Quarterly report pursuant to Section 13 or 15(d)

Acquisitions

v3.10.0.1
Acquisitions
6 Months Ended
Jun. 30, 2018
Business Combinations [Abstract]  
Acquisitions
ACQUISITIONS:
In January 2018, Quanta acquired an electrical infrastructure services business specializing in substation construction and relay services and a postsecondary educational institution that provides pre-apprenticeship training and programs for experienced linemen, both of which are located in the United States. The aggregate consideration for these acquisitions was $51.3 million paid or payable in cash, subject to certain adjustments, and 379,817 shares of Quanta common stock, which had a fair value of approximately $13.5 million as of the respective acquisition dates. Included in the cash consideration was $12.1 million paid in the second quarter of 2018 for the purchase of certain properties and training facilities related to the postsecondary educational institution. Additionally, the acquisition of the postsecondary educational institution includes the potential payment of up to $15.0 million of contingent consideration, payable if the acquired business achieves certain performance objectives over a five-year post-acquisition period. Based on the estimated fair value of this contingent consideration, Quanta recorded a $13.7 million liability as of the acquisition date. The results of the acquired businesses have generally been included in Quanta’s Electric Power Infrastructure Services segment and consolidated financial statements beginning on the acquisition dates.
On July 20, 2017, Quanta acquired Stronghold, a specialized services business located in the United States that provides high-pressure and critical-path solutions to the downstream and midstream energy markets. The aggregate consideration included $351.0 million in cash, subject to certain adjustments, and 2,693,680 shares of Quanta common stock, which had a fair value of $81.3 million at the acquisition date. Additionally, the acquisition includes the potential payment of up to $100.0 million of contingent consideration, payable if the acquired business achieves certain performance objectives over a three-year post-acquisition period. Based on the estimated fair value of this contingent consideration, Quanta recorded a $51.1 million liability as of the acquisition date. The results of the acquired business have generally been included in Quanta’s Oil and Gas Infrastructure Services segment and consolidated financial statements since the acquisition date.
During the year ended December 31, 2017, Quanta also acquired a communications infrastructure services business and an electrical and communications business, both of which are located in the United States. The aggregate consideration for these acquisitions consisted of $12.0 million paid or payable in cash, subject to certain adjustments, and 288,666 shares of Quanta common stock, which had a fair value of $8.3 million as of the acquisition dates. The results of the acquired businesses have generally been included in Quanta’s Electric Power Infrastructure Services segment and consolidated financial statements since the acquisition dates.
Quanta is in the process of finalizing its assessments of the fair values of the acquired assets and assumed liabilities related to businesses acquired subsequent to June 30, 2017, and further adjustments to the purchase price allocations may occur. As of June 30, 2018, the estimated fair values of the net assets acquired were preliminary, with possible updates primarily related to certain tax estimates. The aggregate purchase consideration of the businesses acquired subsequent to June 30, 2017 through June 30, 2018 was allocated to acquired assets and assumed liabilities, which resulted in allocations of $107.7 million to net tangible assets, $116.6 million to identifiable intangible assets and $344.2 million to goodwill.
The following table summarizes the aggregate consideration paid or payable as of June 30, 2018 for the 2018 acquisitions and 2017 acquisitions and presents the allocation of these amounts to net tangible and identifiable intangible assets based on their estimated fair values as of the respective acquisition dates, inclusive of any purchase price adjustments. These allocations require significant use of estimates and is 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. Third-party appraisal firms are engaged to assist in fair value determination of fixed assets, intangible assets and certain other assets and liabilities when appropriate (in thousands).
 
 
2018
 
2017
 
 
All Acquisitions
 
Stronghold
 
Other Acquisitions
Consideration:
 
 
 
 
 
 
Cash paid or payable
 
$
51,345

 
$
351,014

 
$
11,955

Value of Quanta common stock issued
 
13,549

 
81,337

 
8,267

Contingent consideration
 
13,705

 
51,084

 

Fair value of total consideration transferred or estimated to be transferred
 
$
78,599

 
$
483,435

 
$
20,222

 
 
 
 
 
 
 
Accounts receivable
 
$
4,436

 
$
77,478

 
$
7,157

Contract assets
 

 
11,913

 
193

Other current assets
 
5,722

 
20,914

 
170

Property and equipment
 
17,516

 
51,258

 
1,480

Other assets
 
325

 
1,513

 
12

Identifiable intangible assets
 
19,836

 
95,700

 
8,091

Contract liabilities
 

 
(13,489
)
 
(93
)
Other current liabilities
 
(8,238
)
 
(58,346
)
 
(2,705
)
Deferred tax liabilities, net
 
(4,179
)
 

 

Other long-term liabilities
 

 
(48
)
 

Total identifiable net assets
 
35,418

 
186,893

 
14,305

Goodwill
 
43,181

 
296,542

 
5,917

 
 
$
78,599

 
$
483,435

 
$
20,222


Goodwill represents the amount by which the purchase price for an acquired business exceeds the net fair value of the assets acquired and liabilities assumed. The 2018 and 2017 acquisitions strategically expanded Quanta’s domestic electric power, oil and gas and communications service offerings, which Quanta believes contributes to the recognition of the goodwill. In connection with the 2018 acquisitions, as of the acquisition dates, goodwill of $43.2 million was recorded for the acquired businesses that were included within Quanta’s Electric Power Infrastructure Services Division. In connection with the 2017 acquisitions, as of the acquisition dates and inclusive of purchase price adjustments, goodwill of $5.9 million was recorded for the acquired businesses that were included within Quanta’s Electric Power Infrastructure Services Division, and goodwill of $296.5 million was recorded for Stronghold, which is included within Quanta’s Oil and Gas Infrastructure Services Division. Goodwill of $9.8 million related to the 2018 acquisitions is expected to be deductible for income tax purposes, and goodwill of $302.5 million related to the 2017 acquisitions is expected to be deductible for income tax purposes.
The following table summarizes the estimated fair values of identifiable intangible assets for the 2018 acquisitions 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).    
 
 
Estimated Fair Value
 
Weighted Average Amortization Period in Years
Customer relationships
 
$
3,328

 
5.0
Backlog
 
1,055

 
1.0
Trade names
 
6,257

 
15.0
Non-compete agreements
 
196

 
5.0
Curriculum
 
9,000

 
10.0
Total intangible assets subject to amortization acquired in 2018 acquisitions
 
$
19,836

 
10.2


The following unaudited supplemental pro forma results of operations have been provided for illustrative purposes only and do not purport to be indicative of the actual results that would have been achieved by the combined companies for the periods presented or that may be achieved by the combined companies in the future. Future results may vary significantly from the results reflected in the following pro forma financial information because of future events and transactions, as well as other factors (in thousands, except per share amounts):
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
 
 
2018
 
2017
 
2018
 
2017
Revenues
 
$
2,656,348

 
$
2,323,996

 
$
5,077,992

 
$
4,627,463

Gross profit
 
$
333,371

 
$
334,454

 
$
636,226

 
$
633,461

Selling, general and administrative expenses
 
$
206,104

 
$
208,437

 
$
422,537

 
$
415,863

Amortization of intangible assets
 
$
10,507

 
$
10,740

 
$
21,168

 
$
21,665

Net income
 
$
74,706

 
$
66,371

 
$
113,610

 
$
116,797

Net income attributable to common stock
 
$
74,365

 
$
65,848

 
$
112,272

 
$
116,101

 
 
 
 
 
 
 
 
 
Earnings per share attributable to common stock:

 
 
 
 
 
 
 
 
Basic
 
$
0.49

 
$
0.42

 
$
0.72

 
$
0.73

Diluted
 
$
0.48

 
$
0.41

 
$
0.72

 
$
0.73



The pro forma combined results of operations for the three and six months ended June 30, 2018 and 2017 were prepared by adjusting the historical results of Quanta to include the historical results of the 2018 acquisitions as if they occurred January 1, 2017 and the historical results of the 2017 acquisitions as if they occurred January 1, 2016. These pro forma combined historical results were adjusted for the following: a reduction of interest expense as a result of the repayment of outstanding indebtedness of the acquired businesses; an increase in interest expense as a result of the cash consideration paid net of cash received; an increase in amortization expense due to the incremental intangible assets recorded; 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 reclassifications to conform the acquired businesses’ presentation to Quanta’s accounting policies. The pro forma results of operations do not include any adjustments to eliminate the impact of acquisition-related costs or any cost savings or other synergies that resulted or may result from the acquisitions. As noted above, the pro forma results of operations do not purport to be indicative of the actual results that would have been achieved by the combined company for the periods presented or that may be achieved by the combined company in the future.
Revenues of approximately $11.2 million and a loss before income taxes of approximately $1.3 million, which included $0.4 million of acquisition-related costs, were included in Quanta’s consolidated results of operations for the three months ended June 30, 2018 related to the 2018 acquisitions. Revenues of approximately $19.3 million and a loss before income taxes of approximately $6.6 million, which included $6.0 million of acquisition-related costs, were included in Quanta’s consolidated results of operations for the six months ended June 30, 2018 related to the 2018 acquisitions.