QUANTA SERVICES INC, QUANTA SERVICES MANAGEMENT ...

Estimating future cash flows requires significant judgment, and our projections may vary from cash flows
eventually realized. Changes in our judgments and projections could result in a significantly different estimate of
the fair value of reporting units and intangible assets and could result in an impairment. Variances in the
assessment of market conditions, projected cash flows, cost of capital, growth rates and acquisition multiples
applied could have an impact on the assessment of impairments and any amount of goodwill impairment charges
recorded. For example, lower growth rates, lower acquisition multiples or higher costs of capital assumptions
would all individually lead to lower fair value assessments and potentially increased frequency or size of
goodwill impairments. Any goodwill or other intangible impairment would be included in the consolidated
statements of operations.
Based on the first step of the goodwill impairment analysis, we determined that, as of December 31, 2011,
the fair value of each reporting unit was in excess of its carrying value. We considered the sensitivity of these fair
value estimates to changes in certain of management’s assumptions, and after giving consideration to at least a
10% decrease in the fair value of each of our reporting units, the results of our assessment would not have
changed. Additionally, we compared the sum of fair values of our reporting units to our market capitalization at
December 31, 2011 and determined that the excess of the aggregate fair value of all reporting units to our market
capitalization reflected a reasonable control premium. Our market capitalization at December 31, 2011 was
approximately $4.53 billion, and our total equity was approximately $3.39 billion. Accordingly, we determined
that there was no goodwill impairment at December 31, 2011. Increases in the carrying value of individual
reporting units that may be indicated by our impairment tests are not recorded, therefore we may record goodwill
impairments in the future, even when the aggregate fair value of our reporting units as a whole may increase.
We and our customers continue to operate in a challenging business environment, with increasing regulatory
requirements and only gradual recovery in the economy and capital markets from recessionary levels. We are
closely monitoring our customers and the effect that changes in economic and market conditions have had or
may have on them. Certain of our customers have reduced spending in recent years, which we attribute to the
negative economic and market conditions, and we anticipate that these negative conditions may continue to affect
demand for some of our services in the near-term. We continue to evaluate the impact of the economic
environment on our reporting units and the valuation of recorded goodwill. Although we are not aware of
circumstances that would lead to a goodwill impairment at a reporting unit currently, circumstances such as a
continued market decline, the loss of a major customer or other factors could impact the valuation of goodwill in
the future.
Our goodwill is included in multiple reporting units. Due to the cyclical nature of our business, and the other
factors described under “Risk Factors” in Item 1A, the profitability of our individual reporting units may suffer
from downturns in customer demand and other factors. These factors may have a disproportionate impact on the
individual reporting units as compared to Quanta as a whole and might adversely affect such fair value of
individual reporting units. If material adverse conditions occur that impact our reporting units, our future
estimates of fair value may not support the carrying amount of one or more of our reporting units, and the related
goodwill would need to be written down to an amount considered recoverable.
Valuation of Other Intangibles. Our intangible assets include customer relationships, backlog, trade
names, non-compete agreements, patented rights and developed technology and software, all subject to
amortization, along with other intangible assets not subject to amortization. The value of customer relationships
is estimated as of the date a business is acquired 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 our business plan, income taxes
and required rates of return. We value backlog as of the date a business is acquired 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 as of the date a business is acquired
61