Summary of Significant Accounting Policies
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Jun. 30, 2011
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Summary of Significant Accounting Policies [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
Principles
of Consolidation
The consolidated financial statements of Quanta include the
accounts of Quanta Services, Inc. and its wholly owned
subsidiaries, which are also referred to as its operating units.
The consolidated financial statements also include the accounts
of certain of Quanta’s investments in joint ventures, which
are either consolidated or partially consolidated, as discussed
in the following summary of significant accounting policies. All
significant intercompany accounts and transactions have been
eliminated in consolidation. Unless the context requires
otherwise, references to Quanta include Quanta and its
consolidated subsidiaries.
Interim
Condensed Consolidated Financial Information
These unaudited condensed consolidated financial statements have
been prepared pursuant to the rules of the Securities and
Exchange Commission (SEC). Certain information and footnote
disclosures, normally included in annual financial statements
prepared in accordance with accounting principles generally
accepted in the United States, have been condensed or omitted
pursuant to those rules and regulations. Quanta 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 state 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 Quanta have historically been subject to
significant seasonal fluctuations.
Quanta recommends that these unaudited condensed consolidated
financial statements be read in conjunction with the audited
consolidated financial statements and notes thereto of Quanta
and its subsidiaries included in Quanta’s Annual Report on
Form 10-K
for the year ended December 31, 2010, which was filed with
the SEC on March 1, 2011.
Use of
Estimates and Assumptions
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States
requires the use of estimates and assumptions by management in
determining the reported amounts of assets and liabilities,
disclosures of contingent assets and liabilities known to exist
as of the date the financial statements are published and the
reported amount of revenues and expenses recognized during the
periods presented. Quanta reviews all significant estimates
affecting its consolidated financial statements on a recurring
basis and records the effect of any necessary adjustments prior
to their publication. Judgments and estimates are based on
Quanta’s beliefs and assumptions derived from information
available at the time such judgments and estimates are made.
Uncertainties with respect to such estimates and assumptions are
inherent in the preparation of financial statements. Estimates
are primarily used in Quanta’s assessment of the allowance
for doubtful accounts, valuation of inventory, useful lives of
assets, fair value assumptions in analyzing goodwill, other
intangibles and long-lived asset impairments, purchase price
allocations, liabilities for self-insured and other claims,
revenue recognition for construction contracts and fiber optic
licensing, share-based compensation, operating results of
reportable segments, provision (benefit) for income taxes and
calculation of uncertain tax positions.
Cash
and Cash Equivalents
Quanta had cash and cash equivalents of $380.4 million and
$539.2 million as of June 30, 2011 and
December 31, 2010. Cash consisting of interest-bearing
demand deposits is carried at cost, which approximates fair
value. Quanta considers all highly liquid investments purchased
with an original maturity of three months or less to be cash
equivalents, which are carried at fair value. At June 30,
2011 and December 31, 2010, cash equivalents were
$318.2 million and $460.8 million, which consisted
primarily of money market mutual funds and investment grade
commercial paper and are discussed further in “Fair
Value Measurements” below. As of June 30, 2011 and
December 31, 2010, cash and cash equivalents held in
domestic bank accounts was approximately $363.7 million and
$509.6 million, and cash and cash equivalents held in
foreign bank accounts was approximately $16.7 million and
$29.6 million.
Current
and Long-term Accounts and Notes Receivable and Allowance for
Doubtful Accounts
Quanta provides an allowance for doubtful accounts when
collection of an account or note receivable is considered
doubtful, and receivables are written off against the allowance
when deemed uncollectible. Inherent in the assessment of the
allowance for doubtful accounts are certain judgments and
estimates including, among others, the customer’s access to
capital, the customer’s willingness or ability to pay,
general economic and market conditions and the ongoing
relationship with the customer. Quanta considers accounts
receivable delinquent after 30 days but does not generally
include delinquent accounts in its analysis of the allowance for
doubtful accounts unless the accounts receivable have been
outstanding for at least 90 days. In addition to balances
that have been outstanding for 90 days or more, Quanta also
includes accounts receivable in its analysis of the allowance
for doubtful accounts if they relate to customers in bankruptcy
or with other known difficulties. Under certain circumstances
such as foreclosures or negotiated settlements, Quanta may take
title to the underlying assets in lieu of cash in settlement of
receivables. Material changes in Quanta’s customers’
business or cash flows, which may be impacted by negative
economic and market conditions, could affect its ability to
collect amounts due from them. As of June 30, 2011 and
December 31, 2010, Quanta had total allowances for doubtful
accounts of approximately $7.3 million, of which
approximately $6.1 million was included as a reduction of
net current accounts receivable. Should customers experience
financial difficulties or file for bankruptcy, or should
anticipated recoveries relating to receivables in existing
bankruptcies or other workout situations fail to materialize,
Quanta could experience reduced cash flows and losses in excess
of current allowances provided.
The balances billed but not paid by customers pursuant to
retainage provisions in certain contracts will be due upon
completion of the contracts and acceptance by the customer.
Based on Quanta’s experience with similar contracts in
recent years, the majority of the retention balances at each
balance sheet date will be collected within
the next twelve months. Current retainage balances as of
June 30, 2011 and December 31, 2010 were approximately
$103.3 million and $119.4 million and are included in
accounts receivable. Retainage balances with settlement dates
beyond the next twelve months are included in other assets, net,
and as of June 30, 2011 and December 31, 2010 were
$15.5 million and $8.0 million.
Within accounts receivable, Quanta recognizes unbilled
receivables in circumstances such as when revenues have been
earned and recorded but the amount cannot be billed under the
terms of the contract until a later date; costs have been
incurred but are yet to be billed under cost-reimbursement type
contracts; or amounts arise from routine lags in billing (for
example, work completed one month but not billed until the next
month). These balances do not include revenues accrued for work
performed under fixed-price contracts as these amounts are
recorded as costs and estimated earnings in excess of billings
on uncompleted contracts. At June 30, 2011 and
December 31, 2010, the balances of unbilled receivables
included in accounts receivable were approximately
$152.9 million and $103.5 million.
Goodwill
and Other Intangibles
Quanta has recorded goodwill in connection with its
acquisitions. Goodwill is subject to an annual assessment for
impairment using a two-step fair value-based test, which Quanta
performs at the operating unit level. Each of Quanta’s
operating units is organized into one of three internal
divisions, which are closely aligned with Quanta’s
reportable segments, based on the predominant type of work
performed by the operating unit at the point in time the
divisional designation is made. Because separate measures of
assets and cash flows are not produced or utilized by management
to evaluate segment performance, Quanta’s impairment
assessments of its goodwill do not include any consideration of
assets and cash flows by reportable segment. As a result, Quanta
has determined that its individual operating units represent its
reporting units for the purpose of assessing goodwill
impairments.
Quanta’s goodwill impairment assessment is performed
annually at year-end, or more frequently if events or
circumstances exist which indicate that goodwill may be
impaired. For instance, a decrease in Quanta’s market
capitalization below book value, a significant change in
business climate or a loss of a significant customer, among
other things, may trigger the need for interim impairment
testing of goodwill associated with one or all of its reporting
units. The first step of the two-step fair value-based test
involves comparing the fair value of each of Quanta’s
reporting units with its carrying value, including goodwill. If
the carrying value of the reporting unit exceeds its fair value,
the second step is performed. The second step compares the
carrying amount of the reporting unit’s goodwill to the
implied fair value of its goodwill. If the implied fair value of
goodwill is less than the carrying amount, an impairment loss
would be recorded as a reduction to goodwill with a
corresponding charge to operating expense.
Quanta determines the fair value of its reporting units using a
weighted combination of the discounted cash flow, market
multiple and market capitalization valuation approaches, with
heavier weighting on the discounted cash flow method, as in
management’s opinion, this method currently results in the
most accurate calculation of a reporting unit’s fair value.
Determining the fair value of a reporting unit requires judgment
and the use of significant estimates and assumptions. Such
estimates and assumptions include revenue growth rates,
operating margins, discount rates, weighted average costs of
capital and future market conditions, among others. Quanta
believes the estimates and assumptions used in its impairment
assessments are reasonable and based on available market
information, but variations in any of the assumptions could
result in materially different calculations of fair value and
determinations of whether or not an impairment is indicated.
Under the discounted cash flow method, Quanta determines fair
value based on the estimated future cash flows of each reporting
unit, discounted to present value using risk-adjusted industry
discount rates, which reflect the overall level of inherent risk
of a reporting unit and the rate of return an outside investor
would expect to earn. Cash flow projections are derived from
budgeted amounts and operating forecasts (typically a three-year
model) plus an estimate of later period cash flows, all of which
are evaluated by management. Subsequent period cash flows are
developed for each reporting unit using growth rates that
management believes are reasonably likely to occur along
with a terminal value derived from the reporting unit’s
earnings before interest, taxes, depreciation and amortization
(EBITDA). The EBITDA multiples for each reporting unit are based
on trailing twelve-month comparable industry data.
Under the market multiple and market capitalization approaches,
Quanta determines the estimated fair value of each of its
reporting units by applying transaction multiples to each
reporting unit’s projected EBITDA and then averaging that
estimate with similar historical calculations using either a
one, two or three year average. For the market capitalization
approach, Quanta adds a reasonable control premium, which is
estimated as the premium that would be received in a sale of the
reporting unit in an orderly transaction between market
participants.
For recently acquired reporting units, a step one impairment
test may indicate an implied fair value that is substantially
similar to the reporting unit’s carrying value. Such
similarities in value are generally an indication that
management’s estimates of future cash flows associated with
the recently acquired reporting unit remain relatively
consistent with the assumptions that were used to derive its
initial fair value. During the fourth quarter of 2010, a
goodwill impairment analysis was performed for each of
Quanta’s operating units, which indicated that the implied
fair value of each of Quanta’s operating units was
substantially in excess of carrying value. Following the
analysis, management concluded that no impairment was indicated
at any operating unit. As discussed generally above, when
evaluating the 2010 step one impairment test results, management
considered many factors in determining whether or not an
impairment of goodwill for any reporting unit was reasonably
likely to occur in future periods, including future market
conditions and the economic environment in which Quanta’s
reporting units were operating. Additionally, management
considered the sensitivity of its fair value estimates to
changes in certain valuation assumptions and after giving
consideration to at least a 10% decrease in the fair value of
each of Quanta’s reporting units, the results of our
assessment at December 31, 2010 did not change. However,
circumstances such as market declines, unfavorable economic
conditions, the loss of a major customer or other factors could
impact the valuation of goodwill in future periods.
Quanta’s intangible assets include customer relationships,
backlog, trade names, non-compete agreements and patented rights
and developed technology. The value of customer relationships is
estimated using the
value-in-use
concept utilizing the income approach, specifically the excess
earnings method. The excess earnings analysis consists of
discounting to present value the projected cash flows
attributable to the customer relationships, with consideration
given to customer contract renewals, the importance or lack
thereof of existing customer relationships to Quanta’s
business plan, income taxes and required rates of return. Quanta
values backlog based upon the contractual nature of the backlog
within each service line, using the income approach to discount
back to present value the cash flows attributable to the
backlog. The value of trade names is estimated using the
relief-from-royalty method of the income approach. This approach
is based on the assumption that in lieu of ownership, a company
would be willing to pay a royalty in order to exploit the
related benefits of this intangible asset.
Quanta amortizes intangible assets based upon the estimated
consumption of the economic benefits of each intangible asset or
on a straight-line basis if the pattern of economic benefits
consumption cannot otherwise be reliably estimated. Intangible
assets subject to amortization are reviewed for impairment and
are tested for recoverability whenever events or changes in
circumstances indicate that the carrying amount may not be
recoverable. For instance, a significant change in business
climate or a loss of a significant customer, among other things,
may trigger the need for interim impairment testing of
intangible assets. An impairment loss would be recognized if the
carrying amount of an intangible asset is not recoverable and
its carrying amount exceeds its fair value.
Investments
in Affiliates and Other Entities
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 either an incorporated or unincorporated entity, a
general or limited partnership, a contractual joint venture, or
some other form of equity participation. These investments may
also include Quanta’s participation in different finance
structures such as the extension of loans to project specific
entities, the acquisition of convertible notes issued by project
specific entities, or other strategic financing arrangements.
Quanta determines whether such investments involve a variable
interest entity (VIE) based on the characteristics of the
subject entity. 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 meet both of the following characteristics:
(i) the power to direct the activities of a VIE that most
significantly affect the VIE’s economic performance and
(ii) the obligation to absorb losses of the VIE that could
potentially be significant to the VIE or the right to receive
benefits from the VIE that could potentially be significant to
the VIE. When Quanta is deemed to be the primary beneficiary and
the VIE is consolidated, the other party’s equity interest
in the VIE is accounted for as a noncontrolling interest. In
cases where Quanta determines it has an undivided interest in
the assets, liabilities, revenues and profits of an
unincorporated VIE (i.e., a general partnership interest), such
amounts are consolidated on a basis proportional to
Quanta’s ownership interest in the unincorporated entity.
Investments in minority interests in entities of which Quanta is
not the primary beneficiary, but over which Quanta has the
ability to exercise significant influence, are accounted for
using the equity method of accounting. Quanta’s share of
net income or losses from unconsolidated equity investments is
included in other income (expense) in the condensed consolidated
statements of operations. Equity investments are reviewed for
impairment by assessing whether any decline in the fair value of
the investment below the carrying value is other than temporary.
In making this determination, factors such as the ability to
recover the carrying amount of the investment and the inability
of the investee to sustain an earnings capacity are evaluated in
determining whether a loss in value should be recognized. Any
impairment losses would be recognized in other expense. Equity
method investments are carried at original cost and are included
in other assets, net in the condensed consolidated balance sheet
and are adjusted for Quanta’s proportionate share of the
investees’ income, losses and distributions.
On June 22, 2011, Quanta acquired an equity ownership
interest of approximately 39% in Howard Midstream Energy
Partners, LLC (HEP) for an initial capital contribution of
$35.0 million. HEP is engaged in the business of owning,
operating and constructing midstream plant and pipeline assets
in the oil and gas industry. HEP commenced operations in June
2011 with the acquisitions of Texas Pipeline LLC, a pipeline
operator in the Eagle Ford shale region of South Texas, and
Bottom Line Services, LLC, a construction services company.
Quanta accounts for this investment using the equity method of
accounting.
During the second quarter of 2011, Quanta agreed to loan up to
$4.0 million to the indirect parent of NJ Oak Solar, LLC
(NJ Oak Solar). The loan proceeds, together with other financing
and equity funds, will be used for NJ Oak Solar’s
construction of a 10 MW solar power generation facility in
New Jersey. The construction of the facility, which began in the
second quarter of 2011, will be performed by Quanta.
Revenue
Recognition
Infrastructure Services — Through its Electric Power
Infrastructure Services, Natural Gas and Pipeline Infrastructure
Services and Telecommunications Infrastructure Services
segments, Quanta designs, installs and maintains networks for
customers in the electric power, natural gas, oil and
telecommunications industries. These services may be provided
pursuant to master service agreements, repair and maintenance
contracts and fixed price and non-fixed price installation
contracts. Pricing under contracts may be competitive unit
price, cost-plus/hourly (or time and materials basis) or fixed
price (or lump sum basis), and the final terms and prices of
these contracts are frequently negotiated with the customer.
Under unit-based contracts, the utilization of an output-based
measurement is appropriate for revenue recognition. Under these
contracts, Quanta recognizes revenue as units are completed
based on pricing established between Quanta and the customer for
each unit of delivery, which best reflects the pattern in which
the obligation to the customer is fulfilled. Under
cost-plus/hourly and time and materials type contracts, Quanta
recognizes revenue on an input basis, as labor hours are
incurred and services are performed.
Revenues from fixed price contracts are recognized using the
percentage-of-completion
method, measured by the percentage of costs incurred to date to
total estimated costs for each contract. These contracts provide
for a fixed amount of revenues for the entire project. Such
contracts provide that the customer accept completion of
progress to date and compensate Quanta for services rendered,
which may be measured in terms of units installed, hours
expended or some other measure of progress. Contract costs
include all direct materials, labor and subcontract costs and
those indirect costs related to contract performance, such as
indirect labor, supplies, tools, repairs and depreciation costs.
Much of the materials associated with Quanta’s work are
owner-furnished and are therefore not included in contract
revenues and costs. The cost estimation process is based on the
professional knowledge and experience of Quanta’s
engineers, project managers and financial professionals. Changes
in job performance, job conditions and final contract
settlements are factors that influence management’s
assessment of total contract value and the total estimated costs
to complete those contracts and therefore, Quanta’s profit
recognition. Changes in these factors may result in revisions to
costs and income, and their effects are recognized in the period
in which the revisions are determined. Provisions for losses on
uncompleted contracts are made in the period in which such
losses are determined to be probable and the amount can be
reasonably estimated.
Quanta may incur costs subject to change orders, whether
approved or unapproved by the customer,
and/or
claims related to certain contracts. Quanta determines the
probability that such costs will be recovered based upon
evidence such as past practices with the customer, specific
discussions or preliminary negotiations with the customer or
verbal approvals. Quanta treats items as a cost of contract
performance in the period incurred if it is not probable that
the costs will be recovered or will recognize revenue if it is
probable that the contract price will be adjusted and can be
reliably estimated. As of June 30, 2011 and
December 31, 2010, Quanta had approximately
$48.1 million and $83.1 million of change orders
and/or
claims that had been included as contract price adjustments on
certain contracts which were in the process of being negotiated
in the normal course of business.
The current asset “Costs and estimated earnings in excess
of billings on uncompleted contracts” represents revenues
recognized in excess of amounts billed for fixed price
contracts. The current liability “Billings in excess of
costs and estimated earnings on uncompleted contracts”
represents billings in excess of revenues recognized for fixed
price contracts.
Fiber Optic Licensing — The Fiber Optic Licensing
segment constructs and licenses the right to use fiber optic
telecommunications facilities to its customers pursuant to
licensing agreements, typically with terms from five to
twenty-five years, inclusive of certain renewal options. Under
those agreements, customers are provided the right to use a
portion of the capacity of a fiber optic facility, with the
facility owned and maintained by Quanta. Revenues, including any
initial fees or advance billings, are recognized ratably over
the expected length of the agreements, including probable
renewal periods. As of June 30, 2011 and December 31,
2010, initial fees and advance billings on these licensing
agreements not yet recorded in revenue were $47.0 million
and $44.4 million and are recognized as deferred revenue,
with $37.6 million and $34.7 million considered to be
long-term and included in other
non-current liabilities.
Minimum future
licensing revenues expected to be recognized by Quanta pursuant
to these agreements at June 30, 2011 are as follows (in
thousands):
Income
Taxes
Quanta follows the liability method of accounting for income
taxes. Under this method, deferred tax assets and liabilities
are recorded for future tax consequences of temporary
differences between the financial reporting and tax bases of
assets and liabilities and are measured using the enacted tax
rates and laws that are expected to be in effect when the
underlying assets or liabilities are recovered or settled.
Quanta regularly evaluates valuation allowances established for
deferred tax assets for which future realization is uncertain.
The estimation of required valuation allowances includes
estimates of future taxable income. The ultimate realization of
deferred tax assets is dependent upon the generation of future
taxable income during the periods in which those temporary
differences become deductible. Quanta considers projected future
taxable income and tax planning strategies in making this
assessment. If actual future taxable income differs from these
estimates, Quanta may not realize deferred tax assets to the
extent estimated.
Quanta records reserves for expected tax consequences of
uncertain positions assuming that the taxing authorities have
full knowledge of the position and all relevant facts. As of
June 30, 2011, the total amount of unrecognized tax
benefits relating to uncertain tax positions was
$55.9 million, an increase from December 31, 2010 of
$5.3 million, which primarily relates to tax positions
expected to be taken for 2011. Quanta recognized
$1.0 million of interest expense and penalties in the
provision for income taxes for both of the quarters ended
June 30, 2011 and 2010 and recognized $1.8 million and
$2.0 million of interest expense and penalties in the
provision for income taxes for the six months ended
June 30, 2011 and 2010. Quanta believes that it is
reasonably possible that within the next 12 months
unrecognized tax benefits may decrease by up to
$8.7 million due to the expiration of certain statutes of
limitations.
The income tax laws and regulations are voluminous and are often
ambiguous. As such, Quanta is required to make many subjective
assumptions and judgments regarding its tax positions that could
materially affect amounts recognized in its future consolidated
balance sheets and statements of operations.
Stock-Based
Compensation
Quanta recognizes compensation expense for all stock-based
compensation based on the fair value of the awards granted, net
of estimated forfeitures, at the date of grant. The fair value
of restricted stock awards is determined based on the number of
shares granted and the closing price of Quanta’s common
stock on the date of grant. An estimate of future forfeitures is
required in determining the period expense. Quanta uses
historical data to estimate the forfeiture rate; however, these
estimates are subject to change and may impact the value that
will
ultimately be realized as compensation expense. The resulting
compensation expense from discretionary awards is recognized on
a straight-line basis over the requisite service period, which
is generally the vesting period, while compensation expense from
performance-based awards is recognized using the graded vesting
method over the requisite service period. The cash flows
resulting from the tax deductions in excess of the compensation
expense recognized for restricted stock and stock options
(excess tax benefit) are classified as financing cash flows.
Functional
Currency and Translation of Financial Statements
The U.S. dollar is the functional currency for the majority
of Quanta’s operations. However, Quanta has foreign
operating units in Canada, for which Quanta considers the
Canadian dollar to be the functional currency. Generally, the
currency in which the operating unit transacts a majority of its
transactions, including billings, financing, payroll and other
expenditures, would be considered the functional currency, but
any dependency upon the parent company and the nature of the
operating unit’s operations must also be considered. Under
the relevant accounting guidance, the treatment of these
translation gains or losses is dependent upon management’s
determination of the functional currency of each operating unit,
which involves consideration of all relevant economic facts and
circumstances affecting the operating unit. In preparing the
consolidated financial statements, Quanta translates the
financial statements of its foreign operating units from their
functional currency into U.S. dollars. Statements of
operations and cash flows are translated at average monthly
rates, while balance sheets are translated at the month-end
exchange rates. The translation of the balance sheets at the
month-end exchange rates results in translation gains or losses.
If transactions are denominated in the operating units’
functional currency, the translation gains and losses are
included as a separate component of equity under the caption
“Accumulated other comprehensive income.” If
transactions are not denominated in the operating units’
functional currency, the translation gains and losses are
included within the statement of operations.
Comprehensive
Income
Comprehensive income includes all changes in equity during a
period except those resulting from investments by and
distributions to stockholders. Quanta records other
comprehensive income (loss), net of tax, for the foreign
currency translation adjustment related to its foreign
operations and for changes in fair value of its derivative
contracts that are classified as cash flow hedges, as applicable.
Fair
Value Measurements
The carrying values of cash equivalents, accounts receivable,
accounts payable and accrued expenses approximate fair value due
to the short-term nature of these instruments. For disclosure
purposes, qualifying assets and liabilities are categorized into
three broad levels based on the priority of the inputs used to
determine their fair values. The fair value hierarchy gives the
highest priority to quoted prices (unadjusted) in active markets
for identical assets or liabilities (Level 1) and the
lowest priority to unobservable inputs (Level 3). All of
Quanta’s cash equivalents are categorized as Level 1
assets at June 30, 2011 and December 31, 2010, as all
values are based on unadjusted quoted prices for identical
assets in an active market that Quanta has the ability to access.
In connection with Quanta’s acquisitions, identifiable
intangible assets acquired included goodwill, backlog, customer
relationships, trade names and covenants
not-to-compete.
Quanta utilizes the fair value premise as the primary basis for
its valuation procedures, which is a market based approach to
determining the price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between
market participants. Quanta periodically engages the services of
an independent valuation firm to assist management with this
valuation process, which includes assistance with the selection
of appropriate valuation methodologies and the development of
market-based valuation assumptions. Based on these
considerations, management utilizes various valuation methods,
including an income approach, a market approach and a cost
approach, to determine the fair value of intangible assets
acquired based on the appropriateness of each method in relation
to the type of asset being valued. The assumptions used in these
valuation methods are analyzed and compared, where possible, to
available market
data, such as industry-based weighted average costs of capital
and discount rates, trade name royalty rates, public company
valuation multiples and recent market acquisition multiples. The
level of inputs used for these fair value measurements is the
lowest level (Level 3). Quanta believes that these
valuation methods appropriately represent the methods that would
be used by other market participants in determining fair value.
Quanta uses fair value measurements on a routine basis in its
assessment of assets classified as goodwill, other intangible
assets and long-lived assets held and used. In accordance with
its annual impairment test during the quarter ended
December 31, 2010, the carrying amounts of such assets,
including goodwill, was compared to their fair values. No
changes in carrying amounts resulted. The inputs used for fair
value measurements for goodwill, other intangible assets and
long-lived assets held and used are the lowest level
(Level 3) inputs for which Quanta uses the assistance
of third party specialists to develop valuation assumptions.
The valuation of investments in private company equity interests
and financing instruments requires significant management
judgment due to the absence of quoted market prices, the
inherent lack of liquidity and the long-term nature of such
assets. Typically, these investments are valued initially at
cost. Each quarter, valuations are reviewed using available and
relevant market data to determine if the carrying value of these
investments should be adjusted. Such market data primarily
include observations of the trading multiples of public
companies considered comparable to the private companies being
valued and the operating performance of the underlying portfolio
company, including its historical and projected net income and
its earnings before interest, taxes, depreciation and
amortization (EBITDA). Valuations are adjusted to account for
company-specific issues, the lack of liquidity inherent in a
private investment, and the fact that comparable public
companies are not identical to the companies being valued. In
addition, a variety of additional factors are reviewed by
management, including, but not limited to, financing and sales
transactions with third parties, future expectations with
respect to the particular investment, changes in market outlook
and the third-party financing environment. Investments in
private company equity interests and financing arrangements are
included in Level 3 of the valuation hierarchy. As of
June 30, 2011, the fair value of Quanta’s private
equity investment in HEP accounted for under the equity method
is assumed to be equal to its cost due to the investment being
made just prior to quarter-end.
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