<PAGE> 1
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO .
COMMISSION FILE NO. 001-13831
QUANTA SERVICES, INC.
(Exact name of registrant as specified in its charter)
---------------------
<TABLE>
<S> <C>
DELAWARE 74-2851603
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
1360 POST OAK BLVD.
SUITE 2100
HOUSTON, TEXAS 77056
(Address of principal executive offices)
Registrant's telephone number, including area code: (713) 629-7600
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Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
55,646,050 shares of Common Stock were outstanding as of May 11, 2000. As
of the same date, 2,097,791 shares of Limited Vote Common Stock were
outstanding.
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<PAGE> 2
QUANTA SERVICES, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
QUANTA SERVICES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets............................... 1
Consolidated Statements of Operations..................... 2
Consolidated Statements of Cash Flows..................... 3
Notes to Condensed Consolidated Financial Statements...... 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 9
PART II. OTHER INFORMATION
Item 2. Changes in Securities............................... 13
Item 6. Exhibits and Reports on Form 8-K.................... 13
Signature................................................... 14
</TABLE>
i
<PAGE> 3
QUANTA SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1999 2000
------------ -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 10,775 $ 2,210
Accounts receivable, net of allowance of $5,947 and
$6,970................................................. 253,881 290,121
Costs and estimated earnings in excess of billings on
uncompleted contracts.................................. 45,963 52,286
Inventories............................................... 8,741 8,274
Prepaid expenses and other current assets................. 15,703 16,528
---------- ----------
Total current assets.............................. 335,063 369,419
PROPERTY AND EQUIPMENT, net................................. 191,854 223,996
OTHER ASSETS, net........................................... 7,962 10,051
GOODWILL, net............................................... 624,757 673,802
---------- ----------
Total assets...................................... $1,159,636 $1,277,268
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt...................... $ 6,664 $ 8,456
Accounts payable and accrued expenses..................... 141,025 151,109
Billings in excess of costs and estimated earnings on
uncompleted contracts.................................. 23,234 21,052
---------- ----------
Total current liabilities......................... 170,923 180,617
LONG-TERM DEBT, net of current maturities................... 150,308 198,032
CONVERTIBLE SUBORDINATED NOTES.............................. 49,350 49,350
DEFERRED INCOME TAXES AND OTHER NON-CURRENT LIABILITIES..... 32,130 31,861
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred Stock, $.00001 par value, 10,000,000 shares
authorized: Series A Convertible Preferred Stock,
1,860,000 shares issued and outstanding................ -- --
Common Stock, $.00001 par value, 100,000,000 shares
authorized, 51,035,283 and 54,302,161 shares issued and
outstanding, respectively.............................. -- --
Limited Vote Common Stock, $.00001 par value, 3,345,333
shares authorized, 3,746,020 and 2,641,660 shares
issued and outstanding, respectively................... -- --
Additional paid-in capital................................ 675,106 716,274
Retained earnings......................................... 81,819 101,134
---------- ----------
Total stockholders' equity........................ 756,925 817,408
---------- ----------
Total liabilities and stockholders' equity........ $1,159,636 $1,277,268
========== ==========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
1
<PAGE> 4
QUANTA SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------
1999 2000
-------- --------
<S> <C> <C>
REVENUES.................................................... $127,779 $333,737
COST OF SERVICES (including depreciation)................... 104,871 261,056
-------- --------
Gross profit.............................................. 22,908 72,681
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES................ 11,982 29,951
MERGER RELATED CHARGES...................................... 137 --
GOODWILL AMORTIZATION....................................... 1,498 4,216
-------- --------
Income from operations.................................... 9,291 38,514
OTHER INCOME (EXPENSE):
Interest expense.......................................... (2,224) (4,533)
Other, net................................................ 320 549
-------- --------
INCOME BEFORE INCOME TAX PROVISION.......................... 7,387 34,530
PROVISION FOR INCOME TAXES.................................. 3,964(a) 14,986
-------- --------
NET INCOME.................................................. 3,423 19,544
DIVIDENDS ON PREFERRED STOCK................................ -- 232
-------- --------
NET INCOME ATTRIBUTABLE TO COMMON STOCK..................... $ 3,423 $ 19,312
======== ========
BASIC EARNINGS PER SHARE(b)................................. $ 0.09 $ 0.34
======== ========
DILUTED EARNINGS PER SHARE(b)............................... $ 0.09 $ 0.28
======== ========
DILUTED EARNINGS PER SHARE BEFORE MERGER CHARGES(b)......... $ 0.11(c) $ 0.28
======== ========
SHARES USED IN COMPUTING EARNINGS PER SHARE:
Basic(b).................................................. 39,036 56,054
======== ========
Diluted(b)................................................ 45,209 72,568
======== ========
</TABLE>
- ---------------
(a) Includes a non-cash, non-recurring deferred tax charge of $677,000 as a
result of a change in the tax status from an S corporation to a C
corporation of a company acquired in a pooling transaction during the first
quarter of 1999.
(b) Share and earnings per share data have been restated to give effect to a
3-for-2 stock split as discussed in Note 1 to these condensed consolidated
financial statements.
(c) Excludes the effect of note (a) above and non-recurring merger related
charges of $137,000 related to the same transaction.
The accompanying notes are an integral part of these condensed consolidated
financial statements.
2
<PAGE> 5
QUANTA SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------
1999 2000
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income attributable to common stock................... $ 3,423 $ 19,312
Adjustments to reconcile net income attributable to common
stock to net cash provided by (used in) operating
activities --
Depreciation and amortization.......................... 5,350 12,407
Gain on sale of property and equipment................. (34) (219)
Deferred income tax provision.......................... 690 173
Preferred stock dividend............................... -- 232
Changes in operating assets and liabilities, net of
non-cash transactions --
(Increase) decrease in --
Accounts receivable, net............................. (11,998) (26,227)
Costs and estimated earnings in excess of billings on
uncompleted contracts............................... (10,875) (5,486)
Inventories.......................................... (822) (1,721)
Prepaid expenses and other current assets............ (676) (677)
Other, net........................................... 154 --
Increase (decrease) in --
Accounts payable and accrued expenses................ 7,905 5,516
Billings in excess of costs and estimated earnings on
uncompleted contracts............................... 2,476 (2,221)
--------- ---------
Net cash provided by (used in) operating
activities...................................... (4,407) 1,089
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and equipment.............. 287 526
Additions of property and equipment....................... (8,580) (21,942)
Cash paid for acquisitions, net of cash acquired.......... (97,584) (38,975)
Net proceeds from sale of business........................ -- 2,410
--------- ---------
Net cash used in investing activities............. (105,877) (57,981)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (payments) under bank lines of credit...... 24,405 (103,324)
Proceeds from other long-term debt........................ 2,428 150,142
Payments on other long-term debt.......................... (15,657) (4,653)
Debt issuance costs....................................... -- (2,104)
Issuances of stock, net of offering costs................. 101,119 4,233
Exercise of stock options................................. -- 4,033
--------- ---------
Net cash provided by financing activities......... 112,295 48,327
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ 2,011 (8,565)
CASH AND CASH EQUIVALENTS, beginning of period.............. 3,246 10,775
--------- ---------
CASH AND CASH EQUIVALENTS, end of period.................... $ 5,257 $ 2,210
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for --
Interest............................................... $ 1,940 $ 3,983
Income taxes........................................... 5,438 10,852
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
<PAGE> 6
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BUSINESS AND ORGANIZATION:
Quanta Services, Inc. is a leading provider of specialized contracting
services, offering end-to-end network solutions to the telecommunications, cable
television and electric power industries. References herein to the "Company"
include Quanta and its subsidiaries. The consolidated financial statements of
the Company include the accounts of Quanta and its wholly owned subsidiaries.
All significant intercompany accounts and transactions have been eliminated in
consolidation.
Since its inception and through 1999, Quanta has acquired 52 businesses.
The Company has acquired six additional businesses through March 31, 2000 and
intends to continue to acquire, through merger or purchase, similar companies to
expand its national and regional operations.
In the course of its operations, the Company is subject to certain risk
factors, including but not limited to: rapid technological and structural
changes in the Company's industries, risks related to internal growth and
operating strategies, risks related to acquisition financing, significant
fluctuations in quarterly results, risks associated with contracts, management
of growth, dependence on key personnel, availability of qualified employees,
unionized workforce, competition, recoverability of goodwill, potential exposure
to environmental liabilities and anti-takeover measures.
All share amounts and per share amounts in these notes to condensed
consolidated financial statements have been adjusted to give effect to a 3-for-2
stock split declared by the Board of Directors on March 8, 2000 and paid on
April 7, 2000 to stockholders of record as of March 27, 2000.
Interim Condensed Consolidated Financial Information
These unaudited condensed consolidated financial statements have been
prepared pursuant to the rules of the SEC. Certain information and footnote
disclosures, normally included in annual financial statements prepared in
accordance with accounting principles generally accepted in the United States,
have been condensed or omitted pursuant to those rules and regulations. The
Company believes that the disclosures made are adequate to make the information
presented not misleading. In the opinion of management, all adjustments,
consisting only of normal recurring adjustments, necessary to fairly present the
financial position, results of operations and cash flows with respect to the
interim consolidated financial statements, have been included. The results of
operations for the interim periods are not necessarily indicative of the results
for the entire fiscal year. The results of the Company have historically been
subject to significant seasonal fluctuations.
It is suggested that these condensed consolidated financial statements be
read in conjunction with the audited financial statements and notes thereto of
Quanta Services, Inc. and subsidiaries included in the Company's Annual Report
on Form 10-K, which was filed with the SEC on March 30, 2000.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires the use of estimates
and assumptions by management in determining the reported amounts of assets and
liabilities, disclosures of contingent liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
4
<PAGE> 7
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. PER SHARE INFORMATION:
Earnings per share amounts are based on the weighted average number of
shares of common stock and common stock equivalents outstanding during the
period. The weighted average number of shares used to compute basic and diluted
earnings per share for the three months ended March 31, 1999 and 2000 is
illustrated below (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------
1999 2000
-------- --------
<S> <C> <C>
NET INCOME:
Net income for basic earnings per share -- income
attributable to common stockholders.................... $ 3,423 $19,312
Effect of Convertible Subordinated Notes under the "if
converted" method -- interest expense addback, net of
taxes.................................................. 554 548
Dividends on Preferred Stock.............................. -- 232
------- -------
Net income for diluted earnings per share................. $ 3,977 $20,092
======= =======
WEIGHTED AVERAGE SHARES:
Weighted average shares outstanding for basic earnings per
share.................................................. 39,036 56,054
Effect of dilutive stock options.......................... 789 1,830
Effect of Convertible Subordinated Notes under the "if
converted" method -- weighted convertible shares
issuable............................................... 5,384 5,384
Effect of conversion of Preferred Stock into common
stock -- weighted convertible shares issuable.......... -- 9,300
------- -------
Weighted average shares outstanding for diluted earnings
per share.............................................. 45,209 72,568
======= =======
</TABLE>
3. INCOME TAXES:
Certain of the businesses the Company has acquired were S corporations for
income tax purposes and, accordingly, any income tax liabilities for the periods
prior to the acquisitions are the responsibility of the respective stockholders.
Effective with the acquisitions, the S corporations converted to C corporations.
Accordingly, an estimated deferred tax liability has been recorded to provide
for the estimated future income tax liability as a result of the difference
between the book and tax bases of the net assets of these former S corporations.
For purposes of these consolidated financial statements, federal and state
income taxes have been provided for the post-acquisition periods. In addition,
during the first quarter of 1999, a non-cash, non-recurring tax charge of
$677,000 was recorded as a result of a change in the tax status from an S
corporation to a C corporation of a company acquired in a pooling transaction.
4. NEW ACCOUNTING PRONOUNCEMENTS:
In June 1998, the Financial Accounting Standards Board (the "FASB") issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities".
SFAS No. 133 requires a company to recognize all derivative instruments
(including certain derivative instruments embedded in other contracts) as assets
or liabilities in its balance sheet and measure them at fair value. The
statement requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. In June
1999, SFAS No. 137, "Deferral of the Effective Date of FASB Statement No. 133,"
was issued and defers the adoption date to the beginning of an entity's fiscal
year-end beginning after June 15, 2000. Management does not believe that the
adoption of this statement will have a material impact on the financial position
or results of operations of the Company.
5
<PAGE> 8
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. DEBT:
Credit Facility
In June 1999, the Company expanded its bank group from nine to 14 banks and
increased its $175.0 million credit facility to $350.0 million. The credit
facility is secured by a pledge of all of the capital stock of the Company's
subsidiaries and the majority of the Company's assets and is to provide funds to
be used for working capital, to finance acquisitions and for other general
corporate purposes. Amounts borrowed under the credit facility bear interest at
a rate equal to either (a) the London Interbank Offered Rate (the 30 day LIBOR
rate was 6.1875% at March 31, 2000) plus 1.00% to 2.00%, as determined by the
ratio of the Company's total funded debt to EBITDA (as defined in the credit
facility) or (b) the bank's prime rate (which was 9.0% at March 31, 2000) plus
up to 0.25%, as determined by the ratio of the Company's total funded debt to
EBITDA. Commitment fees of 0.25% to 0.50% (based on certain financial ratios)
are due on any unused borrowing capacity under the credit facility. The credit
facility matures June 14, 2004. The Company's subsidiaries guarantee the
repayment of all amounts due under the facility and the facility restricts
pledges on all material assets. The credit facility contains usual and customary
covenants for a credit facility of this nature including the prohibition of the
payment of dividends on common stock, certain financial ratio covenants and the
consent of the lenders for acquisitions exceeding a certain level of cash
consideration. As of March 31, 2000, $35.8 million was borrowed under the credit
facility, and the Company had $5.3 million of letters of credit outstanding,
resulting in a borrowing availability of $308.9 million under the credit
facility.
Senior Secured Notes
In March 2000, the Company closed a senior secured notes private placement
with 16 lenders, primarily insurance companies, for $150 million. The senior
secured notes have maturities of five, seven or ten years with a weighted
average interest rate of 8.52% and rank pari passu in right of repayment to
Quanta's credit facility. The senior secured notes have financial covenants
similar to the credit facility. Proceeds from this private placement were used
to reduce outstanding borrowings under the credit facility.
Convertible Subordinated Notes
In October 1998, the Company entered into a strategic investment agreement
with Enron Capital & Trade Resources Corp., a subsidiary of Enron Corp.,
pursuant to which Enron Capital & Trade Resources Corp. and an affiliate made an
investment of $49.4 million in Quanta. The investment is in the form of
Convertible Subordinated Notes bearing interest at 6 7/8% and is convertible
into 5,383,636 shares of Quanta common stock at a price of $9.17 per share.
Additionally, Quanta and Enron Capital & Trade Resources Corp. entered into a
strategic alliance under which Enron Capital & Trade Resources Corp. and Quanta
will exchange information regarding the design, construction and maintenance of
electric power transmission and distribution systems and fiber optic
communications systems. The Convertible Subordinated Notes require quarterly
interest payments and equal semi-annual principal payments beginning in 2006
until the notes are paid in full in 2010. The Company has the option to redeem
the notes at a premium beginning in 2002. See additional discussion of these
notes in Note 8.
6. SERIES A CONVERTIBLE PREFERRED STOCK
In September 1999, the Company entered into a securities purchase agreement
with UtiliCorp United Inc. ("UtiliCorp") pursuant to which the Company issued
1,860,000 shares of Series A Convertible Preferred Stock, $.00001 par value per
share, for an initial investment of $186,000,000, before transaction costs. The
holders of the Series A Convertible Preferred Stock are entitled to receive
dividends in cash at a rate of 0.5% per annum on an amount equal to $100.00 per
share, plus all unpaid dividends accrued. In addition to the preferred dividend,
the holders are entitled to participate in any cash or non-cash dividends or
distributions declared and paid on the shares of common stock, as if each share
of Series A Convertible
6
<PAGE> 9
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Preferred Stock had been converted into common stock at the applicable
conversion price immediately prior to the record date for payment of such
dividends or distributions. However, holders of Series A Convertible Preferred
Stock will not participate in non-cash dividends or distributions if such
dividends or distributions cause an adjustment in the price at which Series A
Convertible Preferred Stock converts into common stock. At any time after the
sixth anniversary of the issuance of the Series A Convertible Preferred Stock,
if the closing price per share of the Company's common stock is greater than
$20.00, then the Company may terminate the preferred dividend. At any time after
the sixth anniversary of the issuance of the Series A Convertible Preferred
Stock, if the closing price per share of the Company's common stock is equal to
or less than $20.00, then the preferred dividend may, at the option of
UtiliCorp, be adjusted to the then "market coupon rate", which shall equal the
Company's after-tax cost of obtaining financing, excluding common stock, to
replace UtiliCorp's investment in the Company.
UtiliCorp is entitled to that number of votes equal to the number of shares
of common stock into which the outstanding shares of Series A Convertible
Preferred Stock are then convertible. Subject to certain limitations, UtiliCorp
will be entitled to elect two of the total number of directors of the Company.
All or any portion of the outstanding shares of Series A Convertible Preferred
Stock may, at the option of UtiliCorp, be converted at any time into fully paid
and nonassessable shares of common stock. The conversion price shall initially
be $20.00, yielding 9,300,000 shares of common stock upon conversion of all
outstanding shares of Series A Convertible Preferred Stock. The conversion price
may be adjusted under certain circumstances. Also in certain circumstances,
UtiliCorp has the right to purchase additional securities from the Company to
maintain the percentage ownership of the Company represented by the Series A
Convertible Preferred Stock. During the three months ended March 31, 2000,
UtiliCorp purchased 186,174 shares of common stock pursuant to these rights.
7. SEGMENT INFORMATION:
The Company operates in one reportable segment as a specialty contractor.
The Company provides comprehensive network solutions to the telecommunications,
cable and electric power industries, including designing, installing, repairing
and maintaining network infrastructure. Each of these services is provided by
various of the Company's subsidiaries and discrete financial information is not
provided to management at the service level. The following table presents
information regarding revenues derived from the services noted above:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------
1999 2000
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Telecommunications network services..................... $ 38,277 $137,596
Cable television network services....................... 1,338 56,016
Electric power network services......................... 68,502 96,234
Ancillary services...................................... 19,662 43,891
-------- --------
$127,779 $333,737
======== ========
</TABLE>
The Company does not have significant operations or long-lived assets in
countries outside of the United States.
8. RELATED PARTY TRANSACTIONS:
In September 1999, the Company entered into a strategic alliance agreement
with UtiliCorp. Under the terms of the strategic alliance agreement, UtiliCorp
will use the Company, subject to the Company's ability to perform the required
services, as a preferred contractor in outsourced transmission and distribution
infrastruc-
7
<PAGE> 10
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ture construction and maintenance and natural gas distribution construction and
maintenance in all areas serviced by UtiliCorp, provided that the Company
provides such services at a competitive cost. The strategic alliance agreement
has a term of six years.
In addition to the strategic alliance agreement, the Company entered into a
management services agreement with UtiliCorp. Under the management services
agreement, to the extent mutually agreed upon by the parties, UtiliCorp will
provide advice and services including financing activities; corporate strategic
planning; research on the restructuring of the utility industries; the
development, evaluation and marketing of the Company's products, services and
capabilities; identification of and evaluation of potential acquisition
candidates and other merger and acquisition advisory services; and other
services that the board of directors may reasonably request. In consideration of
the advice and services rendered by UtiliCorp, the Company will pay UtiliCorp on
a quarterly basis in arrears a fee of $2,325,000. The management services
agreement has a term of six years. The Company has the right to terminate the
management services agreement at any time if, in the reasonable judgment of the
board of directors, changes in the nature of the relationship between the
Company and UtiliCorp make effective provision of the services to be provided
unlikely. As of March 31, 2000, payments owed to UtiliCorp under this
arrangement were approximately $4.9 million.
9. SUBSEQUENT EVENTS:
Business Combinations
Subsequent to March 31, 2000 and through May 11, 2000, the Company has
acquired four additional companies for an aggregate consideration of $31.0
million in cash and 706,684 shares of common stock. The cash portion of such
consideration was provided by borrowings under the Company's credit facility.
Increase in UtiliCorp Investment
On April 26, 2000, the Company announced that UtiliCorp had increased its
investment in Quanta. UtiliCorp purchased the $49.4 million Convertible
Subordinated Notes from certain affiliates of Enron. Also, UtiliCorp purchased
additional shares of common stock through open market transactions and through
private purchases from certain stockholders with restricted securities or
subject to lockup agreements, including a portion of the common stock held by
certain of Quanta's directors and officers. Upon completion of these
transactions, UtiliCorp beneficially owns approximately 26.2 million shares, or
approximately 36.1% of Quanta's common stock assuming conversion of UtiliCorp's
Series A Convertible Preferred Stock and the Convertible Subordinated Notes.
8
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
The following discussion should be read in conjunction with the Condensed
Consolidated Financial Statements and related notes thereto included elsewhere
in this Quarterly Report on Form 10-Q. Except for the historical financial
information contained herein, the matters discussed in this Quarterly Report on
Form 10-Q may be considered "forward-looking" statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. Such statements include declarations regarding our intent,
belief or current expectations, statements regarding the future results of
acquired companies and our gross margins. Any such forward-looking statements
are not guarantees of future performance and involve a number of risks and
uncertainties. Actual results could differ materially from those indicated by
such forward-looking statements. Among the important factors that could cause
actual results to differ materially from those indicated by such forward-looking
statements are the risk factors identified in our Annual Report on Form 10-K,
which was filed with the SEC on March 30, 2000, which is available at the SEC's
Web site at www.sec.gov.
We derive our revenues from one reportable segment by providing specialized
contracting services and offering comprehensive network solutions. Our customers
include telecommunications, cable television and electric power companies, as
well as commercial, industrial and governmental entities.
We enter into contracts principally on the basis of competitive bids, the
final terms and prices of which we frequently negotiate with the customer.
Although the terms of our contracts vary considerably, most are either a lump
sum or unit price basis in which we agree to do the work for a fixed amount for
the entire project (lump sum) or for units of work performed (unit price). We
also perform services on a cost-plus or time and materials basis. We are
generally able to achieve higher margins on lump sum and unit price contracts
than on cost-plus contracts as a result of our experience in bidding and
performance. Our exposure to loss on fixed price contracts has historically been
limited by the high volume and relatively short duration of the fixed price
contracts we undertake. However, as we perform larger projects, our reported
margins may be significantly affected by actual results on these projects.
We complete most installation projects within one year, while we frequently
provide maintenance and repair work under open-ended, unit price master service
agreements which are renewable annually. We generally record revenues from lump
sum contracts on a percentage-of-completion basis, using the cost-to-cost method
based on the percentage of total cost incurred to date in proportion to total
estimated costs to complete the contract. We recognize revenue when services are
performed except when work is being performed under fixed price or cost-plus
contracts. Such contracts generally require that the customer accept completion
of progress to date and compensate us for services rendered, measured typically
in terms of units installed, hours expended or some other measure of progress.
Some of our customers require us to post performance and payment bonds upon
execution of the contract, depending upon the nature of the work to be
performed. Our fixed price contracts often include payment provisions pursuant
to which the customer withholds a 5% to 10% retainage from each progress payment
and forwards the retainage to us upon completion and approval of the work.
Costs of services consist primarily of salaries and benefits to employees,
depreciation, fuel and other vehicle expenses, equipment rentals, subcontracted
services, materials, parts and supplies. Our gross margin, which is gross profit
expressed as a percentage of revenues, is typically higher on projects where
labor, rather than materials, constitutes a greater portion of the cost of
services. We can predict material costs more accurately than labor costs.
Therefore, to compensate for the potential variability of labor costs, we seek
to maintain higher margins on our labor-intensive projects. Certain of our
subsidiaries were previously subject to deductibles ranging from $100,000 to
$1,000,000 for workers' compensation insurance and in the future we may have
similar large deductibles in our insurance program. Fluctuations in insurance
accruals related to these deductibles could have an impact on gross margins in
the period in which such adjustments are made. Selling, general and
administrative expenses consist primarily of compensation and related benefits
to management, administrative salaries and benefits, marketing, office rent and
utilities, communications and professional fees.
9
<PAGE> 12
RESULTS OF OPERATIONS
The following table sets forth selected unaudited statements of operations
data and such data as a percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
------------------------------------
1999 2000
---------------- ----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues........................................ $127,779 100.0% $333,737 100.0%
Cost of services (including depreciation)....... 104,871 82.1 261,056 78.2
-------- ----- -------- -----
Gross profit.................................. 22,908 17.9 72,681 21.8
Selling, general and administrative expenses.... 11,982 9.4 29,951 9.0
Merger related charges.......................... 137 0.1 -- 0.0
Goodwill amortization........................... 1,498 1.2 4,216 1.3
-------- ----- -------- -----
Income from operations........................ 9,291 7.2 38,514 11.5
Interest expense................................ (2,224) (1.7) (4,533) (1.4)
Other income, net............................... 320 0.3 549 0.2
-------- ----- -------- -----
Income before income tax provision.............. 7,387 5.8 34,530 10.3
Provision for income taxes...................... 3,964 3.1 14,986 4.4
-------- ----- -------- -----
Net income.................................... $ 3,423 2.7% $ 19,544 5.9%
======== ===== ======== =====
</TABLE>
Consolidated Results For The Three Months Ended March 31, 1999, Compared To
The Three Months Ended March 31, 2000.
Revenues. Revenues increased $206.0 million, or 161.2%, to $333.7 million
for the three months ended March 31, 2000. This increase was primarily
attributable to revenues of $114.7 million from platform companies acquired
subsequent to March 31, 1999 which continued to exist as separate reporting
subsidiaries, as well as a full period of contributed revenues for the three
months ended March 31, 2000 for those companies acquired in the first quarter of
1999. In addition, we have experienced strong growth in key business areas as a
result of greater demand for bandwidth, increased outsourcing, deregulation and
industry convergence.
Gross profit. Gross profit increased $49.8 million, or 217.3%, to $72.7
million for the three months ended March 31, 2000. Gross margin increased from
17.9% for the three months ended March 31, 1999 to 21.8% for the three months
ended March 31, 2000. This increase in our gross margin resulted from a shift in
our revenue mix to higher margin cable television and telecommunications
services. We also experienced improved margins in our electric power network
services as a result of better asset utilization and more favorable pricing.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $18.0 million, or 150.0%, to $30.0 million for
the three months ended March 31, 2000. Of this increase, $7.7 million was
attributable to the platform companies we acquired subsequent to March 31, 1999
and $1.6 million was attributable to an increase in accruals associated with a
company-wide incentive program that pays bonuses to management at the operating
units and to corporate management for exceeding their performance targets.
Selling, general and administrative expenses also included a full three months
of costs in 2000 associated with those companies acquired during the first three
months of 1999. The remainder of the increase was attributable to tuck-in
acquisitions and the continued establishment of infrastructure to facilitate our
growth and to integrate our acquired businesses. As a percentage of revenues,
selling, general and administrative expenses decreased slightly due to better
absorption of the fixed component of overhead costs by the higher level of
revenues.
Interest expense. Interest expense increased $2.3 million, or 103.8%, to
$4.5 million for the three months ended March 31, 2000 due to higher levels of
debt resulting from the acquisitions of the companies we purchased subsequent to
March 31, 1999. In addition, we borrowed funds under our credit facility for
10
<PAGE> 13
equipment purchases and other operating activities in connection with the
addition of certain of the companies purchased subsequent to March 31, 1999 and
to support higher levels of revenue.
Provision for income taxes. The provision for income taxes was $15.0
million for the three months ended March 31, 2000 with an effective tax rate of
43.4% compared to $4.0 million for the three months ended March 31, 1999 and an
effective tax rate of 53.7%. In 1999, the provision reflects the
non-deductibility of the merger related charges and a non-cash non-recurring tax
charge of $677,000 as a result of a change in the tax status of a company
acquired in a pooling-of-interest transaction from an S corporation to a C
corporation.
Net Income. Net income increased $16.1 million, or 471.0%, to $19.5 million
for the three months ended March 31, 2000 compared to $3.4 million for the three
months ended March 31, 1999.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2000, we had cash and cash equivalents of $2.2 million,
working capital of $188.8 million and long-term debt of $198.0 million, net of
current maturities, including borrowings of $35.8 million under the credit
facility. We also had $5.3 million of letters of credit outstanding under the
credit facility. In addition, we had $49.4 million of Convertible Subordinated
Notes.
During the three months ended March 31, 2000, operating activities provided
net cash flow of $1.1 million. Changes in working capital accounts are affected
by the acquisitions throughout the quarter and as such are not comparable to
prior periods. We used net cash in investing activities of $58.0 million,
including $39.0 million used for the purchase of businesses, net of cash
acquired. Financing activities provided a net cash flow of $48.3 million,
resulting primarily from $150.0 million from the private placement of senior
secured notes, partially offset by $103.3 million in repayments of our credit
facility.
In June 1999, we expanded our bank group from nine to 14 banks and
increased our $175.0 million credit facility to $350.0 million. The credit
facility is secured by a pledge of all of the capital stock of our operating
subsidiaries and the majority of our assets. We use the credit facility to
provide funds to be used for working capital, to finance acquisitions and for
other general corporate purposes. Amounts borrowed under the credit facility
bear interest at a rate equal to either (a) LIBOR plus 1.00% to 2.00%, as
determined by the ratio of our total funded debt to EBITDA (as defined in the
credit facility) or (b) the bank's prime rate plus up to 0.25%, as determined by
the ratio of our total funded debt to EBITDA. We owe commitment fees of 0.25% to
0.50% (based on total funded debt to EBITDA) on any unused borrowing capacity
under the credit facility. Our subsidiaries guarantee repayment of all amounts
due under the credit facility, and the credit facility restricts pledges of
material assets. We agreed to usual and customary covenants for a credit
facility of this nature, including a prohibition on the payment of dividends on
common stock, certain financial ratios and indebtedness covenants and a
requirement to obtain the consent of the lenders for acquisitions exceeding a
certain level of cash consideration. As of May 11, 2000 we had approximately
$94.0 million in outstanding borrowings under the credit facility and $5.2
million of letters of credit outstanding, resulting in a borrowing availability
of $250.8 million under the revolving credit facility.
In September 1999, we issued 1,860,000 shares of Series A Convertible
Preferred Stock to UtiliCorp for an initial investment of $186,000,000, before
transaction costs. The Series A Convertible Preferred Stock bears a dividend
rate of 0.5% per annum and is convertible into common stock at any time at the
option of UtiliCorp at $20.00 per share, subject to customary adjustments for
certain dilutive events. We used the net proceeds from the investment to reduce
outstanding borrowings under our credit facility.
We also entered into a management services agreement with UtiliCorp for
advice and services including financing activities; corporate strategic
planning; research on the restructuring of the power industries; the
development, evaluation and marketing of our products, services and
capabilities; identification of and evaluation of potential U.S. acquisition
candidates and other merger and acquisition advisory services; and other
services that we may reasonably request. In consideration of the advice and
services rendered by UtiliCorp, we agreed to pay UtiliCorp, on a quarterly basis
in arrears, a fee of $2,325,000. The UtiliCorp management services agreement
lasts for six years, but can be extended by mutual agreement of the parties. We
have the right to terminate the management services agreement at any time if, in
our reasonable
11
<PAGE> 14
judgment, changes in the nature of our relationship with UtiliCorp make
effective provision of the services to be provided unlikely.
In March 2000, we closed a private placement of senior secured notes with
16 lenders, primarily insurance companies, for $150 million. The senior secured
notes have maturities of five, seven or ten years with a weighted average
interest rate of 8.52% and, pursuant to an intercreditor agreement, rank pari
passu in right of repayment with our credit facility indebtedness. The senior
secured notes have financial covenants similar to the credit facility. We used
the proceeds from this private placement to reduce outstanding borrowings under
the credit facility.
Between January 1, 2000 and March 31, 2000, we acquired six companies for
an aggregate consideration of 1.6 million shares of common stock and $40.0
million in cash. The cash portion of such consideration was provided by
borrowings under our credit facility. The timing, size or success of any
acquisition effort and the associated potential capital commitments cannot be
predicted.
We anticipate that our cash flow from operations and our credit facility
will provide sufficient cash to enable us to meet our working capital needs,
debt service requirements, and planned capital expenditures for property and
equipment for at least the next 12 months. However, if companies we wish to
acquire are unwilling to accept our common stock as part of the consideration
for the sale of their businesses, we could be required to utilize more cash to
complete acquisitions. If sufficient funds were not available from operating
cash flow or through borrowings under the credit facility, we may be required to
seek additional financing through the public or private sale of equity or debt
securities. There can be no assurance that we could secure such financing if and
when we need it or on terms we would deem acceptable.
SEASONALITY; FLUCTUATIONS OF QUARTERLY RESULTS
Our results of operations can be subject to seasonal variations. During the
winter months, demand for new projects and new maintenance service arrangements
may be lower due to reduced construction activity. However, demand for repair
and maintenance services attributable to damage caused by inclement weather
during the winter months may partially offset the loss of revenues from lower
demand for new projects and new maintenance service arrangements. Additionally,
our industry can be highly cyclical. As a result, our volume of business may be
adversely affected by declines in new projects in various geographic regions in
the United States. Typically, we experience lower gross and operating margins
during the winter months. The timing of acquisitions, variations in the margins
of projects performed during any particular quarter, the timing and magnitude of
acquisition assimilation costs and regional economic conditions may also
materially affect quarterly results. Accordingly, our operating results in any
particular quarter may not be indicative of the results that can be expected for
any other quarter or for the entire year.
12
<PAGE> 15
PART II -- OTHER INFORMATION
QUANTA SERVICES, INC. AND SUBSIDIARIES
ITEM 2. CHANGES IN SECURITIES.
(c) Unregistered Sales of Securities.
Between January 1, 2000, and March 31, 2000, the Company completed six
acquisitions in which some or all of the consideration was unregistered
securities of the Company. The aggregate consideration paid in these
transactions was $40.0 million in cash and 1.6 million shares of common stock.
The Company considers the acquisitions of World Fiber, Inc., DeltaComm, Inc.,
Sycamore Shoals Communications, Inc. and Choice Optics Communications, Inc. to
be one acquisition as these companies were all part of a related business.
Similarly, the Company considers the acquisitions of Arby Construction, Inc, and
S.K.S. Pipeliners, Inc. to be one acquisition as these companies were all part
of a related business. None of the other acquisitions were affiliated with each
other prior to acquisition by the Company.
All securities listed on the following table were shares of common stock.
The Company relied on Section 4(2) of the Securities Act of 1933, as amended, as
the basis for exemption from registration. The shares of Series A Convertible
Preferred Stock are convertible into 9,300,000 shares of common stock, subject
to adjustment as set forth in the Company's Certificate of Designations. For all
issuances, the purchasers were "accredited investors" as defined in Rule 501
promulgated pursuant to the Securities Act of 1933, as amended. All issuances
were to the owners of businesses acquired in privately negotiated transactions
or to UtiliCorp United, not pursuant to public solicitation. The issuance to
UtiliCorp United was made pursuant to certain preemptive rights negotiated with
UtiliCorp United at the time of its initial investment in Series A Convertible
Preferred Stock of the Company.
<TABLE>
<CAPTION>
NUMBER OF
DATE SHARES PURCHASERS CONSIDERATION
---- --------- ---------- -------------
<C> <C> <S> <C>
1/10/00 186,174 UtiliCorp United, Inc. $3,384,475.25
1/14/00 214,501 Three owners of World Fiber, Inc. Acquisition of World Fiber, Inc.
1/14/00 264,610 Two owners of DeltaComm, Inc. Acquisition of DeltaComm, Inc.
1/14/00 205,350 Two owners of Sycamore Shoals Acquisition of Sycamore Shoals
Communications, Inc. Communications, Inc.
1/14/00 74,982 Three owners of Choice Optics Acquisition of Choice Optics
Communications, Inc. Communications, Inc.
2/24/00 568,924 Five owners of Arby Construction, Acquisition of Arby Construction,
Inc. Inc.
2/24/00 2,965 Five owners of S.K.S. Pipeliners, Acquisition of S.K.S. Pipeliners,
Inc. Inc.
2/24/00 22,099 Five owners of Brown Engineering Acquisition of Brown Engineering
and Testing, Inc. and Testing, Inc.
3/02/00 119,260 Four owners of Grand Electric Acquisition of Grand Electric
Company Company
3/15/00 128,331 Two owners of TVS Systems, Inc. Acquisition of TVS Systems, Inc.
3/28/00 17,478 Three owners of MC Underground LLC Acquisition of MC Underground LLC
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
27.1 -- Financial data schedule
</TABLE>
(b) Reports on Form 8-K.
On March 20, 2000, the Company filed a current report on Form 8-K regarding
adoption of the Company's Shareholder Rights Plan.
13
<PAGE> 16
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant, Quanta Services, Inc., has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
QUANTA SERVICES, INC.
By: /s/ DERRICK A. JENSEN
----------------------------------
Derrick A. Jensen
Vice President, Controller and
Chief Accounting Officer
Dated: May 15, 2000
14
<PAGE> 17
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
27.1 -- Financial data schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 2,210
<SECURITIES> 0
<RECEIVABLES> 297,091
<ALLOWANCES> 6,970
<INVENTORY> 8,274
<CURRENT-ASSETS> 369,419
<PP&E> 286,508
<DEPRECIATION> 62,512
<TOTAL-ASSETS> 1,277,268
<CURRENT-LIABILITIES> 180,617
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 817,408
<TOTAL-LIABILITY-AND-EQUITY> 1,277,268
<SALES> 333,737
<TOTAL-REVENUES> 333,737
<CGS> 261,056
<TOTAL-COSTS> 295,223
<OTHER-EXPENSES> 549
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,533
<INCOME-PRETAX> 34,530
<INCOME-TAX> 14,986
<INCOME-CONTINUING> 19,544
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 19,312
<EPS-BASIC> 0.34
<EPS-DILUTED> 0.28
</TABLE>
