giving effect to the dividend or stock repurchase): (i) no default or event of default under the credit agreement; (ii) continued compliance with the financial covenants in the credit agreement; and (iii) at least $100.0 million of availability under the senior credit facility and/or cash and cash equivalents on hand.
The credit agreement provides for customary events of default and contains cross-default provisions with other debt instruments exceeding $300.0 million in borrowings or availability. If an Event of Default (as defined in the credit agreement) occurs and is continuing, on the terms and subject to the conditions set forth in the credit agreement, the lenders may declare all amounts outstanding and accrued and unpaid interest immediately due and payable, require that Quanta provide cash collateral for all outstanding letter of credit obligations and terminate the commitments under the credit agreement.
Term Loan. As of December 31, 2022, Quanta had $750.0 million outstanding under its term loan facility. The carrying amount of the term loan under Quanta’s senior credit facility approximates fair value due to its variable interest rate.
The term loan requires quarterly principal payments on the first business day of each January, April, July and October, beginning in January 2023, in the amount of $4.7 million per quarter in 2023 and 2024, $9.4 million per quarter in 2025 and $18.8 million per quarter in 2026. The aggregate remaining principal amount outstanding must be paid by the maturity date of the senior credit facility. Quanta may voluntarily prepay the term loan borrowings from time to time, in whole or in part, without premium or penalty.
Beginning August 23, 2022, amounts borrowed under the term loan facility bear interest, at Quanta’s option, at a rate equal to either (a) the Term SOFR (as defined in the credit agreement) plus 1.000% to 1.625%, or (b) the Base Rate (as defined below) plus 0.000% to 0.625%, each as determined based on either Quanta’s Consolidated Leverage Ratio (as described above) or Quanta’s Debt Rating (as defined in the credit agreement), whichever is more favorable to Quanta. The Base Rate equals the highest of (i) the Federal Funds Rate (as defined in the credit agreement) plus 0.5%, (ii) Bank of America N.A.’s prime rate, (iii) the Term SOFR plus 1.00%, and (iv) 1.00% subject to applicable interest rate floors.
Prior to August 23, 2022, amounts borrowed under the term loan facility bore interest, at Quanta’s option, at a rate equal to either (a) the LIBOR Rate (as defined in the credit agreement) plus 1.000% to 1.625%, or (b) the Base Rate (as defined below) plus 0.000% to 0.625%, each as determined based on either Quanta’s Consolidated Leverage Ratio (as described above) or Quanta’s Debt Rating (as described above), whichever was more favorable to Quanta. The Base Rate equaled the highest of (i) the Federal Funds Rate (as described above) plus 0.5%, (ii) Bank of America N.A.’s prime rate and (iii) the LIBOR Rate plus 1.00%.
Revolving Loans. As of December 31, 2022, Quanta had $36.9 million of outstanding revolving loans under the senior credit facility. Of the total outstanding revolving loan borrowings, all $36.9 million were denominated in Canadian dollars. The carrying amounts of the revolving borrowings under Quanta’s senior credit facility approximate fair value, as all revolving borrowings have a short maturity.
As of December 31, 2022, Quanta also had $227.8 million of letters of credit issued under the senior credit facility, of which $128.5 million were denominated in U.S. dollars and $99.3 million were denominated in currencies other than the U.S. dollar, primarily Australian and Canadian dollars. Additionally, available commitments for revolving loans under the senior credit facility must be maintained in order to provide credit support for notes issued under Quanta’s commercial paper program, and therefore such notes effectively reduce the available borrowing capacity under the senior credit facility. As of December 31, 2022, $2.00 billion remained available under the senior credit facility for new revolving loans, letters of credit and support of the commercial paper program in U.S. dollars and certain alternative currencies.
Beginning August 23, 2022, amounts borrowed in U.S. dollars under the revolving credit facility bear interest, at Quanta’s option, at a rate equal to either (a) the Term SOFR plus 1.125% to 1.750%, or (b) the Base Rate plus 0.125% to 0.750%, each as determined based on either Quanta’s Consolidated Leverage Ratio or its Debt Rating, whichever is more favorable to Quanta. Revolving loans borrowed in any currency other than U.S. dollars bear interest at a rate equal to the Alternative Currency Daily Rate or the Alternative Currency Term Rate (each as defined in the credit agreement), as applicable, plus 1.125% to 1.750%, as determined based on either Quanta’s Consolidated Leverage Ratio or Quanta’s Debt Rating, whichever is more favorable to Quanta. Additionally, standby or commercial letters of credit issued under the credit agreement are subject to a letter of credit fee of 1.125% to 1.750%; 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 1.125%; and Quanta is subject to a commitment fee of 0.100% to 0.275% on any unused availability under the revolving credit facility, in each case as determined
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
based on either the Quanta’s Consolidated Leverage Ratio or its Debt Rating, whichever is more favorable to Quanta.
Between October 8, 2021 and August 23, 2022, the interest rates were the same as above except that the benchmark rate utilized was LIBOR Rate rather than Term SOFR.
Prior to October 8, 2021, revolving loans borrowed in U.S. dollars bore interest, at Quanta’s option, at a rate equal to either (i) the Eurocurrency Rate (as defined in the credit agreement) plus 1.125% to 2.000%, as determined based on Quanta’s Consolidated Leverage Ratio, or (ii) the prior base rate (as described below) plus 0.125% to 1.000%, as determined based on Quanta’s Consolidated Leverage Ratio. Revolving loans borrowed in any currency other than U.S. dollars bore interest at a rate equal to the Eurocurrency Rate plus 1.125% to 2.000%, as determined based on Quanta’s Consolidated Leverage Ratio. Additionally, standby or commercial letters of credit issued under the credit agreement were subject to a letter of credit fee of 1.125% to 2.000%, based on Quanta’s Consolidated Leverage Ratio, and Performance Letters of Credit (as described above) issued under the credit agreement in support of certain contractual obligations were subject to a letter of credit fee of 0.675% to 1.150%, based on Quanta’s Consolidated Leverage Ratio. The prior calculation for base rate equaled 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%. Quanta was also subject to a commitment fee of 0.275% to 0.425% from September 22, 2020 through October 7, 2021, based on its Consolidated Leverage Ratio, on any unused availability under the senior credit facility. Prior to the amendment on September 22, 2020, Quanta was subject to a commitment fee of 0.200% to 0.400%.
Deferred Financing Costs. As of December 31, 2022 and 2021, capitalized deferred financing costs, net of accumulated amortization, related to Quanta’s revolving loans under its senior credit facility and commercial paper program were $8.3 million and $10.1 million and are included in “Other assets, net” in the accompanying consolidated balance sheets. Amortization of deferred financing costs for all debt instruments included in interest expense was $12.7 million, $8.4 million and $5.1 million for the years ended December 31, 2022, 2021 and 2020.
Commercial Paper Program
On August 23, 2022, Quanta entered into a commercial paper program that allows Quanta to issue unsecured commercial paper notes in an amount up to a maximum aggregate face amount of $1 billion outstanding at any time. The notes are sold under customary market terms in the U.S. commercial paper market at a discount from par or at par and bear interest at rates determined at the time of issuance. The maturities of the notes may vary, but may not exceed 397 days from the date of issuance. Quanta began issuing notes under this program on September 2, 2022 and had $373.0 million of outstanding notes as of December 31, 2022, with a weighted average interest rate of 5.2%. The commercial paper notes were outstanding from September 2, 2022 through December 31, 2022. During such period, Quanta had maximum borrowings outstanding of $707.3 million, weighted average borrowings outstanding of $462.4 million, a weighted average interest rate of 4.5%, and a weighted average maturity of 15 days. The carrying amounts of the notes issued under Quanta’s commercial paper program approximate fair value, as all notes currently have a short maturity.
Additional Letters of Credit
As of December 31, 2022 Quanta had $189.9 million of surety-backed letters of credit issued outside of its senior credit facility, which were denominated in U.S. dollars.
11. LEASES:
Quanta primarily leases land, buildings, vehicles, construction equipment and office equipment. As of December 31, 2022, the majority of Quanta’s leases had remaining lease terms of less than eleven years. Certain leases include options to
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
extend their terms in increments of up to five years and/or options to terminate. The components of lease costs in the accompanying consolidated statements of operations are as follows (in thousands):
| Year Ended December 31, | |||||||||||||||||||||||
| Lease cost | Classification | 2022 | 2021 | 2020 | |||||||||||||||||||
| Finance lease cost: | |||||||||||||||||||||||
| Amortization of lease assets | Depreciation (1) | $ | 1,540 | $ | 1,097 | $ | 1,234 | ||||||||||||||||
| Interest on lease liabilities | Interest and other financing expenses | 108 | 90 | 107 | |||||||||||||||||||
| Operating lease cost | Cost of services and Selling, general and administrative expenses | 93,539 | 104,668 | 116,672 | |||||||||||||||||||
| Short-term and variable lease cost (2) | Cost of services and Selling, general and administrative expenses | 953,721 | 716,722 | 656,649 | |||||||||||||||||||
| Total lease cost | $ | 1,048,908 | $ | 822,577 | $ | 774,662 |
(1) Depreciation is included within “Cost of services” and “Selling, general and administrative expenses” in the accompanying consolidated statements of operations.
(2) Short-term lease cost includes both leases and rentals with initial terms of one year or less. Variable lease cost is insignificant.
Quanta has entered into arrangements with certain related parties to lease real property and facilities. Typically, the parties are employees of Quanta who are also the former owners of businesses acquired by Quanta, and the real property and facilities continue to be utilized by Quanta subsequent to the acquisitions. Quanta utilizes third-party market valuations to evaluate rental rates for these properties and facilities, and the lease agreements generally have remaining lease terms of up to ten years, subject to renewal options. Related party lease expense was $14.7 million, $13.9 million and $14.3 million for the years ended December 31, 2022, 2021 and 2020.
The components of leases in the accompanying consolidated balance sheets were as follows (in thousands):
| December 31, | |||||||||||||||||||||||
| Lease type | Classification | 2022 | 2021 | ||||||||||||||||||||
| Assets: | |||||||||||||||||||||||
| Operating lease right-of-use assets | Operating lease right-of-use assets | $ | 229,691 | $ | 240,605 | ||||||||||||||||||
| Finance lease assets | Property and equipment, net of accumulated depreciation | 3,238 | 2,415 | ||||||||||||||||||||
| Lease financing transaction assets (1) | Property and equipment, net of accumulated depreciation | 83,591 | 53,950 | ||||||||||||||||||||
| Total lease assets | $ | 316,520 | $ | 296,970 | |||||||||||||||||||
| Liabilities: | |||||||||||||||||||||||
| Current: | |||||||||||||||||||||||
| Operating | Current portion of operating lease liabilities | $ | 74,052 | $ | 78,251 | ||||||||||||||||||
| Finance | Current maturities of long-term debt and short-term debt | 1,433 | 1,156 | ||||||||||||||||||||
| Lease financing transaction liabilities (1) | Current maturities of long-term debt and short-term debt | 15,034 | 9,782 | ||||||||||||||||||||
| Non-current: | |||||||||||||||||||||||
| Operating | Operating lease liabilities, net of current portion | 171,512 | 170,427 | ||||||||||||||||||||
| Finance | Long-term debt, net of current maturities | 2,109 | 1,390 | ||||||||||||||||||||
| Lease financing transaction liabilities (1) | Long-term debt, net of current maturities | 68,557 | 44,168 | ||||||||||||||||||||
| Total lease liabilities | $ | 332,697 | $ | 305,174 |
(1) Certain of Quanta’s equipment rental agreements contain purchase options pursuant to which the purchase price is offset by a portion of the rental payments. When these purchase options are exercised by a third-party lessor on behalf of Quanta, the transaction is deemed to be a financing transaction for accounting purposes, which results in the recognition of an asset equal to the purchase price and a corresponding liability.
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Future minimum lease payments for operating, finance leases and lease financing transactions were as follows (in thousands):
| As of December 31, 2022 | ||||||||||||||||||||||||||
| Operating Leases | Finance Leases | Lease Financing Transactions | Total | |||||||||||||||||||||||
| 2023 | $ | 80,899 | $ | 1,517 | $ | 15,034 | $ | 97,450 | ||||||||||||||||||
| 2024 | 61,186 | 1,002 | 19,058 | 81,246 | ||||||||||||||||||||||
| 2025 | 45,363 | 638 | 15,331 | 61,332 | ||||||||||||||||||||||
| 2026 | 33,227 | 431 | 13,998 | 47,656 | ||||||||||||||||||||||
| 2027 | 19,835 | 40 | 10,460 | 30,335 | ||||||||||||||||||||||
| Thereafter | 24,631 | — | 9,710 | 34,341 | ||||||||||||||||||||||
| Total future minimum payments related to operating leases, finance leases and lease financing transactions | 265,141 | 3,628 | 83,591 | 352,360 | ||||||||||||||||||||||
| Less imputed interest | (19,577) | (86) | — | (19,663) | ||||||||||||||||||||||
| Total operating lease, finance lease and lease financing transaction liabilities | $ | 245,564 | $ | 3,542 | $ | 83,591 | $ | 332,697 |
Future minimum lease payments for short-term leases were $22.3 million as of December 31, 2022.
The weighted average remaining lease terms and discount rates were as follows:
| As of December 31, | ||||||||||||||||||||
| 2022 | 2021 | |||||||||||||||||||
| Weighted average remaining lease term (in years): | ||||||||||||||||||||
| Operating leases | 4.39 | 4.25 | ||||||||||||||||||
| Finance leases | 2.93 | 2.57 | ||||||||||||||||||
| Weighted average discount rate: | ||||||||||||||||||||
| Operating leases | 3.5 | % | 3.7 | % | ||||||||||||||||
| Finance leases | 3.1 | % | 3.3 | % |
Quanta has also guaranteed the residual value under certain of its equipment operating leases, agreeing to pay any difference between the residual value and the fair market value of the underlying asset at the date of lease termination. Residual value guarantees approximate fair value and, therefore, generally do not result in significant payments.
12. INCOME TAXES:
The components of income before income taxes were as follows (in thousands):
| Year Ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| Income before income taxes: | |||||||||||||||||
| Domestic | $ | 532,051 | $ | 534,302 | $ | 632,791 | |||||||||||
| Foreign | 171,835 | 88,599 | (61,445) | ||||||||||||||
| Total | $ | 703,886 | $ | 622,901 | $ | 571,346 |
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The components of the provision for income taxes were as follows (in thousands):
| Year Ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| Current: | |||||||||||||||||
| Federal | $ | 97,673 | $ | 65,273 | $ | 134,538 | |||||||||||
| State | 29,439 | 32,930 | 45,610 | ||||||||||||||
| Foreign | 23,078 | 6,644 | (745) | ||||||||||||||
| Total current tax provision | 150,190 | 104,847 | 179,403 | ||||||||||||||
| Deferred: | |||||||||||||||||
| Federal | 29,657 | 27,762 | (46,251) | ||||||||||||||
| State | 4,225 | (2,418) | (3,850) | ||||||||||||||
| Foreign | 8,171 | 727 | (9,915) | ||||||||||||||
| Total deferred tax provision (benefit) | 42,053 | 26,071 | (60,016) | ||||||||||||||
| Total provision for income taxes | $ | 192,243 | $ | 130,918 | $ | 119,387 |
Income taxes related to other (loss) income within other comprehensive income (loss) was a benefit of $0.2 million, an expense of $0.4 million and a benefit of $0.9 million for the years ended December 31, 2022, 2021 and 2020. There was no tax on foreign currency translation adjustment within other comprehensive income (loss) for the years ended December 31, 2022, 2021 and 2020.
The actual income tax provision differed from the income tax provision computed by applying the U.S. federal statutory corporate rate to income before provision for income taxes as follows (in thousands):
| Year Ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| Provision at the statutory rate | $ | 147,816 | $ | 130,809 | $ | 119,983 | |||||||||||
| Increases (decreases) resulting from: | |||||||||||||||||
| State taxes | 28,320 | 27,204 | 31,791 | ||||||||||||||
| Valuation allowance on deferred tax assets | 23,366 | 6,107 | (31,138) | ||||||||||||||
| Tax contingency reserves, net | 7,939 | 844 | (2,125) | ||||||||||||||
| Employee per diems, meals and entertainment | 6,086 | 3,569 | 10,680 | ||||||||||||||
| Company-owned life insurance | 2,917 | (6,969) | — | ||||||||||||||
| Foreign taxes | (638) | (9,359) | (7,268) | ||||||||||||||
| Taxes on certain equity method investments and non-controlling interests | (12,886) | (8,825) | (3,466) | ||||||||||||||
| Stock-based compensation | (24,066) | (21,271) | (3,109) | ||||||||||||||
| Other | 13,389 | 8,809 | 4,039 | ||||||||||||||
| Total provision for income taxes | $ | 192,243 | $ | 130,918 | $ | 119,387 |
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Deferred income taxes result from temporary differences in the recognition of income and expenses for financial reporting purposes and tax purposes. The tax effects of these temporary differences, representing deferred tax assets and liabilities, result principally from the following (in thousands):
| December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Deferred income tax liabilities: | |||||||||||
| Property and equipment | $ | (286,950) | $ | (278,303) | |||||||
| Goodwill | (129,491) | (93,632) | |||||||||
| Leased assets | (84,870) | (76,728) | |||||||||
| Retainage | (28,773) | (32,661) | |||||||||
| Total deferred income tax liabilities | (530,084) | (481,324) | |||||||||
| Deferred income tax assets: | |||||||||||
| Lease liabilities | 84,189 | 76,608 | |||||||||
| Other intangible assets | 73,654 | 19,110 | |||||||||
| Net operating loss carryforwards | 56,556 | 78,947 | |||||||||
| Stock and incentive compensation | 55,413 | 50,772 | |||||||||
| Accruals and reserves | 48,168 | 66,000 | |||||||||
| Tax credits | 34,413 | 39,826 | |||||||||
| Deferred tax benefits on unrecognized tax positions | 8,899 | 10,090 | |||||||||
| Equity method investments and non-controlling interests | 5,878 | 273 | |||||||||
| Other | 5,849 | 7,114 | |||||||||
| Subtotal | 373,019 | 348,740 | |||||||||
| Valuation allowance | (58,461) | (41,308) | |||||||||
| Total deferred income tax assets | 314,558 | 307,432 | |||||||||
| Total net deferred income tax liabilities | $(215,526) | $(173,892) |
The net deferred income tax assets and liabilities comprised the following in the accompanying consolidated balance sheets (in thousands):
| December 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Deferred income taxes: | |||||||||||
| Assets | $ | 12,335 | $ | 17,206 | |||||||
| Liabilities | (227,861) | (191,098) | |||||||||
| Total net deferred income tax liabilities | $ | (215,526) | $ | (173,892) |
The valuation allowances for deferred income tax assets at December 31, 2022, 2021 and 2020 were $58.5 million, $41.3 million and $43.3 million. These valuation allowances relate to state and foreign net operating loss carryforwards and foreign tax credits. The net changes in the total valuation allowance for each of the years ended December 31, 2022, 2021 and 2020 were an increase of $17.2 million, a decrease of $1.9 million and a decrease of $60.9 million. The change in valuation allowance during the year ended December 31, 2022 resulted in a $23.3 million increase in tax expense due primarily to $22.7 million in new valuation allowances recorded on unrealized losses on Quanta’s investment in Starry as further described in Note 8. The total valuation allowance increased by $17.2 million from December 31, 2021 to December 31, 2022 primarily as a result of the $22.7 million valuation allowance related to Starry mentioned above, partially offset by a reduction of $4.8 million due to the removal of deferred tax assets that were no longer available to be carried forward to future years for which a valuation allowance had been provided in prior years, as well as currency translation adjustments on previously provided valuation allowances. The change in valuation allowance during the year ended December 31, 2021 resulted in a $6.1 million increase in tax expense due to approximately $8.5 million of new valuation allowances primarily recorded on foreign net operating losses, which was partially offset by a $2.4 million valuation allowance release recorded due to the completion of certain internal restructuring efforts that increased management’s visibility into future utilization of certain state net operation losses. The total valuation allowance was reduced by $1.9 million from December 31, 2020 to December 31, 2021 as a result of
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
a reduction of $8.0 million due to the expiration of certain net operating losses, for which a valuation allowance had previously been recorded, as well as currency translation adjustments on previously recorded valuation allowances, offset by an increase to the valuation allowance as a result of the $6.1 million of new valuation allowances as noted above. The change in valuation allowance during the year ended December 31, 2020 resulted in a $31.1 million reduction in tax expense, primarily due to a release of $45.1 million of valuation allowance on foreign tax credits due to the completion of an internal financial reorganization, which was partially offset by the establishment of $14.0 million of new valuation allowances on deferred tax assets generated during the year ended December 31, 2020. The total change in valuation allowance for the year ended December 31, 2020 was a $60.9 million reduction, primarily due to the removal of approximately $29.4 million of foreign net operating losses that were no longer eligible to be carried forward as well as the $31.1 million reduction noted above. The valuation allowances were established primarily as a result of uncertainty in Quanta’s outlook as to the amount and character of future taxable income in particular tax jurisdictions. Quanta believes it is more likely than not that it will realize the benefit of its deferred tax assets net of existing valuation allowances.
At December 31, 2022, Quanta had state and foreign net operating loss carryforwards, the tax effect of which was $57.7 million. These carryforwards will expire as follows: 2023, $0.3 million; 2024, $0.1 million; 2025, $5.5 million; 2026, $1.6 million; 2027, $0.2 million; and $50.0 million thereafter. A valuation allowance of $27.6 million has been recorded against certain foreign and state net operating loss carryforwards.
Quanta generally does not provide for taxes related to undistributed earnings of its foreign subsidiaries because such earnings either would not be taxable when remitted or they are considered to be indefinitely reinvested. Quanta could also be subject to additional foreign withholding taxes if it were to repatriate cash that is indefinitely reinvested outside the United States, but it does not expect such amount to be material.
A reconciliation of unrecognized tax benefit balances is as follows (in thousands):
| December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| Balance at beginning of year | $ | 37,737 | $ | 33,219 | $ | 40,878 | |||||||||||
| Additions based on tax positions related to the current year | 11,699 | 6,881 | 4,398 | ||||||||||||||
| Additions for tax positions of prior years | 230 | 2,339 | — | ||||||||||||||
| Reductions for tax positions of prior years | (407) | — | (2,410) | ||||||||||||||
| Reductions for audit settlements | (2,207) | — | (930) | ||||||||||||||
| Reductions resulting from a lapse of the applicable statute of limitations periods | (5,413) | (4,702) | (8,717) | ||||||||||||||
| Balance at end of year | $ | 41,639 | $ | 37,737 | $ | 33,219 |
As of December 31, 2022, the total amount of unrecognized tax benefits relating to uncertain tax positions was $41.6 million, a net increase of $3.9 million from December 31, 2021, which primarily resulted from a $11.7 million increase related to positions expected to be taken in 2022, partially offset by a $2.2 million reduction related to the settlement of audits and a $5.4 million reduction related to the expiration of U.S. federal and state statutes of limitations. For the year ended December 31, 2021, the aggregate increase results primarily from reserves for uncertain tax positions taken in 2021. For the year ended December 31, 2020, the $12.1 million of aggregate reductions were primarily due to the favorable settlement of U.S. and Canadian tax audits and the expiration of U.S. federal and state statutes of limitations.
The balances of unrecognized tax benefits, the amount of related interest and penalties and what Quanta believes to be the range of reasonably possible changes in the next 12 months are as follows (in thousands):
| December 31, 2022 | |||||
| Unrecognized tax benefits | $ | 41,639 | |||
| Portion that, if recognized, would reduce tax expense and effective tax rate | 39,247 | ||||
| Accrued interest on unrecognized tax benefits | 4,334 | ||||
| Accrued penalties on unrecognized tax benefits | 1,085 | ||||
| Reasonably possible reduction to the balance of unrecognized tax benefits in succeeding 12 months | $0 to $12,122 | ||||
| Portion that, if recognized, would reduce tax expense and effective tax rate | $0 to $11,699 |
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Quanta classifies interest and penalties within the provision for income taxes. Quanta recognized interest expense of $0.5 million, interest income of $0.8 million and interest income of $0.7 million in the provision for income taxes for the years ended December 31, 2022, 2021 and 2020.
Quanta’s consolidated federal income tax returns for tax years 2017, 2018, 2019, 2020 and 2021 remain open to examination by the IRS, as the applicable statute of limitations periods have not yet expired. Additionally, various state and foreign tax returns filed by Quanta and certain subsidiaries for multiple periods remain under examination by various U.S. state and foreign tax authorities. Quanta does not consider any state in which it does business to be a major tax jurisdiction.
13. EQUITY:
Treasury Stock
General
Treasury stock is recorded at cost. Under Delaware law, treasury stock is not counted for quorum purposes or entitled to vote.
Shares withheld for tax withholding obligations
The tax withholding obligations of employees with respect to RSUs and PSUs that are settled in common stock are typically satisfied by Quanta making tax payments and withholding the number of shares of common stock having a value equal to the tax withholding obligation that is due on the date of vesting or settlement (as applicable). With respect to these liabilities, Quanta withheld 0.7 million shares of Quanta common stock during the year ended December 31, 2022, which had a market value of $82.9 million, 0.8 million shares of Quanta common stock during the year ended December 31, 2021, which had a market value of $65.3 million, and 0.6 million shares of Quanta common stock during the year ended December 31, 2020, which had a market value of $25.5 million. These shares and the related costs to acquire them were accounted for as adjustments to the balance of treasury stock.
Stock repurchases
During the third quarter of 2018, Quanta’s Board of Directors approved a stock repurchase program that authorized Quanta to purchase up to $500.0 million of its outstanding common stock. This program was completed in 2021. In August 2020, Quanta’s Board of Directors approved a stock repurchase program that authorized Quanta to repurchase, from time to time through June 30, 2023, up to an additional $500.0 million in shares of its outstanding common stock, and as of December 31, 2022, $345.1 million remained available under this repurchase program. Quanta repurchased the following shares of common stock in the open market under stock repurchase programs (in thousands):
| Year ended: | Shares | Amount | ||||||||||||
| December 31, 2022 | 1,061 | $ | 127,747 | |||||||||||
| December 31, 2021 | 721 | $ | 63,988 | |||||||||||
| December 31, 2020 | 6,680 | $ | 249,949 |
Quanta’s policy is to record a stock repurchase as of the trade date of the transaction; however, the payment of cash related to the repurchase is made on the settlement date of the transaction. During the years ended December 31, 2022, 2021 and 2020, cash payments related to stock repurchases were $127.8 million, $66.7 million and $247.2 million. Repurchases may be implemented through open market repurchases or privately negotiated transactions, at management’s discretion, based on market and business conditions, applicable contractual and legal requirements, including restrictions under Quanta’s senior credit facility, and other factors. Quanta is not obligated to acquire any specific amount of common stock, and the repurchase program may be modified or terminated by Quanta’s Board of Directors at any time at its sole discretion and without notice.
Non-controlling Interests
The carrying amounts of investments held by the non-controlling interests were $15.4 million and $4.6 million at December 31, 2022 and 2021 and are included in “Non-controlling interests” in the consolidated balance sheets. The carrying amount of these investments held by Quanta was $29.3 million and $12.9 million at December 31, 2022 and 2021. See Notes 2 and 16 for further disclosures related to Quanta’s joint venture arrangements.
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Dividends
Quanta declared and paid the following cash dividends and cash dividend equivalents during 2022, 2021 and 2020 (in thousands, except per share amounts):
| Declaration | Record | Payment | Dividend | Dividends | ||||||||||||||||||||||
| Date | Date | Date | Per Share | Declared | ||||||||||||||||||||||
| December 13, 2022 | January 3, 2023 | January 13, 2023 | $ | 0.08 | $ | 11,756 | ||||||||||||||||||||
| August 31, 2022 | October 3, 2022 | October 14, 2022 | $ | 0.07 | $ | 10,322 | ||||||||||||||||||||
| May 27, 2022 | July 1, 2022 | July 15, 2022 | $ | 0.07 | $ | 10,283 | ||||||||||||||||||||
| March 31, 2022 | April 11, 2022 | April 18, 2022 | $ | 0.07 | $ | 10,459 | ||||||||||||||||||||
| December 1, 2021 | January 4, 2022 | January 14, 2022 | $ | 0.07 | $ | 10,363 | ||||||||||||||||||||
| August 27, 2021 | October 1, 2021 | October 15, 2021 | $ | 0.06 | $ | 8,638 | ||||||||||||||||||||
| May 27, 2021 | July 1, 2021 | July 15, 2021 | $ | 0.06 | $ | 8,650 | ||||||||||||||||||||
| March 25, 2021 | April 6, 2021 | April 15, 2021 | $ | 0.06 | $ | 8,429 | ||||||||||||||||||||
| December 11, 2020 | January 4, 2021 | January 15, 2021 | $ | 0.06 | $ | 8,933 | ||||||||||||||||||||
| August 26, 2020 | October 1, 2020 | October 15, 2020 | $ | 0.05 | $ | 7,244 | ||||||||||||||||||||
| May 28, 2020 | July 1, 2020 | July 15, 2020 | $ | 0.05 | $ | 7,182 | ||||||||||||||||||||
| March 26, 2020 | April 6, 2020 | April 15, 2020 | $ | 0.05 | $ | 7,184 | ||||||||||||||||||||
| December 11, 2019 | January 2, 2020 | January 16, 2020 | $ | 0.05 | $ | 7,371 |
A significant majority of the dividends declared were paid on the corresponding payment dates, which are generally within two months of the declaration date. Holders of certain stock awards generally received cash dividend equivalent payments equal to the cash dividends payable on account of the underlying Quanta common stock. Holders of other stock awards receive cash dividend equivalent payments only to the extent such awards become earned and/or vest. Additionally, cash dividend equivalent payments related to certain stock-based awards that have been deferred pursuant to the terms of Quanta’s deferred compensation plan are recorded as liabilities in such plans until the deferred awards are settled.
14. STOCK-BASED COMPENSATION:
Stock Incentive Plans
The 2019 Plan was approved by Quanta’s stockholders in May 2019 and provides for the award of non-qualified stock options, incentive (qualified) stock options, stock appreciation rights, restricted stock awards, RSUs, stock bonus awards, performance compensation awards (including cash bonus awards) or any combination of the foregoing. Current and prospective employees, directors, officers, advisors or consultants of Quanta or its affiliates are eligible to participate in the 2019 Plan. In May 2022, Quanta’s stockholders approved an amendment to the 2019 Plan to increase the shares available for issuance. Subject to certain adjustments, the maximum number of shares available for issuance under the 2019 Plan is 9,639,592, plus any shares underlying share-settling awards previously awarded pursuant to the 2011 Plan that are ultimately forfeited, canceled, expired or settled in cash subsequent to stockholder approval of the 2019 Plan. All awards subsequent to stockholder approval of the 2019 Plan have been and will be made pursuant to the 2019 Plan and applicable award agreements. Awards made under the 2011 Plan prior to approval of the 2019 Plan remain subject to the terms of the 2011 Plan and applicable award agreements.
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
RSUs to be Settled in Common Stock
A summary of the activity for RSUs to be settled in common stock for the years ended December 31, 2022, 2021 and 2020 is as follows (RSUs in thousands):
| 2022 | 2021 | 2020 | |||||||||||||||||||||||||||||||||
| RSUs | Weighted Average Grant Date Fair Value (Per Unit) | RSUs | Weighted Average Grant Date Fair Value (Per Unit) | RSUs | Weighted Average Grant Date Fair Value (Per Unit) | ||||||||||||||||||||||||||||||
| Unvested at January 1 | 3,880 | $61.64 | 3,869 | $37.57 | 3,265 | $35.34 | |||||||||||||||||||||||||||||
| Granted | 860 | $113.07 | 1,642 | $94.83 | 2,029 | $39.91 | |||||||||||||||||||||||||||||
| Vested | (1,319) | $50.60 | (1,476) | $37.03 | (1,269) | $35.69 | |||||||||||||||||||||||||||||
| Forfeited | (158) | $84.94 | (155) | $48.52 | (156) | $36.67 | |||||||||||||||||||||||||||||
| Unvested at December 31 | 3,263 | $78.74 | 3,880 | $61.64 | 3,869 | $37.57 |
The approximate fair value of RSUs that vested during the years ended December 31, 2022, 2021 and 2020 was $152.5 million, $125.7 million and $51.6 million, respectively.
During the years ended December 31, 2022, 2021 and 2020, Quanta recognized $84.0 million, $67.3 million and $55.7 million of non-cash stock compensation expense related to RSUs to be settled in common stock. As of December 31, 2022, there was $143.4 million of total unrecognized compensation expense related to unvested RSUs to be settled in common stock granted to both employees and non-employees. This cost is expected to be recognized over a weighted average period of 3.87 years.
PSUs to be Settled in Common Stock
A summary of the activity for PSUs to be settled in common stock for the years ended December 31, 2022, 2021 and 2020 is as follows (PSUs in thousands):
| 2022 | 2021 | 2020 | |||||||||||||||||||||||||||||||||
| PSUs | Weighted Average Grant Date Fair Value (Per Unit) | PSUs | Weighted Average Grant Date Fair Value (Per Unit) | PSUs | Weighted Average Grant Date Fair Value (Per Unit) (1) | ||||||||||||||||||||||||||||||
| Unvested at January 1 | 931 | $47.27 | 1,047 | $37.65 | 848 | $40.04 | |||||||||||||||||||||||||||||
| Granted | 153 | $119.74 | 174 | $90.44 | 437 | $34.60 | |||||||||||||||||||||||||||||
| Vested | (334) | $40.15 | (268) | $38.28 | (238) | $41.87 | |||||||||||||||||||||||||||||
| Forfeited | (17) | $58.79 | (22) | $41.86 | — | N/A | |||||||||||||||||||||||||||||
| Unvested at December 31 | 733 | $65.39 | 931 | $47.27 | 1,047 | $37.65 |
(1) Certain weighted average grant date fair value per unit amounts related to the year ended December 31, 2020 were recast in the year ended December 31, 2021 to conform to the correction of the valuation of PSUs described below.
The Monte Carlo simulation valuation methodology applied the following key inputs:
| 2022 | 2021 | 2020 | ||||||||||||||||||
| Valuation date price based on March 2, 2022, March 25, 2021 and March 26, 2020 closing stock prices of Quanta common stock | $110.24 | $83.48 | $31.49 | |||||||||||||||||
| Expected volatility | 39 | % | 36 | % | 34 | % | ||||||||||||||
| Risk-free interest rate | 1.64 | % | 0.26 | % | 0.35 | % | ||||||||||||||
| Term in years | 2.83 | 2.77 | 2.76 |
During the years ended December 31, 2022, 2021 and 2020, Quanta recognized $21.6 million, $21.0 million and $35.9 million of non-cash stock compensation expense related to PSUs to be settled in common stock. Included in compensation expense associated with PSUs during the year ended December 31, 2020 was a charge of $14.0 million to correct the valuation of certain PSUs during the years 2017 to 2019. Quanta assessed the materiality of the prior period error and determined that the error was immaterial to the December 31, 2020 and prior period financial statements.
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
As of December 31, 2022, there was an estimated $19.6 million of total unrecognized compensation expense related to unearned and unvested PSUs. This amount is based on forecasted attainment of performance metrics and estimated forfeitures of unearned and unvested PSUs. The compensation expense related to outstanding PSUs can vary from period to period based on changes in forecasted achievement of established performance goals and the total number of shares of common stock that Quanta anticipates will be issued upon vesting of such PSUs. This cost is expected to be recognized over a weighted average period of 1.69 years.
During the years ended December 31, 2022, 2021 and 2020, 0.7 million, 0.5 million and 0.5 million shares of common stock were earned and either issued or deferred for future issuance under Quanta’s deferred compensation plans in connection with PSUs. The approximate fair values of PSUs earned during the years ended December 31, 2022, 2021 and 2020 were $72.4 million, $45.2 million and $18.3 million, respectively.
RSUs to be Settled in Cash
During the years ended December 31, 2022, 2021 and 2020, compensation expense related to RSUs to be settled in cash was $15.5 million, $17.4 million and $9.4 million. RSUs that are anticipated to be settled in cash are not included in the calculation of weighted average shares outstanding for earnings per share, and the estimated earned value of such RSUs is calculated at the end of each reporting period based on the market value of Quanta’s common stock and is classified as a liability. Quanta paid $14.5 million, $13.2 million and $4.3 million to settle liabilities related to cash-settled RSUs in the years ended December 31, 2022, 2021 and 2020. Accrued liabilities for the estimated earned value of outstanding RSUs to be settled in cash were $11.0 million and $11.1 million as of December 31, 2022 and 2021.
15. EMPLOYEE BENEFIT PLANS:
Unions’ Multiemployer Pension Plans
Quanta contributes to a number of multiemployer defined benefit pension plans under the terms of collective bargaining agreements with various unions that represent certain of Quanta’s employees. Approximately 34% of Quanta’s employees as of December 31, 2022 were covered by collective bargaining agreements. Quanta’s multiemployer pension plan contribution rates generally are specified in the collective bargaining agreements (usually on a monthly or annual basis), and contributions are made to the plans on a “pay-as-you-go” basis based on its union employee payrolls. Quanta may also have additional liabilities imposed by law as a result of its participation in multiemployer defined benefit pension plans. The Employee Retirement Income Security Act of 1974, as amended by the Multiemployer Pension Plan Amendments Act of 1980, imposes certain liabilities upon an employer who is a contributor to a multiemployer pension plan if the employer withdraws or is deemed to have withdrawn from the plan or the plan is terminated or experiences a mass withdrawal.
The Pension Protection Act of 2006 (PPA) also added special funding and operational rules generally applicable to plan years beginning after 2007 for multiemployer plans in the United States that are classified as “endangered,” “seriously endangered” or “critical” status based on multiple factors (including, for example, the plan’s funded percentage, cash flow position and whether a projected minimum funding deficiency exists). Plans in these classifications must adopt remedial measures to improve their funded status through a funding improvement or rehabilitation plan, as applicable, which may require additional contributions from employers (which may take the form of a surcharge on benefit contributions) and/or modifications to retiree benefits. Certain plans to which Quanta contributes or may contribute in the future are in “endangered,” “seriously endangered” or “critical” status. The amount of additional funds, if any, that Quanta may be obligated to contribute to these plans cannot be reasonably estimated due to uncertainty regarding the amount of future work involving covered union employees, future contribution levels and possible surcharges on plan contributions.
The following table summarizes plan information relating to Quanta’s participation in multiemployer defined benefit pension plans, including company contributions for the last three years, the status of the plans under the PPA and whether the plans are subject to a funding improvement or rehabilitation plan or contribution surcharges. The most recent PPA zone status available in 2022 and 2021 relates to the plans’ fiscal year-ends in 2021 and 2020. Forms 5500 were not yet available for the plan years ending in 2022. The PPA zone status is based on information that Quanta received from the respective plans’ administrators, as well as publicly available information on the U.S. Department of Labor website, and is certified by each plan’s actuary. Although multiple factors or tests may result in red zone or yellow zone status, plans in the red zone generally are less than 65 percent funded, plans in the yellow zone generally are less than 80 percent funded, and plans in the green zone generally are at least 80 percent funded. Under the PPA, red zone plans are classified as “critical” status, yellow zone plans are classified as “endangered” status and green zone plans are classified as neither “endangered” nor “critical” status. The “Subject to Financial Improvement/ Rehabilitation Plan” column indicates plans for which a financial improvement plan or a rehabilitation plan is either pending or has been implemented. The last column lists the expiration dates of Quanta’s collective-bargaining agreements to which the plans are subject. Total contributions to these plans correspond to the number of union
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
employees employed at any given time and the plans in which they participate and vary depending upon the location and number of ongoing projects at a given time and the need for union resources in connection with such projects. Information has been presented separately for individually significant plans, based on PPA funding status classification, and in the aggregate for all other plans.
| Employee Identification Number/ Pension Plan Number | PPA Zone Status | Subject to Financial Improve- ment/ Reha- bilitation Plan | Contributions (in thousands) | Sur-charge Imposed | Expiration Date of Collective Bargaining Agreement | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Fund | 2022 | 2021 | 2022 | 2021 | 2020 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| National Electrical Benefit Fund | 53-0181657 | Green | Green | No | $ | 47,390 | $ | 38,195 | $ | 40,902 | No | Varies through May 2027 | ||||||||||||||||||||||||||||||||||||||||||||
| Excavators Union Local 731 Pension Fund | 13-1809825 | Green | Green | No | 20,733 | 16,202 | 14,310 | No | April 2026 | |||||||||||||||||||||||||||||||||||||||||||||||
| Central Pension Fund of the IUOE & Participating Employers | 36-6052390 | Green | Green | No | 11,989 | 11,237 | 8,467 | No | Varies through May 2024 | |||||||||||||||||||||||||||||||||||||||||||||||
| Eighth District Electrical Pension Fund | 84-6100393 | Green | Green | No | 5,119 | 1,599 | 4,272 | No | Varies through August 2024 | |||||||||||||||||||||||||||||||||||||||||||||||
| Laborers Pension Trust Fund for Northern California | 94-6277608 | Green | Green | No | 4,849 | 4,479 | 2,328 | No | Varies through May 2024 | |||||||||||||||||||||||||||||||||||||||||||||||
| IBEW LOCAL 1249 Pension Plan | 15-6035161 | Green | Green | No | 4,558 | 2,667 | 530 | No | May 2025 | |||||||||||||||||||||||||||||||||||||||||||||||
| Operating Engineers' Local 324 Pension Fund | 38-1900637 | Red | Red | Yes | 2,951 | 2,789 | 2,629 | No | Varies through April 2026 | |||||||||||||||||||||||||||||||||||||||||||||||
| Local 697 IBEW and Electrical Industry Pension Plan | 51-6133048 | Green | Green | No | 2,509 | 2,229 | 1,840 | No | May 2025 | |||||||||||||||||||||||||||||||||||||||||||||||
| Pipeline Industry Pension Fund | 73-6146433 | Green | Green | No | 2,477 | 5,081 | 3,654 | No | Varies through June 2023 | |||||||||||||||||||||||||||||||||||||||||||||||
| Pension Trust Fund for Operating Engineers | 94-6090764 | Yellow | Yellow | Yes | 1,898 | 1,755 | 1,177 | Yes | Varies through June 2025 | |||||||||||||||||||||||||||||||||||||||||||||||
| Operating Engineers Pension Trust | 95-6032478 | Yellow | Yellow | Yes | 1,360 | 1,143 | 172 | No | June 2025 | |||||||||||||||||||||||||||||||||||||||||||||||
| Plumbers and Pipefitters National Pension Fund | 52-6152779 | Green | Yellow | Yes | 1,153 | 932 | 1,453 | No | Varies through June 2023 | |||||||||||||||||||||||||||||||||||||||||||||||
| Laborers National Pension Fund | 75-1280827 | Red | Red | Yes | 667 | 1,049 | 638 | No | June 2023 | |||||||||||||||||||||||||||||||||||||||||||||||
| Laborers District Council of W PA Pension Fund | 25-6135576 | Yellow | Yellow | Yes | 110 | 1,375 | 77 | No | Varies through May 2024 | |||||||||||||||||||||||||||||||||||||||||||||||
| All other plans - U.S. | 40,391 | 39,470 | 32,769 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| All other plans - Canada (1) | 19,245 | 2,794 | 6,760 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total contributions | $ | 167,399 | $ | 132,996 | $ | 121,978 |
(1) Multiemployer defined benefit pension plans in Canada are not subject to the reporting requirements under the PPA. Accordingly, certain information was not publicly available.
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Quanta’s contributions to the following individually significant plans were five percent or more of the total contributions to these plans for the periods indicated based on the Forms 5500 for these plans for the years ended December 31, 2021 and 2020. Forms 5500 were not yet available for these plans for the year ended December 31, 2022.
| Pension Fund | Plan Years in which Quanta Contributions Were Five Percent or More of Total Plan Contributions | |||||||
| National Electrical Benefit Fund | 2021 and 2020 | |||||||
| Excavators Union Local 731 Pension Fund | 2021 and 2020 | |||||||
| Local 697 IBEW and Electrical Industry Pension Fund | 2021 and 2020 | |||||||
| Pipeline Industry Pension Fund | 2021 and 2020 | |||||||
| Local Union No. 9 IBEW and Outside Contractors Pension Fund (1) | 2021 and 2020 | |||||||
| IBEW Local 456 Pension Plan (1) | 2021 and 2020 | |||||||
| Teamsters National Pipe Line Pension Plan (1) | 2021 and 2020 | |||||||
| Eighth District Electrical Pension Fund | 2020 |
(1) This plan is included in the “All other plans - U.S.” category in the prior table.
In addition to the contributions made to multiemployer defined benefit pension plans noted above, Quanta also contributed to multiemployer defined contribution or other benefit plans on behalf of certain union employees. Contributions to union multiemployer defined contribution or other benefit plans by Quanta were $234.3 million, $213.4 million and $188.6 million for the years ended December 31, 2022, 2021 and 2020. Total contributions made to all of these multiemployer plans correspond to the number of union employees employed at any given time and the plans in which they participate and vary depending upon the location and number of ongoing projects at a given time and the need for union resources in connection with such projects.
Quanta 401(k) Plan
Quanta maintains a 401(k) plan pursuant to which employees who are not provided retirement benefits through a collective bargaining agreement may make contributions through payroll deductions. Quanta makes matching cash contributions of 100% of each employee’s contribution up to 3% of that employee’s salary and 50% of each employee’s contribution between 3% and 6% of such employee’s salary, up to the maximum amount permitted by law. Contributions to the 401(k) plan by Quanta were $61.7 million, $50.7 million and $45.9 million for the years ended December 31, 2022, 2021 and 2020.
Deferred Compensation Plans
Quanta maintains non-qualified deferred compensation plans under which eligible directors and key employees may defer their receipt of certain cash compensation and/or the settlement of certain stock-based awards. These plans are unfunded and unsecured compensation arrangements. Individuals participating in these plans may allocate deferred cash amounts among a group of notional accounts that mirror the gains and losses of various investment alternatives. Generally, participants receive distributions of deferred balances based on predetermined payout schedules or other events.
The plan covering key employees provides for employer matching contributions for certain officers and employees whose benefits under the 401(k) plan are limited by federal tax law. Quanta may also make discretionary employer contributions to such plan. Matching contributions vest immediately, and discretionary employer contributions may be subject to a vesting schedule determined at the time of the contribution, provided that vesting accelerates upon a change in control or the participant’s death or retirement. All matching and discretionary employer contributions, whether vested or not, are forfeited upon a participant’s termination of employment for cause or upon the participant engaging in competition with Quanta or any of its affiliates.
Quanta made matching contributions to the eligible participants’ accounts under the deferred compensation plans of $1.5 million, $1.4 million and $1.3 million during the years ended December 31, 2022, 2021 and 2020 and did not make discretionary contributions during those years. As of December 31, 2022 and 2021, the deferred compensation liability under Quanta’s deferred compensation plans, including amounts contributed by Quanta, was $67.4 million and $74.2 million, the majority of which was included in “Insurance and other non-current liabilities” in the accompanying consolidated balance sheets. To provide for future obligations related to these deferred compensation plans, Quanta has invested in corporate-owned life insurance (COLI) policies covering certain participants in the deferred compensation plans, the underlying investments of which are intended to be aligned with the investment alternatives elected by plan participants. The COLI assets are recorded at their cash surrender value, which is considered their fair market value, and as of December 31, 2022 and 2021, the fair market
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values were $64.0 million and $73.8 million and were included in “Other assets, net” in the accompanying consolidated balance sheets. The level of inputs used for these fair value measurements is Level 2.
Changes in the fair market value of Quanta’s COLI assets and deferred compensation liabilities largely offset and are recorded in the accompanying statements of operations as follows (in thousands):
| December 31, | |||||||||||||||||||||||
| Classification | Change in fair market value of | 2022 | 2021 | 2020 | |||||||||||||||||||
| Gain (loss) included in Selling, general and administrative expenses | Deferred compensation liabilities | $ | 13,192 | $ | (10,428) | $ | (7,507) | ||||||||||||||||
| Other (expense) income, net | COLI assets | $ | (13,757) | $ | 8,566 | $ | 6,857 |
16. COMMITMENTS AND CONTINGENCIES:
Legal Proceedings
Quanta is from time to time party to various lawsuits, claims and other legal proceedings that arise in the ordinary course of business. These actions typically seek, among other things, compensation for alleged personal injury, property damage, breach of contract, negligence or gross negligence, environmental liabilities, wage and hour and other employment-related damages, punitive damages, consequential damages, civil penalties or other losses, or injunctive or declaratory relief. With respect to all such lawsuits, claims and proceedings, Quanta records a reserve when it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. In addition, Quanta discloses matters for which management believes a material loss is at least reasonably possible.
The assessment of whether a loss is probable or reasonably possible, and whether the loss or a range of loss is estimable, often involves a series of complex judgments about future events. In all instances, management has assessed the matter based on current information and made a judgment concerning its potential outcome, giving due consideration to the nature of the claim, the amount and nature of damages sought and the probability of success and taking into account, among other things, negotiations with claimants, discovery, settlements and payments, judicial rulings, arbitration and mediation decisions, advice of internal and external legal counsel, and other information and events pertaining to a particular matter. Costs incurred for litigation are expensed as incurred. Except as otherwise stated below, none of these proceedings are expected to have a material adverse effect on Quanta’s consolidated financial position, results of operations or cash flows. However, management’s judgment may prove materially inaccurate, and such judgment is made subject to the known uncertainties of litigation.
Peru Project Dispute
In 2015, Redes Andinas de Comunicaciones S.R.L. (Redes), a majority-owned subsidiary of Quanta, entered into two separate contracts with an agency of the Peruvian Ministry of Transportation and Communications (MTC), currently Programa Nacional de Telecomunicaciones (PRONATEL), as successor to Fondo de Inversion en Telecomunicaciones (FITEL), pursuant to which Redes would design, construct and operate certain telecommunication networks in rural regions of Peru. The aggregate consideration provided for in the contracts was approximately $248 million, consisting of approximately $151 million to be paid during the construction period and approximately $97 million to be paid during a 10-year post-construction operation and maintenance period. At the beginning of the project, FITEL made advance payments totaling approximately $87 million to Redes, which were secured by two on-demand advance payment bonds posted by Redes to guarantee proper use of the payments in the execution of the project. Redes also provided two on-demand performance bonds in the aggregate amount of $25 million to secure performance of its obligations under the contracts.
During the construction phase, the project experienced numerous challenges and delays, primarily related to issues which Quanta believes were outside of the control of and not attributable to Redes, including, among others, weather-related issues, local opposition to the project, permitting delays, the inability to acquire clear title to certain required parcels of land and other delays which Quanta believes were attributable to FITEL/PRONATEL. In response to various of these challenges and delays, Redes requested and received multiple extensions to certain contractual deadlines and relief from related liquidated damages. However, in April 2019, PRONATEL provided notice to Redes claiming that Redes was in default under the contracts due to the delays and that PRONATEL would terminate the contracts if the alleged defaults were not cured. Redes responded by claiming that it was not in default, as the delays were due to events not attributable to Redes, and therefore PRONATEL was not entitled to terminate the contracts. PRONATEL subsequently terminated the contracts for alleged cause prior to completion of Redes’ scope of work, exercised the on-demand performance bonds and advance payment bonds against Redes, and indicated its intention to claim damages, including liquidated damages under the contracts.
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As of the date of the contract terminations, Redes had incurred costs of approximately $157 million related to the design and construction of the project and had received approximately $100 million of payments (inclusive of the approximately $87 million advance payments).
In May 2019, Redes filed for arbitration before the Court of International Arbitration of the International Chamber of Commerce (ICC) against PRONATEL and the MTC. In the arbitration, Redes claimed that PRONATEL: breached and wrongfully terminated the contracts; wrongfully executed the advance payment bonds and the performance bonds; and was not entitled to the alleged amount of liquidated damages, and sought compensation for various damages arising from PRONATEL’s actions in the initially claimed amount of approximately $190 million. In August 2022, Redes received the decision of the arbitration tribunal, which unanimously found in favor of Redes in connection with its claims and ordered, among other things, (i) repayment of the amounts collected by PRONATEL under the advance payment bonds and the performance bonds; (ii) payment of amounts owed for work completed by Redes under the contracts; (iii) payment of lost income in connection with Redes’ future operation and maintenance of the networks; and (iv) payment of other related costs and damages to Redes as a result of the breach and improper termination of the contracts (including costs related to the execution of the bonds, costs related to the transfer of the networks and legal and expert fees). Accordingly, the arbitration tribunal awarded Redes approximately $177 million. In addition, per the terms of the arbitration decision, interest will accrue on the amount owed up to the date of payment. The decision of the arbitration tribunal is final; however, there are limited grounds on which PRONATEL and the MTC may seek to annul the decision in Peruvian court, and in December 2022, an annulment proceeding was filed by PRONATEL and the MTC. Additionally, following the favorable arbitration ruling, in December 2022 Quanta received $100.5 million pursuant to coverage under an insurance policy for the improper collection by PRONATEL and the MTC of the advance payment and performance bonds, and in January 2023 Quanta received $6.8 million pursuant to coverage under an insurance policy for nonpayment by PRONATEL and the MTC of amounts owed for work completed by Redes. Quanta is continuing to pursue collection of the ICC arbitration award and any amount collected would result in repayment of an equal amount to the insurers up to the amount received from the insurers. As a result, $100.5 million is included in “Insurance and other non-current liabilities” in the accompanying consolidated balance sheet as of December 31, 2022.
Quanta also reserves the right to seek full compensation for the loss of its investment under applicable legal regimes, including investment treaties and customary international law, as well as to seek resolution through direct discussions with PRONATEL or the MTC. In connection with these rights, in May 2020 Quanta’s Dutch subsidiary delivered to the Peruvian government an official notice of dispute arising from the termination of the contracts and related acts by PRONATEL (which are attributable to Peru) under the Agreement on the Encouragement and Reciprocal Protection of Investments between the Kingdom of the Netherlands and the Republic of Peru (Investment Treaty). The Investment Treaty protects Quanta’s subsidiary’s indirect ownership stake in Redes and the project, and provides for rights and remedies distinct from the ICC arbitration. In December 2020, Quanta’s Dutch subsidiary filed a request for the institution of an arbitration proceeding against Peru with the International Centre for Settlement of Investment Disputes (ICSID) related to Peru’s breach of the Investment Treaty, which was registered by ICSID in January 2021. In the ICSID arbitration, Quanta’s Dutch subsidiary claims, without limitation, that Peru: (i) treated the subsidiary’s investment in Redes and the project unfairly and inequitably; and (ii) effectively expropriated the subsidiary’s investment in Redes and the project. In addition, Quanta’s Dutch subsidiary is seeking full compensation for all damages arising from Peru’s actions, including but not limited to (i) the fair market value of the investment and/or lost profits; (ii) attorneys’ fees and arbitration costs; (iii) other related costs and damages and (iv) pre- and post-award interest. The ICSID arbitration hearing is currently scheduled to occur in June 2023.
Quanta believes Redes is entitled to all amounts awarded by the ICC arbitration tribunal, and that its Dutch subsidiary is entitled to other amounts associated with the pending ICSID arbitration proceeding. Quanta and Redes intend to vigorously pursue recovery of the amounts awarded by the ICC arbitration tribunal and take additional legal actions deemed necessary to enforce the ICC arbitration decision. However, due to the inherent uncertainty involved with, among other things, the annulment proceeding, the ultimate timing and conclusion with respect to collection of the amount of the ICC arbitration award remains unknown.
As a result of the contract terminations and the inherent uncertainty involved in arbitration proceedings and recovery of amounts owed, during the three months ended June 30, 2019, Quanta recorded a charge to earnings of $79.2 million, which included a reduction of previously recognized earnings on the project, a reserve against a portion of the project costs incurred through the project termination date, an accrual for a portion of the alleged liquidated damages, and the estimated costs to complete the project turnover and close out the project. Quanta also initially recorded a contract receivable of approximately $120 million related to the project during the three months ended June 30, 2019, which includes the amounts collected by PRONATEL through exercise of the advance payment bonds and performance bonds, and that receivable was not changed as of December 31, 2021 and 2022 and is included in “Other assets, net” in the accompanying consolidated balance sheet. After considering, as discussed above, that the ultimate timing and conclusion with respect to collection of the ICC arbitration award remains unknown, Quanta has not recognized a gain in the current period. To the extent amounts in excess of the current
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receivable are determined to be realizable, a gain would be recorded in the period such determination is made. However, if Quanta is ultimately not successful with respect to collection of the ICC arbitration award, through annulment or otherwise, or with respect to its claims in the pending ICSID arbitration proceeding, this matter could result in an additional significant loss that could have a material adverse effect on Quanta’s consolidated results of operations and cash flows.
Lorenzo Benton v. Telecom Network Specialists, Inc., et al.
In June 2006, plaintiff Lorenzo Benton filed a class action complaint in the Superior Court of California, County of Los Angeles, alleging various wage and hour violations against Telecom Network Specialists (TNS), a former subsidiary of Quanta. Quanta retained liability associated with this matter pursuant to the terms of Quanta’s sale of TNS in December 2012. Benton represents a class of workers that includes all persons who worked on certain TNS projects, including individuals that TNS retained through numerous staffing agencies. The plaintiff class in this matter is seeking damages for unpaid wages, penalties associated with the failure to provide meal and rest periods and overtime wages, interest and attorneys’ fees. In January 2017, the trial court granted a summary judgment motion filed by the plaintiff class and found that TNS was a joint employer of the class members and that it failed to provide adequate meal and rest breaks and failed to pay overtime wages. During 2019 and 2020, the parties filed additional summary judgment and other motions and a bench trial on liability and damages was held. Liability and damages have been determined by the trial court, with the amount of liability for TNS, including interest through the date of the trial court’s orders, determined to be approximately $9.5 million. Separately, in 2022, the court issued a final ruling awarding attorneys’ fees and costs to plaintiffs in the amount of approximately $17.3 million. Quanta continues to contest its liability and the damages calculations asserted by the plaintiff class in this matter and believes the court’s decisions on these matters are not supported by controlling law and that attorneys’ fees would only be recoverable by the plaintiff class in the event Quanta’s appeal of the trial court’s rulings on liability and damages is unsuccessful.
Additionally, in November 2007, TNS filed cross complaints for indemnity and breach of contract against the staffing agencies, which employed many of the individuals in question. In December 2012, the trial court heard cross-motions for summary judgment filed by TNS and the staffing agencies pertaining to TNS’s demand for indemnity. The court denied TNS’s motion and granted the motions filed by the staffing agencies; however, the California Appellate Court reversed the trial court’s decision in part and instructed the trial court to reconsider its ruling. In February 2017, the court denied a new motion for summary judgment filed by the staffing companies and has since stated that the staffing companies would be liable to TNS for any damages owed to the class members that the staffing companies employed. However, Quanta currently believes that, due to solvency issues, any contribution from the staffing companies may not be substantial.
The final amount of liability and attorneys’ fees, if any, payable in connection with this matter remains the subject of pending litigation and will ultimately depend on various factors, including the outcome of the parties’ appeals of the trial court’s rulings on liability, damages, and attorneys’ fees and costs, and the solvency of the staffing agencies. Based on review and analysis of the trial court’s rulings on liability, Quanta does not believe, at this time, that it is probable this matter will result in a material loss. However, if Quanta is unsuccessful in this litigation and the staffing agencies are unable to fund damages owed to class members, based on rulings issued by the trial court, Quanta believes the range of reasonably possible loss to Quanta upon final resolution of this matter could be up to approximately $26.8 million, plus any additional attorneys’ fees, interest, and expenses awarded to the plaintiff class.
Hallen Acquisition Assumed Liability
In August 2019, in connection with the acquisition of The Hallen Construction Co., Inc. (Hallen), Quanta assumed certain contingent liabilities associated with a March 2014 natural gas-fed explosion and fire in the Manhattan borough of New York City, New York. The incident resulted in, among other things, loss of life, personal injury and the destruction of two buildings and other property damage. After investigation, the National Transportation Safety Board determined that the probable cause of the incident was the failure of certain natural gas infrastructure installed by Consolidated Edison, Inc. (Con Ed) and the failure of certain sewer infrastructure maintained by the City of New York. Pursuant to a contract with Con Ed, Hallen had performed certain work related to such natural gas infrastructure and agreed to indemnify Con Ed for certain claims, liabilities and costs associated with its work. Numerous lawsuits are pending in New York state courts related to the incident, which generally name Con Ed, the City of New York and Hallen as defendants. These lawsuits are at various stages and generally seek unspecified damages and, in some cases, punitive damages, for wrongful death, personal injury, property damage and business interruption.
As of December 31, 2022, Quanta had not recorded an accrual related to this matter. Hallen’s liabilities associated with this matter are expected to be covered under applicable insurance policies or contractual remedies negotiated by Quanta with the former owners of Hallen. If a loss becomes probable and estimable with respect to this matter, Quanta expects to accrue its estimated liability and a receivable in the same amount. However, the ultimate amount of liability in connection with this matter remains subject to uncertainties associated with pending litigation, including, among other things, the apportionment of liability among the defendants and other responsible parties and the likelihood and amount of potential damages claims. As a result, this matter could result in a loss that is in excess of, or not covered by, such insurance or contractual remedies, which could have a material adverse effect on Quanta’s consolidated financial condition, results of operations and cash flows.
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Silverado Wildfire Matter
During 2022 and 2023, two of Quanta’s subsidiaries received tenders of defense and demands for preservation of evidence from Southern California Edison Company (SCE) related to lawsuits filed from April 2021 through January 2023 against SCE and T-Mobile USA, Inc. (T-Mobile) in the Superior Court of California, County of Orange. The lawsuits generally assert property damage and related claims on behalf of certain individuals and subrogation claims on behalf of insurers relating to damages caused by a wildfire that began in October 2020 in Orange County, California (the Silverado Fire) and that is purported to have damaged approximately 13,000 acres. The lawsuits allege the Silverado Fire originated from utility poles in the area, generally claiming that each defendant failed to adequately maintain, inspect, repair or replace its overhead facilities, equipment and utility poles and remove vegetation in the vicinity; that the utility poles were overloaded with equipment from shared usage; and that SCE failed to de-energize its facilities during red flag warnings for a Santa Ana wind event. The lawsuits allege the Silverado Fire started when SCE and T-Mobile equipment contacted each other and note the Orange County Fire Department is investigating whether a T-Mobile lashing wire contacted an SCE overhead primary conductor in high winds. T-Mobile has filed cross-complaints against SCE alleging, among other things, that the ignition site of the Silverado Fire encompassed two utility poles replaced by SCE or a third party engaged by SCE, and that certain equipment, including T-Mobile’s lashing wire, was not sufficiently re-secured after the utility pole replacements. One of Quanta’s subsidiaries performed planning and other services related to the two utility poles, and another Quanta subsidiary replaced the utility poles and reattached the electrical and telecommunication equipment to the new utility poles in March 2019, approximately 19 months before the Silverado Fire. Pursuant to the general terms of a master services agreement and a master consulting services agreement between the Quanta subsidiaries and SCE, the subsidiaries agreed to defend and indemnify SCE against certain claims arising with respect to performance or nonperformance under the agreements. The SCE tender letters seek contractual indemnification and defense from Quanta’s subsidiaries for the claims asserted against SCE in the lawsuits and the T-Mobile cross-complaints.
Quanta’s subsidiaries intend to vigorously defend against the lawsuits, the T-Mobile cross-complaints and any other claims asserted in connection with the Silverado Fire. Quanta will continue to review additional information in connection with this matter as litigation and resolution efforts progress, and any such information may potentially allow Quanta to determine an estimate of potential loss, if any. As of December 31, 2022, Quanta had not recorded an accrual with respect to this matter, and Quanta is currently unable to reasonably estimate a range of reasonably possible loss, if any, because there are a number of unknown facts and legal considerations that may impact the amount of any potential liability. Quanta also believes that to the extent its subsidiaries are determined to be liable for any damages resulting from this matter, its insurance would be applied to any such liabilities over its deductible amount and its insurance coverage would be adequate to cover such potential liabilities. However, the ultimate amount of any potential liability and insurance coverage in connection with this matter remains subject to uncertainties associated with pending and potential future litigation.
Concentrations of Credit Risk
Quanta is subject to concentrations of credit risk related primarily to its cash and cash equivalents and its net receivable position with customers, which includes amounts related to billed and unbilled accounts receivable and contract assets for services Quanta has performed for customers. Substantially all of Quanta’s cash and cash equivalents are managed by what it believes to be high credit quality financial institutions. In accordance with Quanta’s investment policies, these institutions are authorized to invest cash and cash equivalents in a diversified portfolio of what Quanta believes to be high quality cash and cash equivalent investments, which consist primarily of interest-bearing demand deposits, money market investments and money market mutual funds. Although Quanta does not currently believe the principal amount of these cash and cash equivalents is subject to any material risk of loss, changes in economic conditions could impact the interest income Quanta receives from these investments.
Quanta grants credit under normal payment terms, generally without collateral, to its customers, which primarily include utilities, renewable energy developers, communications providers, industrial companies and energy delivery companies located primarily in the United States, Canada and Australia. While Quanta generally has certain statutory lien rights with respect to services provided, Quanta is subject to potential credit risk related to business, economic and financial market conditions that affect these customers and locations, which has been heightened as a result of recent economic and financial market conditions, including in connection with the uncertainties and challenges in the overall economy, including, among other things, inflationary pressure and increased interest rates. Some of Quanta’s customers have experienced significant financial difficulties (including bankruptcy), and customers may experience financial difficulties in the future. These difficulties expose Quanta to increased risk related to collectability of billed and unbilled receivables and contract assets for services Quanta has performed. See Note 4 for additional discussion on concentrations on credit risk.
Insurance
As discussed in Note 2, Quanta carries various insurance policies. As of December 31, 2022 and 2021, the gross amount accrued for employer’s liability, workers’ compensation, auto liability, general liability and group health claims totaled $319.6
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million and $318.2 million, respectively, of which $209.8 million and $238.0 million are included in “Insurance and other non-current liabilities”, and the remainder is included in “Accounts payables and accrued expenses.” Related insurance recoveries/receivables as of December 31, 2022 and 2021 were $5.8 million and $28.6 million, respectively, of which $0.3 million and $0.4 million are included in “Prepaid expenses and other current assets” and $5.5 million and $28.2 million are included in “Other assets, net.”
Quanta renews its insurance policies on an annual basis, and therefore deductibles and levels of insurance coverage may change in future periods. In addition, insurers may cancel Quanta’s coverage or determine to exclude certain items from coverage, including wildfires, or Quanta may elect not to obtain certain types or incremental levels of insurance based on the potential benefits considered relative to the cost of such insurance, or coverage may not be available at reasonable and competitive rates.
Letters of Credit
Certain of Quanta’s vendors require letters of credit to ensure reimbursement for amounts they are disbursing on Quanta’s behalf, such as to beneficiaries under its insurance programs. In addition, from time to time, certain customers require Quanta to post letters of credit to ensure payment of subcontractors and vendors and guarantee performance under contracts. Such letters of credit are generally issued by a bank or similar financial institution, typically pursuant to Quanta’s senior credit facility. Each letter of credit commits the issuer to pay specified amounts to the holder of the letter of credit if the holder claims that Quanta has failed to perform specified actions. If this were to occur, Quanta would be required to reimburse the issuer of the letter of credit. Depending on the circumstances of such a reimbursement, Quanta may also be required to record a charge to earnings for the reimbursement. See Note 10 for additional information regarding Quanta’s letters of credit outstanding. Quanta is not aware of any claims currently asserted or threatened under any of these letters of credit that are material, individually or in the aggregate. However, to the extent payment is required for any such claims, the amount paid could be material and could adversely affect Quanta’s consolidated business, financial condition, results of operations and cash flows.
Bonds and Parent Guarantees
Many customers, particularly in connection with new construction, require Quanta to post performance and payment bonds. These bonds provide a guarantee that Quanta will perform under the terms of a contract and pay its subcontractors and vendors. In certain circumstances, the customer may demand that the surety make payments or provide services under the bond, and Quanta must reimburse the surety for any expenses or outlays it incurs. Quanta may also be required to post letters of credit in favor of the sureties, which would reduce the borrowing availability under its senior credit facility. Quanta has not been required to make any material reimbursements to its sureties for bond-related costs except as described in Legal Proceedings - Peru Project Dispute above. However, to the extent further reimbursements are required, the amounts could be material and could adversely affect Quanta’s consolidated business, financial condition, results of operations and cash flows. As of December 31, 2022, Quanta is not aware of any outstanding material obligations for payments related to bond obligations.
Performance bonds expire at various times ranging from mechanical completion of a project to a period extending beyond contract completion in certain circumstances, and therefore a determination of maximum potential amounts outstanding requires certain estimates and assumptions. Such amounts can also fluctuate from period to period based upon the mix and level of Quanta’s bonded operating activity. As of December 31, 2022, the estimated total amount of the outstanding performance bonds was estimated to be approximately $4.5 billion. Quanta’s estimated maximum exposure related to the value of the performance bonds outstanding is lowered on each bonded project as the cost to complete is reduced, and each commitment under a performance bond generally extinguishes concurrently with the expiration of its related contractual obligation. The estimated cost to complete these bonded projects was approximately $1.2 billion as of December 31, 2022.
Additionally, from time to time, Quanta guarantees certain obligations and liabilities of its subsidiaries that may arise in connection with, among other things, contracts with customers, equipment lease obligations, joint venture arrangements and contractor licenses. These guarantees may cover all of the subsidiary’s unperformed, undischarged and unreleased obligations and liabilities under or in connection with the relevant agreement. For example, with respect to customer contracts, a guarantee may cover a variety of obligations and liabilities arising during the ordinary course of the subsidiary’s business or operations, including, among other things, warranty and breach of contract claims, third party and environmental liabilities arising from the subsidiary’s work and for which it is responsible, liquidated damages, or indemnity claims. Quanta is not aware of any claims under any guarantees that are material. To the extent a subsidiary incurs a material obligation or liability and Quanta has guaranteed the performance or payment of such obligation or liability, the recovery by a customer or other counterparty or a third party will not be limited to the assets of the subsidiary. As a result, responsibility under the guarantee could exceed the amount recoverable from the subsidiary alone and could materially and adversely affect Quanta’s consolidated business, financial condition, results of operations and cash flows.
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Collective Bargaining Agreements and Multiemployer Pension Plans
Certain of Quanta’s operating companies are parties to collective bargaining agreements with unions that represent certain of their employees. The collective bargaining agreements expire at various times and have typically been renegotiated and renewed on terms similar to those in the expiring agreements. From time to time, Quanta is a party to grievance and arbitration actions based on claims arising out of the collective bargaining agreements. The agreements require the operating companies to pay specified wages, provide certain benefits to union employees and contribute certain amounts to multiemployer pension plans and employee benefit trusts. Quanta’s multiemployer pension plan contribution rates generally are made to the plans on a “pay-as-you-go” basis based on its union employee payrolls. The location and number of union employees that Quanta employs at any given time and the plans in which they may participate vary depending on Quanta’s need for union resources in connection with its ongoing projects. Therefore, Quanta is unable to accurately predict its union employee payroll and the resulting multiemployer pension plan contribution obligations for future periods.
In addition, Quanta may also be subject to liabilities as a result of its participation in, or withdrawal from, multiemployer defined benefit pension plans. Quanta may be required to make additional contributions to its multiemployer pension plans if they become underfunded, and these additional contributions will be determined based on Quanta’s union employee payrolls. Certain plans to which Quanta contributes or may contribute in the future may adopt measures to improve their funded status through a funding improvement or rehabilitation plan, as applicable, which may require additional contributions from employers (e.g., a surcharge on benefit contributions) and/or modifications to retiree benefits. The amount, if any, that Quanta may be obligated to contribute to these plans cannot be reasonably estimated due to uncertainty regarding the amount of future work involving covered union employees, future contribution levels and possible surcharges on plan contributions. Quanta may also be subject to additional liabilities imposed by law if it or another participating employer withdraws from a multiemployer defined benefit pension plan, a plan is terminated or a plan experiences a mass withdrawal. These liabilities may include an allocable share of the unfunded vested benefits in the plan for all plan participants, not only the benefits payable to a contributing employer’s own retirees. As a result, participating employers may bear a higher proportion of liability for unfunded vested benefits if other participating employers cease to contribute or withdraw, with the reallocation of liability being more acute in cases when a withdrawn employer is insolvent or otherwise fails to pay its withdrawal liability. Quanta is not aware of any material withdrawal liabilities that have been incurred or asserted and that remain outstanding as a result of a withdrawal by Quanta from a multiemployer defined benefit pension plan. However, Quanta’s future contribution obligations and potential withdrawal liability exposure could vary based on the investment and actuarial performance of the multiemployer pension plans to which it contributes and other factors, which could be negatively impacted as a result of recent unfavorable and uncertain economic and financial market conditions. Quanta has been subject to significant withdrawal liabilities in the past, and to the extent Quanta is subject to material withdrawal liabilities in the future, such liability could adversely affect its business, financial condition, results of operations and cash flows.
Indemnities
Quanta generally indemnifies its customers for the services it provides under its contracts and other specified liabilities, which may subject Quanta to indemnity claims and liabilities and related litigation. Quanta is not aware of any indemnity claims in connection with these obligations that are material, except as described in Legal Proceedings - Silverado Wildfire Matter above.
Additionally, in the normal course of Quanta’s acquisition transactions, Quanta has granted indemnification rights to various parties against certain potential liabilities related to the transaction or the acquired business and obtained rights to indemnification from the sellers or former owners of acquired businesses for certain risks, liabilities and obligations arising from business operations prior to the date of acquisition, such as financial, performance, operational, safety, workforce, environmental, litigation, compliance or tax issues, some of which Quanta may not have discovered during due diligence. However, the indemnities may not cover all of Quanta’s exposure for such pre-acquisition matters, or the indemnitors may be unwilling or unable to pay amounts owed to Quanta. Accordingly, Quanta may incur expenses for which it is not reimbursed, and such amounts could be material and could have a material adverse effect on Quanta’s business or consolidated financial condition, results of operations and cash flows. For example, Quanta has obtained certain indemnification rights from the former owners of Hallen with respect to contingent liabilities that were assumed in connection with the acquisition, as described in Legal Proceedings — Hallen Acquisition Assumed Liability above.
Joint Venture Liabilities
As described in Notes 2, 8 and 13, Quanta is a participant in certain joint ventures, including joint venture entities that provide infrastructure-related services under specific customer contracts and partially owned entities that own, operate and/or maintain certain infrastructure assets. If losses are incurred by joint venture entities in which Quanta holds an interest, they are generally shared ratably based on the percentage ownership of the participants in the structures. However, in Quanta’s joint venture structures that provide infrastructure-related services, each participant is typically jointly and severally liable for all of the obligations of the joint venture entity pursuant to the contract with the customer, and therefore Quanta can be liable for full
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performance of the contract with the customer. Additionally, in circumstances where Quanta’s participation in a joint venture qualifies as a general partnership, Quanta can be liable for all obligations of the joint venture, including obligations owed to the customer or any other person or entity. Quanta is not aware of circumstances that would lead to future claims against it for material amounts in connection with these liabilities. Additionally, typically each joint venture participant agrees to indemnify the other participant for any liabilities incurred in excess of what the other participant is obligated to bear under the respective joint venture agreement or in accordance with the scope of work subcontracted to each participant. It is possible, however, that Quanta could be required to pay or perform obligations in excess of its share if another participant is unable or refuses to pay or perform its share of the obligations. Quanta is not aware of circumstances that would lead to future claims against it for material amounts that would not be indemnified. However, to the extent any such claims arise, they could be material and could adversely affect Quanta’s consolidated business, financial condition, results of operations and cash flows.
Capital Commitments and Other Committed Expenditures
As of December 31, 2022, Quanta had $0.6 million of outstanding capital commitments associated with investments in unconsolidated affiliates payable by December 31, 2023 and $10.5 million payable thereafter.
Quanta has capital commitments for the expansion of its equipment fleet in order to accommodate manufacturer lead times on certain types of vehicles. As of December 31, 2022, Quanta had $172.3 million of production orders with expected delivery dates in 2023. Although Quanta has committed to purchase these vehicles at the time of their delivery, Quanta anticipates that the majority of these orders will be assigned to third-party leasing companies and made available under certain master equipment lease agreements, thereby releasing Quanta from its capital commitments.
Employment Agreements
Quanta has various employment agreements with certain executives and other employees, which provide for compensation, other benefits and, under certain circumstances, severance payments and post-termination stock-based compensation benefits. Certain employment agreements also contain clauses that require the potential payment of specified amounts to such employees upon the occurrence of a defined change in control event.
Availability of Project Materials, Equipment and Labor
Quanta’s customers depend on the availability of certain materials for construction, upgrade and repair and maintenance of their infrastructure and are typically responsible for supplying most or all of the materials required for the services Quanta performs on their projects, including, among other things, steel, copper, aluminum and components for renewable energy projects (e.g., solar panels, wind turbine blades). Additionally, Quanta is required to procure all or part of the materials needed for certain projects. Although there have been recent delays related to disruption in the supply chain for certain project materials, including delays with respect to solar panels during the year ended December 31, 2022, Quanta and its customers have generally been able to procure necessary materials.
Quanta also depends on the availability of certain equipment, including specialty vehicles, to perform services. Based on the significant worldwide shortage of semiconductors, vehicle manufacturers experienced production delays with respect to new vehicles for Quanta’s fleet (both on-road and specialty vehicles) and vehicle parts (e.g., tires), and certain of its vehicle delivery orders scheduled for delivery in 2022 were delayed and cancelled. Quanta believes it has taken steps to secure delivery of a sufficient amount of vehicles and does not anticipate any significant disruptions with respect to its fleet in the near-term.
Quanta’s success depends on its ability to attract, develop and retain highly qualified employees, including craft skilled labor, engineers, architects, designers, management and professional and administrative employees, and the industries in which Quanta operates have experienced shortages of qualified skilled labor personnel in recent years, which is expected to continue and potentially worsen in the future. In order to help meet near-term and longer term labor needs, Quanta supports and utilizes its own training and educational programs and has developed additional company-wide and project-specific employee training and educational programs and strategic relationships with universities, the military and unions to recruit qualified personnel.
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
17. DETAIL OF CERTAIN ACCOUNTS:
Cash and Cash Equivalents
Amounts related to Quanta’s cash and cash equivalents based on geographic location of the bank accounts were as follows (in thousands):
| December 31, | |||||||||||||||||
| 2022 | 2021 | ||||||||||||||||
| Cash and cash equivalents held in domestic bank accounts | $ | 376,456 | $ | 205,781 | |||||||||||||
| Cash and cash equivalents held in foreign bank accounts | 52,049 | 23,316 | |||||||||||||||
| Total cash and cash equivalents | $ | 428,505 | $ | 229,097 |
As of December 31, 2022 and 2021, cash equivalents were $260.1 million and $140.0 million and consisted primarily of money market investments and money market mutual funds. Cash and cash equivalents in foreign bank accounts are primarily held in Canada and Australia.
Cash and cash equivalents held by joint ventures, which are either consolidated or proportionately consolidated, are available to support joint venture operations, but Quanta cannot utilize those assets to support its other operations. Quanta generally has no right to cash and cash equivalents held by a joint venture other than participating in distributions, to the extent made, and in the event of dissolution. Cash and cash equivalents held by Quanta’s wholly-owned captive insurance company are generally not available for use in support of its other operations. Amounts related to cash and cash equivalents held by consolidated or proportionately consolidated joint ventures and the captive insurance company, which are included in Quanta’s total cash and cash equivalents balances, were as follows (in thousands):
| December 31, | ||||||||||||||
| 2022 | 2021 | |||||||||||||
| Cash and cash equivalents held by domestic joint ventures | $ | 14,291 | $ | 21,828 | ||||||||||
| Cash and cash equivalents held by foreign joint ventures | 6,277 | 3,461 | ||||||||||||
| Total cash and cash equivalents held by joint ventures | 20,568 | 25,289 | ||||||||||||
| Cash and cash equivalents held by captive insurance company | 35,085 | 133,302 | ||||||||||||
| Cash and cash equivalents not held by joint ventures or captive insurance company | 372,852 | 70,506 | ||||||||||||
| Total cash and cash equivalents | $ | 428,505 | $ | 229,097 |
Property and Equipment
Property and equipment consisted of the following (in thousands):
| Estimated Useful | December 31, | ||||||||||||||||
| Lives in Years | 2022 | 2021 | |||||||||||||||
| Land | N/A | $ | 90,715 | $ | 86,013 | ||||||||||||
| Buildings and leasehold improvements | 5-30 | 396,003 | 318,499 | ||||||||||||||
| Operating machinery, equipment and vehicles | 1-25 | 2,726,546 | 2,603,149 | ||||||||||||||
| Office equipment, furniture and fixtures and information technology systems | 3-10 | 282,282 | 259,776 | ||||||||||||||
| Construction work in progress | N/A | 84,446 | 91,502 | ||||||||||||||
| Finance lease assets and lease financing transactions | 5-20 | 101,385 | 64,256 | ||||||||||||||
| Property and equipment, gross | 3,681,377 | 3,423,195 | |||||||||||||||
| Less — Accumulated depreciation and amortization | (1,650,913) | (1,503,498) | |||||||||||||||
| Property and equipment, net of accumulated depreciation | $ | 2,030,464 | $ | 1,919,697 |
Depreciation expense related to property and equipment is recognized on a straight-line basis over the estimated useful lives of the assets and was $290.6 million, $255.5 million and $225.3 million for the years ended December 31, 2022, 2021 and 2020.
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consisted of the following (in thousands):
| December 31, | ||||||||||||||
| 2022 | 2021 | |||||||||||||
| Accounts payable, trade | $ | 1,302,086 | $ | 1,251,118 | ||||||||||
| Accrued compensation and related expenses | 469,048 | 547,161 | ||||||||||||
| Other accrued expenses | 381,995 | 456,392 | ||||||||||||
| Accounts payable and accrued expenses | $ | 2,153,129 | $ | 2,254,671 |
Other accrued expenses primarily include accrued insurance liabilities, income and franchise taxes payable and deferred revenues.
18. SUPPLEMENTAL CASH FLOW INFORMATION:
The net effects of changes in assets and liabilities, net of non-cash transactions, on cash flows from operating activities are as follows (in thousands):
| Year Ended December 31, | ||||||||||||||||||||
| 2022 | 2021 | 2020 | ||||||||||||||||||
| Accounts and notes receivable | $ | (349,485) | $ | (248,452) | $ | 71,058 | ||||||||||||||
| Contract assets | (311,175) | (331,946) | 153,832 | |||||||||||||||||
| Inventories | (19,333) | 1,418 | 9,860 | |||||||||||||||||
| Prepaid expenses and other current assets | (15,615) | (6,503) | 83,518 | |||||||||||||||||
| Accounts payable and accrued expenses and other non-current liabilities (1) | 144,219 | 95,829 | 115,569 | |||||||||||||||||
| Contract liabilities | 336,113 | 47,163 | (84,370) | |||||||||||||||||
| Other, net | (14,439) | (15,191) | (22,098) | |||||||||||||||||
| Net change in assets and liabilities, net of non-cash transactions | $ | (229,715) | $ | (457,682) | $ | 327,369 |
(1) Accounts payable and accrued expenses and other non-current liabilities for the year ended December 31, 2022 includes the receipt of $100.5 million pursuant to coverage under an insurance policy, as further described in Note 16.
Reconciliations of cash, cash equivalents, and restricted cash reported within the consolidated balance sheets that sum to the total of such amounts shown in the statements of cash flows are as follows (in thousands):
| December 31, | ||||||||||||||||||||||||||
| 2022 | 2021 | 2020 | 2019 | |||||||||||||||||||||||
| Cash and cash equivalents | $ | 428,505 | $ | 229,097 | $ | 184,620 | $ | 164,798 | ||||||||||||||||||
| Restricted cash included in “Prepaid expenses and other current assets” (1) | 3,759 | 1,836 | 1,275 | 4,026 | ||||||||||||||||||||||
| Restricted cash included in “Other assets, net” (1) | 950 | 954 | 913 | 921 | ||||||||||||||||||||||
| Total cash, cash equivalents, and restricted cash reported in the statements of cash flows | $ | 433,214 | $ | 231,887 | $ | 186,808 | $ | 169,745 |
(1) Restricted cash includes any cash that is legally restricted as to withdrawal or usage.
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Supplemental cash flow information related to leases is as follows (in thousands):
| Year Ended December 31, | ||||||||||||||||||||
| 2022 | 2021 | 2020 | ||||||||||||||||||
| Cash paid for amounts included in the measurement of lease liabilities: | ||||||||||||||||||||
| Operating cash flows used by operating leases | $ | (95,175) | $ | (104,434) | $ | (115,597) | ||||||||||||||
| Operating cash flows used by finance leases | $ | (108) | $ | (90) | $ | (108) | ||||||||||||||
| Financing cash flows used by finance leases | $ | (1,457) | $ | (1,001) | $ | (1,198) | ||||||||||||||
| Lease assets obtained in exchange for lease liabilities: | ||||||||||||||||||||
| Operating leases | $ | 77,826 | $ | 73,713 | $ | 69,721 | ||||||||||||||
| Finance leases | $ | 2,331 | $ | 1,044 | $ | 1,384 | ||||||||||||||
| Lease financing transaction assets obtained in exchange for lease financing transaction liabilities | $ | 35,144 | $ | 11,713 | $ | 35,734 |
Additional supplemental cash flow information is as follows (in thousands):
| Year Ended December 31, | ||||||||||||||||||||
| 2022 | 2021 | 2020 | ||||||||||||||||||
| Cash (paid) received during the period for: | ||||||||||||||||||||
| Interest paid | $ | (106,052) | $ | (52,737) | $ | (32,142) | ||||||||||||||
| Income taxes paid | $ | (111,569) | $ | (125,328) | $ | (231,186) | ||||||||||||||
| Income tax refunds | $ | 8,281 | $ | 13,257 | $ | 18,119 |
Accrued capital expenditures were $13.4 million, $27.4 million and $11.3 million as of December 31, 2022, 2021 and 2020. The impact of these items has been excluded from Quanta’s capital expenditures in the accompanying consolidated statements of cash flows due to their non-cash nature.
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