The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q (Quarterly Report) and with our Annual Report on Form 10-K for the year endedDecember 31, 2019 (2019 Annual Report), which was filed with theSecurities and Exchange Commission (SEC) onFebruary 28, 2020 and is available on theSEC's website at www.sec.gov and on our website at www.quantaservices.com. The discussion below contains forward-looking statements that are based upon our current expectations and are subject to uncertainty and changes in circumstances. Actual results may differ materially from these expectations due to inaccurate assumptions and known or unknown risks and uncertainties, including those identified in Uncertainty of Forward-Looking Statements and Information below, Item 1A. Risk Factors of Part II of this Quarterly Report and Item 1A. Risk Factors of Part I of our 2019 Annual Report. Overview We are a leading provider of specialty contracting services, delivering comprehensive infrastructure solutions for the electric and gas utility, energy and communications industries inthe United States ,Canada ,Australia and select other international markets. The performance of our business generally depends on our ability to obtain contracts with customers and to effectively deliver the services provided under those contracts. The services we provide include the design, installation, upgrade, repair and maintenance of infrastructure within each of the industries we serve, such as electric power transmission and distribution networks; substation facilities; gas utility systems; refinery, petrochemical and industrial facilities; pipeline transmission systems and facilities; and telecommunications and cable multi-system operator networks. Our customers include many of the leading companies in the industries we serve, and we endeavor to develop and maintain strategic alliances and preferred service provider status with our customers. Our services are typically provided pursuant to master service agreements, repair and maintenance contracts and fixed price and non-fixed price installation contracts. We report our results under two reportable segments: (1)Electric Power Infrastructure Services and (2) Pipeline and Industrial Infrastructure Services. This structure is generally focused on broad end-user markets for our services. Included within the Electric Power Infrastructure Services segment are the results related to our telecommunications infrastructure services. Current Quarter Financial Results Key financial results for the three months endedJune 30, 2020 included: • Consolidated revenues decreased 11.7% to$2.51 billion , of which 71.5%
was attributable to the Electric Power Infrastructure Services segment
and 28.5% was attributable to the Pipeline and Industrial Infrastructure
Services segment, as compared to consolidated revenues of
for the three months ended
• Operating income increased 43.7%, or
compared to$78.6 million for the three months endedJune 30, 2019 ; • Net income attributable to common stock increased 170.4%, or$46.6 million , to$73.9 million as compared to$27.3 million for the three months endedJune 30, 2019 ; • Diluted earnings per share increased 177.7%, or$0.33 , to$0.52 as compared to$0.19 for the three months endedJune 30, 2019 ;
• Net cash provided by operating activities increased by
• Remaining performance obligations decreased 2.2%, or
$5.18 billion as ofJune 30, 2020 as compared to$5.30 billion as ofDecember 31, 2019 ; and
• Total backlog (a non-GAAP measure) decreased 7.2%, or
performance obligations, its most comparable GAAP measure, see Remaining
Performance Obligations and Backlog below.
Key Segment Highlights and Significant Operational Trends and Events During the three months endedJune 30, 2020 , we were impacted by the following significant operational trends and events as compared to the three months endedJune 30, 2019 : Electric Power Infrastructure Services Segment • Revenues increased by 3.4% to$1.79 billion , as compared to$1.73 billion . • Operating income increased by 97.9% to$183.9 million , as compared to$92.9 million . 47
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• Revenues increased primarily due to a
with growth in our North American communications operations; increased
customer spending on distribution services projects, which are services
we generally consider to be included within base business operations; and
approximately$20 million of incremental revenues from acquired businesses.
• Revenues associated with grid modernization and fire hardening programs
in the westernUnited States decreased; however, we expect revenues related to these services to increase in the second half of 2020 but remain lower than our revenues associated with such services in the second half of 2019.
• Operating income increased due to improved performance across the segment
and increased Canadian revenues contributed to improved equipment
utilization and fixed cost absorption as compared to the three months
ended
unabsorbed costs as crews and equipment were transitioned from a completed larger transmission project. • Operating income increased as well due to a reduction in losses associated with our Latin American operations.
Pipeline and Industrial Infrastructure Services Segment
• Revenues decreased by 35.4% to
• Operating income decreased by 69.6% to$21.3 million , as compared to$69.9 million .
• Revenues decreased partially due to the impact of the COVID-19 pandemic,
which resulted in decreased capital spending by our customers on
industrial services due to the significant decline in demand for refined
petroleum products, restrictions on our ability to perform services in
certain downstream industrial locations and the suspension of gas utility
services in certain metropolitan markets during a portion of the quarter. • Revenues associated with larger pipeline projects also decreased, as the
timing of such projects is highly variable due to, among other things,
potential permitting, delays, worksite access limitations related to environmental regulations and seasonal weather patterns. • Partially offsetting the decrease in revenues was approximately$55 million of incremental revenues from acquired businesses.
• Operating income decreased primarily due to the decrease in revenues.
Operating income for the three months ended
negatively impacted by the recognition of a
with continued rework and start-up delays on a processing facility
project in
See COVID-19 Pandemic - Response and Impact, Results of Operations and Liquidity below for additional information and discussion related to consolidated and segment results. Recent LUMA Joint Venture Award During the three months endedJune 30, 2020 , a joint venture in which we own a 50% interest,LUMA Energy, LLC (LUMA), was selected for a 15-year operation and maintenance agreement to operate, maintain and modernize the approximately 18,000-mile electric transmission and distribution system inPuerto Rico . The 15-year operation and maintenance period is expected to begin following an approximately one-year transition period, during which LUMA will complete numerous steps necessary to transition operation and maintenance from the current operator to LUMA. Pursuant to the agreement, during the transition period LUMA receives a transition fee and is reimbursed for costs and expenses. During the operation and maintenance period, LUMA will continue to be reimbursed for costs and expenses and will receive a fixed annual management fee, with the opportunity to receive additional annual performance-based incentive fees. LUMA will not assume ownership of any electric transmission and distribution system assets and will not be responsible for operation of the power generation assets. Recent Acquisitions We continue to selectively evaluate acquisitions as part of our overall business strategy and acquired two businesses in the six months endedJune 30, 2020 , including an industrial services business located inCanada that performs catalyst handling services, such as changeover and shutdown maintenance, for customers in the refining and chemical industries and an electric power infrastructure business located inthe United States that primarily provides underground conduit services. During the three and six months endedJune 30, 2020 , revenues were positively impacted by approximately$75 million and$190 million from acquired businesses. Additionally, inJuly 2020 , we acquired a professional engineering business located inthe United States that provides infrastructure engineering and design services to electric utilities, gas utilities and communications services companies, as well as permitting and utility locating services. Beginning on the acquisition date, the results of the acquired business will generally be included in ourElectrical Power Infrastructure Services segment. 48 -------------------------------------------------------------------------------- Our ownership interest and participation in LUMA is accounted for as an equity method investment due to our equal ownership and management of LUMA with our joint venture partner. LUMA is operationally integral to the operations of Quanta, and therefore Quanta's share of LUMA's net income or losses is reported within operating income. We anticipate our ownership interest in LUMA will positively contribute to operating income and cash flow from operating activities and be accretive to diluted earnings per share attributable to common stock during 2020. COVID-19 Pandemic - Response and Impact During 2020, the COVID-19 pandemic has significantly impacted global economies, resulting in workforce and travel restrictions, supply chain and production disruptions and reduced demand and spending across many sectors. These factors had an adverse impact on portions of our operations, financial performance, customers and suppliers duringMarch 2020 and the three months endedJune 30, 2020 . However, we continue to operate substantially all of our activities as a provider of essential services in our industries. Additionally, we are continuing to collaborate with customers to minimize potential service disruptions and anticipate how the COVID-19 pandemic may continue to impact our operations, as the locations where we, our customers, our suppliers or our third-party business partners operate continue to experience challenges as a result of the pandemic. We have also taken proactive measures to protect the health and safety of our employees, such as the adoption of specialized training initiatives and the utilization of additional protective equipment for our employees operating in the field and additional sanitation measures for our offices, vehicles and equipment. We have also canceled non-essential business travel, applied work-from-home policies where appropriate and developed other human resource guidance to help employees. During the three and six months endedJune 30, 2020 , our results have been adversely impacted by the COVID-19 pandemic as a result of disruptions in our operations created by shelter-in-place restrictions in certain service areas, particularly major metropolitan markets that have been meaningfully impacted by the pandemic such asNew York City ,Detroit andSeattle . The COVID-19 pandemic has also compounded broader challenges in the energy market, resulting in a decline in commodity prices and volatility with respect to commodity production volumes that are affecting portions of our Pipeline and Industrial Infrastructure Services segment. As expected, this dynamic had a materially negative impact on segment results for the three and six months endedJune 30, 2020 . In particular, demand for our industrial services operations has declined as customers are reducing and deferring regularly scheduled maintenance due to lack of demand for refined products. Additionally, smaller pipeline and industrial capital projects are expected to be negatively impacted for a prolonged period due to the low commodity price environment and resulting reductions in customer capital budgets. We are also experiencing some permitting and regulatory delays for projects due to the COVID-19 pandemic and the COVID-19 pandemic has negatively impacted our Latin American operations due to shelter-in-place restrictions and other work disruptions. While the significant adverse impacts resulting from shelter-in-place restrictions in major metropolitan markets are subsiding, we expect continued operational challenges through the balance of the year as we operate during and adjust to an unprecedented health and economic environment. Furthermore, while we are not currently experiencing significant supply chain disruptions or workforce availability concerns, we are continuing to monitor these areas for potential issues. Additionally, we are focused on maintaining a strong balance sheet to help us navigate the challenges presented by the COVID-19 pandemic. As ofJune 30, 2020 , we had$530.7 million of cash and cash equivalents and$1.61 billion of availability under our senior secured credit facility. We generated$497.5 million and$725.0 million of cash flow from operating activities in the three and six months endedJune 30, 2020 and$526.6 million in cash flow from operations in the year endedDecember 31, 2019 . We are managing our costs through, among other things, reductions in discretionary spending, reductions in workforce at operations experiencing challenges, hiring and compensation increase deferrals, and deferrals of non-essential capital expenditures. Capital expenditures for 2020 are expected to be$250 million , which is approximately 17% less than our original estimate at the beginning of 2020. We will continue to maintain capital discipline and monitor rapidly changing market dynamics and adjust our costs and financing strategies accordingly. As a result of the currently challenged energy market and recent oil price volatility, as well as the exacerbating effect of the COVID-19 pandemic, we assessed the expected negative impacts related to goodwill, intangible assets, long-lived assets, and investments as ofJune 30, 2020 , and concluded that other than$14.8 million and$18.0 million of impairments recognized during the three and six months endedJune 30, 2020 related to certain non-integral equity method investments and a cost method investment, as described in Results of Operations below, the impacts are not likely to result in any other impairments of such assets at this time. However, the potential impacts are uncertain and may change based on numerous factors. We will continue to monitor the impacts and should a reporting unit or investment suffer additional significant declines in actual or forecasted financial results, the risk of impairment would increase. OnMarch 27, 2020 , theU.S. federal government enacted the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act). The CARES Act provides for various tax relief and tax incentive measures, which are not expected to have a material impact on our results of operations. During the three months endedJune 30, 2020 , under the CARES Act and related state actions, we deferred the payment of$58.0 million of federal and state income taxes toJuly 2020 and deferred the payment of$30.7 million of payroll taxes, 50% of which are due byDecember 31, 2021 and the remainder of which are due byDecember 31, 2022 . Although 49 -------------------------------------------------------------------------------- there is currently no legislation that would permit further deferrals of income taxes, the CARES Act permits deferral of payroll taxes throughDecember 31, 2020 , and we currently intend to continue to defer such payments, The broader and longer-term implications of the COVID-19 pandemic on our results of operations and overall financial performance and position remain highly uncertain, and therefore we cannot predict the full impact that the pandemic, or any resulting market disruption and volatility, will have on our business, cash flows, liquidity, financial condition and results of operations at this time. The ultimate impact will depend on future developments, including, among others, the ongoing spread of COVID-19, the consequences of governmental and other measures designed to prevent the spread of the virus, the development of effective treatments, the duration and severity of the pandemic, actions taken by governmental authorities, customers, suppliers and other third parties, workforce availability, and the timing and extent to which normal economic and operating conditions resume and continue. For additional discussion regarding risks associated with the COVID-19 pandemic, see Item 1A. Risk Factors of Part II of this Quarterly Report. Business Environment Despite the current challenging economic conditions, we believe there are long-term growth opportunities across our industries, and we continue to have a positive long-term outlook. Although not without risks and challenges, including those discussed in Overview and in Uncertainty of Forward-Looking Statements and Information and included in Item 1A. Risk Factors, we believe, with our full-service operations, broad geographic reach, financial position and technical expertise, we are well positioned to capitalize on opportunities and trends in our industries. Electric Power Infrastructure Services Segment. Utilities are investing significant capital in their electric power delivery systems, particularly transmission, substation and distribution infrastructure, through multi-year, multi-billion dollar grid modernization and reliability programs, which have provided, and are expected to continue to provide, demand for our services. Utilities are accommodating a changing fuel generation mix that is moving toward more sustainable sources such as natural gas and renewables and replacing aging infrastructure to support long-term economic growth. In order to reliably and efficiently deliver power, and in response to federal reliability standards, utilities are also integrating smart grid technologies into distribution systems in order to improve grid management and create efficiencies, and in preparation for emerging technologies such as electric vehicles. A number of utilities are also implementing system upgrades or hardening programs in response to recurring severe weather events, such as hurricanes and wildfires. In particular, current system resiliency initiatives inCalifornia and other regions in the westernU.S. are designed to prevent and manage the impact of wildfires. However, while these resiliency initiatives provide opportunities for our services, they also increase our potential exposure to significant liabilities attributable to those events. While the COVID-19 pandemic has resulted in an overall decline in electricity usage in the near term, primarily related to commercial and industrial users, we expect demand for electricity inNorth America to grow over the long term and believe that certain segments of the North American electric power grid are not adequate to efficiently serve the power needs of the future. As demand for power increases, we also expect an increase in new power generation facilities powered by certain traditional energy sources (e.g., natural gas) and renewable energy sources (e.g., solar and wind). To the extent this dynamic continues, we expect continued demand for new or expanded transmission and substation infrastructure to transport power and interconnect new generation facilities and the modification and reengineering of existing infrastructure as existing coal and nuclear generation facilities are retired or shut down. With respect to our communications service offerings, consumer and commercial demand for communication and data-intensive, high-bandwidth wireline and wireless services and applications is driving significant investment in infrastructure and the deployment of new technologies. In particular, communications providers inNorth America are in the early stages of developing new fifth generation wireless services (5G), which are intended to facilitate bandwidth-intensive services at high speeds for consumers and a wide range of commercial applications. As a result of these industry trends, we believe there will be meaningful demand for our services in that market. While we continue to perform certain electric power and communications services inLatin America , we have completed a strategic review of those operations, and due to circumstances experienced in connection with the terminated telecommunications project inPeru during 2019 and political volatility in other areas of the region, concluded to pursue an orderly exit of our Latin American operations. While we have incurred costs and expect to incur additional costs in the near-term related to exiting these operations, our estimates for which have increased as a result of the COVID-19 pandemic, we anticipate this decision will result in improved profitability of our overall services offerings. Pipeline and Industrial Infrastructure Services Segment. For several years we have focused on increasing our pipeline and industrial services offerings related to specialty services and industries that we believe are driven by regulated utility spending, regulation, replacement and rehabilitation of aging infrastructure and safety and environmental initiatives, which we believe provide a greater level of business sustainability and predictability. These services include gas utility services, pipeline integrity services and downstream industrial services, which we have expanded through organic growth, geographic expansion initiatives and select acquisitions. This strategy is also intended to mitigate the seasonality and cyclicality of our larger pipeline project activities, which we are not strategically investing in but continue to pursue to the extent they fit our margin and risk profiles and support the needs of our customers. 50 -------------------------------------------------------------------------------- As discussed in COVID-19 Pandemic - Response and Impact, though we have experienced short-term disruptions due to the impact of the COVID-19 pandemic in certain metropolitan markets, in recent years demand has increased for our gas utility distribution services as a result of lower natural gas prices, increasing regulatory requirements and customer desire to upgrade and replace aging infrastructure. In particular, natural gas utilities have implemented multi-decade modernization programs to replace aging cast iron and bare steel gas system infrastructure with modern materials for safety, reliability and environmental purposes. We believe there are also growth opportunities for our pipeline integrity, rehabilitation and replacement services, as regulatory measures have increased the frequency or stringency of pipeline integrity testing requirements. Regulatory requirements continue to encourage our customers to test, inspect, repair, perform maintenance and replace pipeline infrastructure to ensure the safe, reliable and environmentally friendly delivery of energy. Further, permitting challenges associated with construction of new pipelines can make existing pipeline infrastructure more valuable, increasing the desire of owners to extend the useful life of existing pipeline assets through integrity initiatives. Due to these dynamics, we expect demand to continue to grow for our pipeline integrity services. We provide critical path solutions and related specialty services to refinery and chemical processing facilities, primarily along theGulf Coast ofthe United States and in other select markets inNorth America . Trends and estimates for process facility utilization rates and overall refining capacity showNorth America as the largest downstream maintenance market in the world over the next several years, and we believe processing facilities located along theU.S. Gulf Coast region should have certain long-term strategic advantages due to their proximity to affordable hydrocarbon resources. While the COVID-19 pandemic has resulted in an overall decline in global demand for refined products, we believe there are significant long-term opportunities for our services, including our high-pressure and critical-path turnaround services, as well as our capabilities with respect to instrumentation, high-voltage and other electrical services, piping, fabrication and storage, and other industrial services. However, these processing facilities can be negatively impacted for short-term periods due to severe weather events, such as hurricanes, tropical storms and floods. Additionally, due to the COVID-19 pandemic and challenging overall energy market conditions, we have recently experienced a decrease in demand for certain of these services. While demand for our critical path catalyst solutions has remained solid, in the second quarter of 2020 customers began restricting onsite activity for our other services and have deferred maintenance and certain turnaround projects to later 2020 or possibly 2021. With respect large pipeline project opportunities, a number of such projects from the North American shale formations and Canadian oil sands to power plants, refineries, liquefied natural gas (LNG) export facilities and other demand centers are in various stages of development. While we believe many of our customers remain committed to these projects given the cost and time required to move from conception to construction, the overall larger pipeline market is cyclical and there is risk the projects will not move forward or be delayed or canceled. For example, inJuly 2020 , the project sponsors of an approximately 600-mile natural gas pipeline under construction in the easternUnited States that one of our subsidiaries has been contracted to construct a portion of announced that they are no longer moving forward with the project. Furthermore, our revenues related to larger pipeline projects have declined over the last few years. Due to its abundant supply and current low price, we also believe natural gas will remain a fuel of choice for both primary power generation and backup power generation for renewable-driven power plants inNorth America . The favorable characteristics of natural gas also positionthe United States as a leading competitor in the global LNG export market, which has the potential to continue to grow over the coming years as approved and proposed LNG export facilities are developed. In certain areas, the existing pipeline system infrastructure is insufficient to support these expected future developments, which could provide additional opportunities for our services. Although portions of our pipeline and industrial infrastructure services are influenced by hydrocarbon production volume rather than shorter-term changes in commodity prices, the broader oil and gas industry is highly cyclical and subject to price volatility, such as the current low commodity price environment, which can impact demand for our services. For example, certain of our end markets where the price of oil is influential, such asAustralia , the Canadian Oil Sands and certain oil-drivenU.S. shale formations, have been materially impacted by the current challenging energy market conditions. Regulatory Challenges and Opportunities. The regulatory environment creates both challenges and opportunities for our business, and in recent years electric power and pipeline infrastructure services margins have been impacted by regulatory and permitting delays, particularly with respect to larger electric transmission and larger pipeline projects. Regulatory and environmental permitting processes continue to create uncertainty for projects and negatively impact customer spending, and delays have recently increased as the COVID-19 pandemic has impacted regulatory agency operations. Furthermore, the recent ruling by the federal district court for the district ofMontana vacating theU.S. Army Corps of Engineers Clean Water Act Section 404 Nationwide Permit 12 may result in increased costs and project interruptions or delays if we or our customers are forced to seek individual permits from theU.S. Army Corps of Engineers . However, we believe that there are also several existing, pending or proposed legislative or regulatory actions that may alleviate certain regulatory and permitting issues and positively impact long-term demand, particularly in connection with electric power infrastructure and renewable energy spending. For example, regulatory changes affecting siting and right-of-way processes 51 -------------------------------------------------------------------------------- could potentially accelerate construction for transmission projects, and state and federal reliability standards are creating incentives for system investment and maintenance. We also consider renewable energy, including solar and wind generation facilities, to be an ongoing opportunity for our engineering, project management and installation services; however, the economic feasibility of some of these projects remains subject to the continued availability of tax incentive programs. Labor Resource Availability. In addition to the health and safety measures we are taking to ensure labor resource availability during the COVID-19 pandemic, we continue to address the longer-term need for additional labor resources in our markets. Our customers continue to seek additional specialized labor resources to address an aging utility workforce and longer-term labor availability issues, increasing pressure to reduce costs and improve reliability, and increasing duration and complexity of their capital programs. We believe these trends will continue, possibly to the point where demand for labor resources will outpace supply. Furthermore, the cyclical nature of the natural gas and oil industry can create shortages of qualified labor in those markets during periods of high demand. Our ability to capitalize on available opportunities is limited by our ability to employ, train and retain the necessary skilled personnel, and we are taking proactive steps to develop our workforce, including through strategic relationships with universities, the military and unions and the expansion and development of our training facility and postsecondary educational institution. Although we believe these initiatives will help address workforce needs, meeting our customers' demand for labor resources could remain challenging. Acquisitions and Investments. We believe potential acquisition and investment opportunities exist in our industries and adjacent industries, primarily due to the highly fragmented and evolving nature of those industries and inability of many companies to expand and modernize due to capital or liquidity constraints. We continue to evaluate opportunities that are expected to, among other things, broaden our customer base, expand our geographic area of operations, and grow and diversify our portfolio of services. Significant Factors Impacting Results Our revenues, margins and other results of operations can be influenced by a variety of factors in any given period, including those described in Uncertainty of Forward-Looking Statements and Information below, Item 1A. Risk Factors of Part II of this Quarterly Report and Item 1A. Risk Factors of Part I of our 2019 Annual Report, and those factors have caused fluctuations in our results in the past and are expected to cause fluctuations in our results in the future. Additional information with respect to certain of those factors is provided below. Seasonality. Typically, our revenues are lowest in the first quarter of the year because cold, snowy or wet conditions can create challenging working environments that are more costly for our customers or cause delays on projects. In addition, infrastructure projects often do not begin in a meaningful way until our customers finalize their capital budgets, which typically occurs during the first quarter. Second quarter revenues are typically higher than those in the first quarter, as some projects begin, but continued cold and wet weather can often impact productivity. Third quarter revenues are typically the highest of the year, as a greater number of projects are underway and operating conditions, including weather, are normally more accommodating. Generally, revenues during the fourth quarter are lower than the third quarter but higher than the second quarter, as many projects are completed and customers often seek to spend their capital budgets before year end. However, the holiday season and inclement weather can sometimes cause delays during the fourth quarter, reducing revenues and increasing costs. These seasonal impacts are typical for ourU.S. operations, but seasonality for our international operations may differ. For example, revenues inCanada are typically higher in the first quarter because projects are often accelerated in order to complete work while the ground is frozen and prior to the break up, or seasonal thaw, as productivity is adversely affected by wet ground conditions during warmer months. As referenced above in COVID-19 Pandemic - Response and Impact, we expect portions of our operations will continue to experience challenges due to the COVID-19 pandemic. Weather, natural disasters and emergencies. The results of our business in a given period can be impacted by adverse weather conditions, severe weather events, natural disasters or other emergencies, which include, among other things, heavy or prolonged snowfall or rainfall, hurricanes, tropical storms, tornadoes, floods, blizzards, extreme temperatures, wildfires, pandemics (including the ongoing COVID-19 pandemic) and earthquakes. These conditions and events can negatively impact our financial results due to, among other things, the termination, deferral or delay of projects, reduced productivity and exposure to significant liabilities. See COVID-19 Pandemic - Response and Impact above for further discussion regarding the current and expected impact of the COVID-19 pandemic. However, in some cases, severe weather events can increase our emergency restoration services, which typically yield higher margins due in part to higher equipment utilization and absorption of fixed costs. Cyclicality and demand for services. Our volume of business may be adversely affected by declines in demand for our services or delays in new and ongoing projects due to cyclicality, which may vary by geographic region. Project schedules also fluctuate, particularly in connection with larger, more complex or longer-term projects, which can affect the amount of work performed in a given period. For example, the timing of obtaining permits and other approvals on a larger project may be delayed, and we may need to maintain a portion of our workforce and equipment in an underutilized capacity to ensure we are strategically positioned to deliver on the project when it moves forward. Examples of other items that may cause demand for our services to fluctuate materially from quarter to quarter include: the financial condition of our customers and their access to capital; economic and political conditions on a regional, national or global scale, including interest rates, governmental regulations affecting the 52 -------------------------------------------------------------------------------- sourcing of certain materials and equipment, and other changes inU.S. and global trade relationships; our customers' capital spending, including on larger pipeline and electrical infrastructure projects; commodity and material prices; and project deferrals and cancellations. As described above in COVID 19 Pandemic - Response and Impact, we have experienced reductions in demand for certain of our services as a result of disruptions due to shelter-in-place and worksite access restrictions and delays in regulatory agency operations due to the COVID-19 pandemic, as well as the decline in commodity prices and decreased commodity production levels. Revenue mix. The mix of revenues based on the types of services we provide in a given period will impact margins, as certain industries and services provide higher-margin opportunities. For example, installation work is often performed on a fixed price basis, while maintenance work is often performed under pre-established or negotiated prices or cost-plus pricing arrangements. Margins for installation work varies by project but can be higher than maintenance work due to higher risk. We have historically derived approximately 30% to 35% of our annual revenues from maintenance work, but a higher portion of maintenance work in any given period may affect our gross margins for that period. Additionally, the areas in which we operate during a given period can impact margins. Some areas offer the opportunity for higher margins due to their more difficult geographic characteristics, such as urban settings or mountainous and other difficult terrain. However, margins may also be negatively impacted by unexpected difficulties that can arise due to those same characteristics, as well as unexpected site conditions. Size, scope and complexity of projects. Larger or more complex projects with higher voltage capacities; larger-diameter throughput capacities; increased engineering, design or construction complexities; more difficult terrain requirements; or longer distance requirements typically yield opportunities for higher margins as we assume a greater degree of performance risk and there is greater utilization of our resources for longer construction timeframes. Furthermore, smaller or less complex projects typically have a greater number of companies competing for them, and competitors at times may more aggressively pursue available work. A greater percentage of smaller scale or less complex work also could negatively impact margins due to the inefficiency of transitioning between a larger number of smaller projects versus continuous production on fewer larger projects. Also, at times we may choose to maintain a portion of our workforce and equipment in an underutilized capacity to ensure we are strategically positioned to deliver on larger projects when they move forward. Project variability and performance. Margins for a single project may fluctuate period to period due to changes in the volume or type of work performed, the pricing structure under the project contract or job productivity. Additionally, our productivity and performance on a project can vary period to period based on a number of factors, including unexpected project difficulties or site conditions; project location, including locations with challenging operating conditions; whether the work is on an open or encumbered right of way; inclement weather or severe weather events; environmental restrictions or regulatory delays; protests, other political activity or legal challenges related to a project; and the performance of third parties. Subcontract work and provision of materials. Work that is subcontracted to other service providers generally yields lower margins, and therefore an increase in subcontract work in a given period can decrease margins. In recent years, we have subcontracted approximately 15% to 20% of our work to other service providers. Our customers are usually responsible for supplying the materials for their projects; however, under some contracts we agree to procure all or part of the required materials. Margins may be lower on projects where we furnish a significant amount of materials, including projects where we provide engineering, procurement and construction (EPC) services, as our markup on materials is generally lower than our markup on labor costs. Furthermore, fluctuations in the price or availability of materials we or our customers procure, including as a result of changes inU.S. or global trade relationships, governmental regulations affecting the sourcing of certain materials and equipment or other economic or political conditions, may impact our margins or cause delays. In a given period, an increase in the percentage of work with higher materials procurement requirements may decrease our overall margins. Foreign currency risk. Our financial performance is reported on aU.S. dollar-denominated basis but is partially subject to fluctuations in foreign currency exchange rates. Fluctuations in exchange rates relative to theU.S. dollar, primarily Canadian and Australian dollars, can materially impact margins and comparisons of our results of operations between periods. 53 -------------------------------------------------------------------------------- Results of Operations The results of acquired businesses have been included in the following results of operations beginning on their respective acquisition dates. Consolidated Results Three months endedJune 30, 2020 compared to the three months endedJune 30, 2019 The following table sets forth selected statements of operations data, such data as a percentage of revenues for the periods indicated, as well as the dollar and percentage change from the prior period (dollars in thousands): Three Months Ended June 30, Change 2020 2019 $ % Revenues$ 2,506,231 100.0 %$ 2,839,199 100.0 %$ (332,968 ) (11.7 )% Cost of services (including depreciation) 2,150,967 85.8 2,519,694 88.7 (368,727 ) (14.6 )% Gross profit 355,264 14.2 319,505 11.3 35,759 11.2 % Equity in earnings of integral unconsolidated affiliates 1,045 - - - 1,045 * Selling, general and administrative expenses (227,852 ) (9.1 ) (223,944 ) (7.9 ) (3,908 ) 1.7 % Amortization of intangible assets (17,779 ) (0.7 ) (12,610 ) (0.4 ) (5,169 ) 41.0 % Change in fair value of contingent consideration liabilities 2,238 0.1 (4,371 ) (0.2 ) 6,609 * Operating income 112,916 4.5 78,580 2.8 34,336 43.7 % Interest expense (8,654 ) (0.3 ) (15,821 ) (0.6 ) 7,167 (45.3 )% Interest income 275 - 267 - 8 3.0 % Other income (expense), net 3,248 0.1 6,521 0.2 (3,273 ) (50.2 )% Income before income taxes 107,785 4.3 69,547 2.4 38,238 55.0 % Provision for income taxes 32,989 1.3 41,088 1.4 (8,099 ) (19.7 )% Net income 74,796 3.0 28,459 1.0 46,337 162.8 % Less: Net income attributable to non-controlling interests 849 - 1,115 - (266 ) (23.9 )% Net income attributable to common stock$ 73,947 3.0 %$ 27,344
1.0 %
* The percentage change is not meaningful. Revenues. Contributing to the decrease were lower revenues of$391.6 million from pipeline and industrial infrastructure services, partially offset by incremental revenues of$58.6 million from electric power infrastructure services. See Segment Results below for additional information and discussion related to segment revenues. Gross profit. The increase in gross profit was due to increased earnings from electric power infrastructure services based on improved performance across the segment, partially offset by decreased earnings from pipeline and industrial services primarily attributable to the decrease in revenues. Contributing to the increase in electric power infrastructure services gross profit was an improvement related to our Latin American operations, which during the three months endedJune 30, 2019 included the$79.2 million charge associated with the terminated telecommunications project inPeru , as compared to$12.2 million of project losses in the three months endedJune 30, 2020 primarily related to accelerated project terminations and operational impacts of the COVID-19 pandemic. See Segment Results below for additional information and discussion related to segment operating income (loss). Equity in earnings of integral unconsolidated affiliates. The amount for the three months endedJune 30, 2020 primarily relates to the commencement of transition services under the agreement recently awarded to LUMA for the operation and maintenance of the electric transmission and distribution system inPuerto Rico . Selling, general and administrative expenses. The increase was primarily attributable to a$6.4 million increase in the fair market value of deferred compensation liabilities during the three months endedJune 30, 2020 , as compared to a$1.6 million increase in the fair market value of deferred compensation liabilities during the three months endedJune 30, 2019 . The fair market value changes in deferred compensation liabilities were partially offset by changes in the fair value of assets associated with the deferred compensation plan, which are included in other income (expense), net. Also contributing to the increase in selling, general and administrative expense was a$5.2 million increase in expenses associated with acquired businesses and a$8.3 million increase in compensation expense primarily due to an increase in non-cash stock-based compensation expense. Partially offsetting these 54 -------------------------------------------------------------------------------- increases was a$7.9 million decrease in travel expenses, primarily related to reductions in travel as a result of the COVID-19 pandemic, and a$4.6 million decrease in legal and professional fees. Selling, general and administrative expenses as a percentage of revenues increased to 9.1% for the three months endedJune 30, 2020 from 7.9% for the three months endedJune 30, 2019 , primarily due to the decrease in revenues described above. Amortization of intangible assets. The increase was primarily due to increased amortization of intangible assets associated with recently acquired businesses, partially offset by reduced amortization expense associated with previously acquired intangible assets, as certain of those assets became fully amortized. Change in fair value of contingent consideration liabilities. The overall change was primarily due to changes in performance in post-acquisition periods by certain acquired businesses and the effect of present value accretion on fair value calculations. Further changes in fair value are expected to be recorded periodically until the contingent consideration liabilities are settled, with a significant portion of such obligations expected to be settled in late 2020 or early 2021. See Contractual Obligations - Contingent Consideration Liabilities for more information. Interest expense. Interest expense decreased primarily due to the impact of a lower weighted average interest rate, and to a lesser extent due to decreased borrowing activity. Other income (expense), net. The net other income for the three months endedJune 30, 2020 primarily relates to an$8.9 million legal settlement received and a$6.5 million increase in the fair market value of assets associated with our deferred compensation plan, as compared to a$1.5 million increase in the fair market value of assets associated with our deferred compensation plan during the three months endedJune 30, 2019 . This incremental increase in the fair market value offsets the increase in selling, general, and administrative expenses discussed above. Partially offsetting these items was a$9.3 million impairment associated with an investment in a water and gas pipeline infrastructure contractor located inAustralia , which is accounted for under the cost method of accounting, and$5.5 million of impairments associated with two non-integral equity investments that have been negatively impacted by the decline in demand for refined petroleum products. Provision for income taxes. The effective tax rates for the three months endedJune 30, 2020 andJune 30, 2019 were 30.6% and 59.1%. The decrease in the effective tax rate was primarily due to the$79.2 million charge recognized in the three months endedJune 30, 2019 associated with a terminated telecommunications project inPeru , for which no income tax benefit was recognized. We do not expect any significant benefits to the income tax provision as a result of the CARES Act. Other comprehensive income (loss). Other comprehensive income (loss) results from translation of the balance sheets of our foreign operating units, which are primarily located inCanada andAustralia and have functional currencies other than theU.S. dollar, and therefore are affected by the strengthening or weakening of theU.S. dollar against such currencies. The gain in the three months endedJune 30, 2020 was impacted by the weakening of theU.S. dollar against both the Canadian and Australian dollars as ofJune 30, 2020 when compared toMarch 31, 2020 . The gain in the three months endedJune 30, 2019 was primarily impacted by the weakening of theU.S. dollar against the Canadian dollar as ofJune 30, 2019 when compared toMarch 31, 2019 . 55 -------------------------------------------------------------------------------- Six months endedJune 30, 2020 compared to the six months endedJune 30, 2019 The following table sets forth selected statements of operations data, such data as a percentage of revenues for the periods indicated, as well as the dollar and percentage change from the prior period (dollars in thousands): Six Months Ended June 30, Change 2020 2019 $ % Revenues$ 5,270,326 100.0 %$ 5,646,458 100.0 %$ (376,132 ) (6.7 )% Cost of services (including depreciation) 4,582,866 87.0 4,962,972 87.9 (380,106 ) (7.7 )% Gross profit 687,460 13.0 683,486 12.1 3,974 0.6 % Equity in earnings of integral unconsolidated affiliates 1,045 - - 1,045 * Selling, general and administrative expenses (458,645 ) (8.7 ) (455,852 ) (8.1 ) (2,793 ) 0.6 % Amortization of intangible assets (35,687 ) (0.6 ) (25,280 ) (0.4 ) (10,407 ) 41.2 % Change in fair value of contingent consideration liabilities (520 ) - (4,287 ) (0.1 ) 3,767 (87.9 )% Operating income 193,653 3.7 198,067 3.5 (4,414 ) (2.2 )% Interest expense (22,660 ) (0.4 ) (29,697 ) (0.5 ) 7,037 (23.7 )% Interest income 1,034 - 576 - 458 79.5 % Other income (expense), net (6,580 ) (0.2 ) 65,480 1.2 (72,060 ) * Income before income taxes 165,447 3.1 234,426 4.2 (68,979 ) (29.4 )% Provision for income taxes 49,149 0.9 84,932 1.6 (35,783 ) (42.1 )% Net income 116,298 2.2 149,494 2.6 (33,196 ) (22.2 )% Less: Net income attributable to non-controlling interests 3,666 0.1 1,662 - 2,004 120.6 % Net income attributable to common stock$ 112,632 2.1 %$ 147,832
2.6 %
* The percentage change is not meaningful. Revenues. Contributing to the decrease were lower revenues of$537.7 million from pipeline and industrial infrastructure services, partially offset by increased revenues of$161.6 million from electric power infrastructure services. See Segment Results below for additional information and discussion related to segment revenues. Gross profit. The increase in gross profit was primarily due to increased earnings from electric power infrastructure services, partially offset by lower earnings from pipeline and industrial services primarily due to the decrease in revenues. Contributing to the increase in electric power infrastructure services gross profit was an improvement related to our Latin American operations, which during the six months endedJune 30, 2019 included the$79.2 million charge associated with the terminated telecommunications project inPeru , as compared to$24.9 million of project losses in the six months endedJune 30, 2020 primarily related to accelerated project terminations and operational impacts of the COVID-19 pandemic. See Segment Results below for additional information and discussion related to segment operating income (loss). Equity in earnings of integral unconsolidated affiliates. The amount for the three months endedJune 30, 2020 primarily relates to the commencement of transition services under the agreement recently awarded to LUMA for the operation and maintenance of the electric transmission and distribution system inPuerto Rico . Selling, general and administrative expenses. This increase was primarily due to a$13.2 million increase in expenses associated with acquired businesses and a$11.5 million increase in compensation expenses, largely associated with higher non-cash stock-based compensation expense. Partially offsetting these increases was a$1.4 million decrease in the fair market value of deferred compensation liabilities during the six months endedJune 30, 2020 , as compared to a$5.4 million increase in the fair market value of deferred compensation liabilities during the six months endedJune 30, 2019 . The fair market value changes in deferred compensation liabilities were offset by changes in the fair value of assets associated with the deferred compensation plan which are included in other income (expense), net below. Also partially offsetting the increases were a$6.7 million decrease in travel expenses, primarily related to reductions in travel as a result of the COVID-19 pandemic, and a$4.8 million decrease in legal and other contracted services. Selling, general and administrative expenses as a percentage of revenues increased to 8.7% for the six months endedJune 30, 2020 from 8.1% for the six months endedJune 30, 2019 , primarily due to the decrease in revenues described above. Amortization of intangible assets. The increase was primarily due to increased amortization of intangible assets associated with recently acquired businesses, partially offset by reduced amortization expense associated with previously acquired intangible assets as certain of these assets became fully amortized. 56 -------------------------------------------------------------------------------- Change in fair value of contingent consideration liabilities. The overall change was primarily due to changes in performance in post-acquisition periods by certain acquired businesses and the effect of present value accretion on fair value calculations. Further changes in fair value are expected to be recorded periodically until the contingent consideration liabilities are settled, with a significant portion of such obligations expected to be settled in late 2020 or early 2021. See Contractual Obligations - Contingent Consideration Liabilities for more information. Interest expense. Interest expense decreased due to a lower weighted average interest rate, partially offset by higher borrowing activity. Other income (expense), net. The net other expense for the six months endedJune 30, 2020 was primarily related to a$9.3 million impairment associated with an investment in a water and gas pipeline infrastructure contractor located inAustralia and$8.7 million of impairments associated with two non-integral equity investments that have been negatively impacted by the decline in demand for refined petroleum products, partially offset by an$8.9 million legal settlement received. The net other income for the six months endedJune 30, 2019 was primarily due to the deferral and subsequent recognition of earnings on a large electric transmission project inCanada that was substantially completed and placed into commercial operation during the three months endedMarch 31, 2019 . As a result of the project completion, we recognized$60.3 million of earnings that were deferred in prior periods. Provision for income taxes. The effective tax rates for the six months endedJune 30, 2020 andJune 30, 2019 were 29.7% and 36.2%. The higher effective tax rate for the six months endedJune 30, 2019 was primarily due to the$79.2 million charge in the period associated with the terminated telecommunications project inPeru , for which no income tax benefit was recognized. Other comprehensive income (loss). Other comprehensive income (loss) results from translation of the balance sheets of our foreign operating units, which are primarily located inCanada andAustralia and have functional currencies other than theU.S. dollar, and therefore are affected by the strengthening or weakening of theU.S. dollar against such currencies. The loss in the six months endedJune 30, 2020 was impacted by the strengthening of theU.S. dollar against both the Canadian and Australian dollars as ofJune 30, 2020 when compared toDecember 31, 2019 . The gain in the six months endedJune 30, 2019 was impacted of the weakening of theU.S. dollar against the Canadian dollar as ofJune 30, 2019 when compared toDecember 31, 2018 . Segment Results Reportable segment information, including revenues and operating income by type of work, is gathered from each operating unit for the purpose of evaluating segment performance. Classification of our operating unit revenues by type of work for segment reporting purposes can at times require judgment on the part of management. Our operating units may perform joint projects for customers in multiple industries, deliver multiple types of services under a single customer contract or provide service offerings to various industries. For example, we perform joint trenching projects to install distribution lines for electric power and natural gas customers. Our integrated operations and common administrative support for operating units require that certain allocations be made to determine segment profitability, including allocations of shared and indirect costs (e.g., facility costs), indirect operating expenses (e.g., depreciation), and general and administrative costs. Certain corporate costs are not allocated, including payroll and benefits, employee travel expenses, facility costs, professional fees, acquisition costs, non-cash stock-based compensation, amortization related to intangible assets, asset impairment related to goodwill and intangible assets and change in fair value of contingent consideration liabilities. 57 -------------------------------------------------------------------------------- Three months endedJune 30, 2020 compared to the three months endedJune 30, 2019 The following table sets forth segment revenues, segment operating income (loss) and operating margins for the periods indicated, as well as the dollar and percentage change from the prior period. Operating margins are calculated by dividing operating income by revenues. Management utilizes operating margins as a measure of profitability, which can be helpful for monitoring how effectively we are performing under our contracts. Management also believes operating margins are a useful metric for investors to utilize in evaluating our performance. The following table shows dollars in thousands. Three Months Ended June 30, Change 2020 2019 $ % Revenues: Electric Power Infrastructure Services excluding Latin America$ 1,790,469 71.4 %$ 1,755,160 61.8 %$ 35,309 2.0 % Latin America 2,449 0.1 (20,824 ) (0.7 ) 23,273 * Electric Power Infrastructure Services 1,792,918 71.5 1,734,336 61.1 58,582 3.4 % Pipeline and Industrial Infrastructure Services 713,313 28.5 1,104,863 38.9 (391,550 ) (35.4 )% Consolidated revenues$ 2,506,231 100.0 %$ 2,839,199 100.0 %$ (332,968 ) (11.7 )% Operating income (loss): Electric Power Infrastructure Services excluding Latin America$ 198,044 11.1 %$ 172,266 9.8 %$ 25,778 15.0 % Latin America (15,194 ) * (79,331 ) * 64,137 * Equity in earnings of integral unconsolidated affiliates 1,046 N/A - N/A 1,046 * Electric Power Infrastructure Services 183,896 10.3 % 92,935 5.4 %$ 90,961 97.9 % Pipeline and Industrial Infrastructure Services 21,250 3.0 % 69,943 6.3 % (48,693 ) (69.6 )% Corporate and non-allocated costs (92,230 ) N/A (84,298 ) N/A (7,932 ) 9.4 % Consolidated operating income$ 112,916 4.5 %$ 78,580 2.8 %$ 34,336 43.7 % * The percentage or percentage change is not meaningful. Electric Power Infrastructure Services Segment Results Revenues for the three months endedJune 30, 2020 included a$46 million increase in revenues attributable to our North American communications operations, increased customer spending on distribution services, a$20 million incremental increase in revenues attributable to acquired businesses and an$11 million increase in emergency restoration services. These increases were partially offset by lower revenues associated with grid modernization and accelerated fire hardening programs in the westernUnited States . Additionally, during the three months endedJune 30, 2019 , we recognized a$79.2 million charge associated with the terminated telecommunications project inPeru , which included a$48.8 million reversal of revenues and a$30.4 million increase in cost of services. The charge included a reduction of previously recognized earnings on the project, a reserve against a portion of the project costs incurred through the project termination date, a reserve against a portion of alleged liquidated damages and recognition of estimated costs to complete the project turnover and close out the project. See Legal Proceedings in Note 11 of the Notes to Condensed Consolidated Financial Statements in Item 1. Financial Statements of Part I of this Quarterly Report for additional information involving the termination of the telecommunications project inPeru . As a result of the contract termination and other factors, we have concluded to pursue an orderly exit of our operations inLatin America , and therefore have separately provided our Latin American operating results above. We believe that providing visibility into these results is beneficial to understanding the performance of our ongoing operations. The operating loss attributable to our Latin American operations in the three months endedJune 30, 2020 was primarily associated with early termination and project close out costs, cost adjustments on certain remaining projects and disruptions caused by the COVID-19 pandemic. For the full year of 2020, our Latin American operations are expected to generate revenues of$20 million to$30 million and an operating loss of$40 million to$45 million . Operating income and operating income as a percentage of revenues were positively impacted by improved performance across the segment, including increased Canadian revenues contributing to improved equipment utilization and fixed cost absorption. The three months endedJune 30, 2019 was impacted by pronounced seasonal effects inCanada , which in addition to normal revenue seasonality, included higher levels of unabsorbed costs as the crews and equipment completing a large transmission project transitioned to new projects. These positive factors were partially offset by a reduction in fire hardening services in the westernUnited States during the second quarter of 2020 as compared to the three months endedJune 30, 2019 . We expect revenues 58 -------------------------------------------------------------------------------- from fire hardening services in the westernUnited States to increase in the second half of 2020 as compared to the first half of 2020 but remain lower than revenues recognized from such services during the second half of 2019. The equity in earnings of integral unconsolidated affiliates primarily relates to the commencement of transition services under the agreement recently awarded to LUMA for the operation and maintenance of the electric transmission and distribution system inPuerto Rico . Pipeline and Industrial Infrastructure Services Segment Results The decrease in revenues was primarily due to disruptions resulting from shelter-in-place and worksite access restrictions related to the COVID-19 pandemic and the compounding impact on the challenged energy market, including decreased capital spending by our customers on industrial services due to the significant decline in demand for refined petroleum products. Revenues associated with larger pipeline projects also decreased as compared to the three months endedJune 30, 2019 , as the timing of such projects is highly variable due to potential permitting delays, worksite access limitations related to environmental regulations and seasonal weather patterns. The decrease was partially offset by approximately$55 million in incremental revenues from acquired businesses. As a result of the variability in timing for larger pipeline transmission projects, we expect larger pipeline transmission revenues for 2020 to be between$350 million and$400 million as compared to$1.2 billion during 2019. The decreases in operating income and operating income as a percentage of revenues were primarily due to the decrease in revenues as discussed above. The lower revenues associated with industrial services negatively impacted margins and the ability to cover fixed and overhead costs. The reduction in larger pipeline transmission projects, which generally yield higher margins, also contributed to the decrease. The three months endedJune 30, 2019 included a$13.9 million loss associated with continued rework and start-up delays on a processing facility project inTexas , which was approximately 99% complete atJune 30, 2020 . Corporate and Non-allocated Costs The increase in corporate and non-allocated costs was partially due to a$5.2 million increase in intangible asset amortization, a$7.7 million increase in non-cash stock-based compensation expense and a$4.7 million incremental increase in the fair value of deferred compensation liabilities. Partially offsetting these increases were a$2.2 million decrease in the fair value of contingent consideration liabilities in the three months endedJune 30, 2020 , as compared to a$4.4 million increase in the fair value of contingent consideration liabilities recognized during the three months endedJune 30, 2019 . Also partially offsetting the increases were decreases in certain costs related to cost containment measures associated with the current operating environment. Six months endedJune 30, 2020 compared to the six months endedJune 30, 2019 The following table sets forth segment revenues, segment operating income (loss) and operating margins for the periods indicated, as well as the dollar and percentage change from the prior period (dollars in thousands): Six Months Ended June 30, Change 2020 2019 $ % Revenues: Electric Power Infrastructure Services excluding Latin America$ 3,552,815 67.4 %$ 3,391,348 60.1 %$ 161,467 4.8 % Latin America 7,130 0.1 7,011 0.1 119 1.7 % Electric Power Infrastructure Services$ 3,559,945 67.5$ 3,398,359 60.2$ 161,586 4.8 % Pipeline and Industrial Infrastructure Services 1,710,381 32.5 2,248,099 39.8 (537,718 ) (23.9 )% Consolidated revenues$ 5,270,326 100.0 %$ 5,646,458 100.0 %$ (376,132 ) (6.7 )% Operating income (loss): Electric Power Infrastructure Services excluding Latin America$ 343,117 9.7 %$ 334,495 9.9 %$ 8,622 2.6 % Latin America (31,509 ) * (79,943 ) * 48,434 * Equity in earnings of integral unconsolidated affiliates 1,046 N/A - N/A 1,046 * Electric Power Infrastructure Services$ 312,654 8.8 %$ 254,552 7.5 %$ 58,102 22.8 % Pipeline and Industrial Infrastructure Services 52,527 3.1 % 110,642 4.9 % (58,115 ) (52.5 )% Corporate and non-allocated costs (171,528 ) N/A (167,127 ) N/A (4,401 ) 2.6 % Consolidated operating income$ 193,653 3.7 %$ 198,067
3.5 %
* The percentage change is not meaningful.
59 -------------------------------------------------------------------------------- Electric Power Infrastructure Services Segment Results The increase in revenues was primarily due to increased customer spending on distribution services. Segment revenues also increased due to a$76 million increase in revenues in our North American communication operations and approximately$35 million of incremental revenues attributable to acquired businesses. These increases were partially offset by lower revenues on a larger transmission project inCanada that was substantially completed during the three months endedMarch 31, 2019 , lower revenues associated with grid modernization and accelerated fire hardening programs in the westernUnited States ; and a$21 million decrease in emergency restoration services revenues. As discussed above, during the six months endedJune 30, 2019 , we recognized a$79.2 million charge associated with the terminated telecommunications project inPeru , which included a$48.8 million reversal of revenues and a$30.4 million increase in cost of services. The operating loss associated with our Latin American operations in the six months endedJune 30, 2020 was primarily associated with early termination and project close out costs, cost adjustments on certain remaining projects and disruptions caused by the COVID-19 pandemic. Operating income and operating income as a percentage of revenues were positively impacted during the six months endedJune 30, 2020 by increased Canadian revenues contributing to improved equipment utilization and fixed cost absorption. The six months endedJune 30, 2019 was negatively impacted by pronounced seasonal effects inCanada , which in addition to normal revenue seasonality, had elevated levels of unabsorbed costs as the crews and equipment completing a large transmission project transitioned to new projects. Partially offsetting these increases between periods were the successful execution of the larger transmission project inCanada described above; decreased revenues from emergency restorations services, which typically yield higher margins due in part to higher equipment utilization and absorption of fixed costs; and a reduction in fire hardening services in the westernUnited States during the first six months of 2020. We expect revenues from fire hardening services in the westernUnited States to increase in the second half of 2020 as compared to the first half of 2020 but remain lower than revenues recognized from such services during the second half of 2019. The equity in earnings of integral unconsolidated affiliates primarily relates to the commencement of transition services under the operation and maintenance agreement recently awarded to LUMA discussed above. Pipeline and Industrial Infrastructure Services Segment Results The decrease in revenues was primarily due to a decrease in services related to pipeline transmission projects and industrial services, which resulted from decreased capital spending by our customers primarily attributable to the challenging overall energy market conditions, disruptions due to shelter-in-place and worksite access restrictions related to the COVID-19 pandemic and the timing of construction for larger pipeline projects, which is highly variable due to potential permitting delays, worksite access limitations related to environmental regulations and seasonal weather patterns. This decrease was partially offset by approximately$155 million in revenues from acquired businesses. The decreases in operating income and operating income as a percentage of revenues were primarily due to the reduction in larger pipeline transmission projects, which generally yield higher margins. Also contributing to this decrease were adverse impacts related to the COVID-19 pandemic, including lower revenues associated with industrial services, which negatively impacted margins and the ability to cover fixed and overhead costs. The six months endedJune 30, 2020 were also negatively impacted by adverse weather across our Canadian pipeline operations, including a$14.1 million loss associated with production issues and severe weather conditions on a larger gas transmission project inCanada , which was approximately 97% complete atJune 30, 2020 . The six months endedJune 30, 2019 included a$21.5 million loss associated with continued rework and start-up delays on a processing facility project inTexas , which was approximately 99% complete atJune 30, 2020 . Additionally, segment results were adversely impacted by the COVID-19 pandemic and the challenged energy market as discussed further above in COVID-19 - Response and Impact. Corporate and Non-allocated Costs The increase in corporate and non-allocated costs was partially due to a$10.4 million increase in intangible asset amortization, a$9.6 million increase in non-cash stock-based compensation and a$3.9 million increase in professional fees. Partially offsetting these increases were a$1.6 million decline in the fair value of deferred compensation liabilities in the six months endedJune 30, 2020 , as compared to a$5.2 million increase in the fair value of deferred compensation liabilities in the six months endedJune 30, 2019 , and a$0.5 million increase in the fair value of contingent consideration liabilities in the six months endedJune 30, 2020 , as compared to a$4.3 million increase in the fair value of contingent consideration liabilities recognized during the six months endedJune 30, 2019 . Also partially offsetting the increases were decreases in certain costs related to cost containment measures associated with the current operating environment. Remaining Performance Obligations and Backlog A performance obligation is a promise in a contract with a customer to transfer a distinct good or service. Our remaining performance obligations represent management's estimate of consolidated revenues that are expected to be realized from the 60 -------------------------------------------------------------------------------- remaining portion of firm orders under fixed price contracts not yet completed or for which work has not yet begun, which includes estimated revenues attributable to consolidated joint ventures and variable interest entities (VIEs), revenues from funded and unfunded portions of government contracts to the extent they are reasonably expected to be realized, and revenues from change orders and claims to the extent management believes they will be earned and are probable of collection. We have also historically disclosed our backlog, a measure commonly used in our industry but not recognized under generally accepted accounting principles inthe United States (GAAP). We believe this measure enables management to more effectively forecast our future capital needs and results and better identify future operating trends that may not otherwise be apparent. We believe this measure is also useful for investors in forecasting our future results and comparing us to our competitors. Our remaining performance obligations are a component of backlog, which also includes estimated orders under master service agreements (MSAs), including estimated renewals, and non-fixed price contracts expected to be completed within one year. Our methodology for determining backlog may not be comparable to the methodologies used by other companies. As ofJune 30, 2020 andDecember 31, 2019 , MSAs accounted for 54% and 53% of our estimated 12-month backlog and 64% and 61% of total backlog. Generally, our customers are not contractually committed to specific volumes of services under our MSAs, and most of our contracts can be terminated on short notice even if we are not in default. We determine the estimated backlog for these MSAs using recurring historical trends, factoring in seasonal demand and projected customer needs based upon ongoing communications. In addition, many of our MSAs are subject to renewal, and these potential renewals are considered in determining estimated backlog. As a result, estimates for remaining performance obligations and backlog are subject to change based on, among other things, project accelerations; project cancellations or delays, including but not limited to those caused by commercial issues, regulatory requirements, natural disasters, emergencies (including the ongoing COVID-19 pandemic) and adverse weather conditions; and final acceptance of change orders by customers. These factors can cause revenues to be realized in periods and at levels that are different than originally projected. The following table reconciles total remaining performance obligations to our backlog (a non-GAAP measure) by reportable segment along with estimates of amounts expected to be realized within 12 months (in thousands):June 30, 2020
12 Month Total 12 Month Total Electric Power Infrastructure Services Remaining performance obligations$ 2,490,774 $ 3,812,768 $ 2,483,109 $ 3,957,710 Estimated orders under MSAs and short-term, non-fixed price contracts 2,847,235 5,871,440 2,873,446 5,864,527 Backlog 5,338,009 9,684,208
5,356,555 9,822,237
Pipeline and Industrial Infrastructure Services Remaining performance obligations 670,290 1,371,816 670,707 1,344,741 Estimated orders under MSAs and short-term, non-fixed price contracts 1,652,152 2,872,127 1,919,791 3,837,923 Backlog 2,322,442 4,243,943 2,590,498 5,182,664 Total Remaining performance obligations 3,161,064 5,184,584 3,153,816 5,302,451 Estimated orders under MSAs and short-term, non-fixed price contracts 4,499,387 8,743,567 4,793,237 9,702,450 Backlog$ 7,660,451 $ 13,928,151 $ 7,947,053 $ 15,004,901 Subsequent toJune 30, 2020 , the project sponsors of an approximately 600-mile natural gas pipeline under construction in the easternUnited States announced that they are no longer moving forward with the project. One of our subsidiaries has been contracted, as part of a joint venture, to construct a portion of this project. Although the joint venture has not received a notice of termination, based on the announcement, we have concluded that the revenues related to the remaining performance obligation and backlog associated with the project are no longer probable. As a result, this project has been excluded from remaining performance obligations and backlog as ofJune 30, 2020 . Liquidity and Capital Resources Management monitors financial markets and national and global economic conditions for factors that may affect our liquidity and capital resources. We consider our investment policies related to cash and cash equivalents to be conservative in that we maintain a diverse portfolio of what we believe to be high-quality cash and cash equivalent investments with short-term maturities. 61 -------------------------------------------------------------------------------- The extent of the impact of the COVID-19 pandemic on our future operational and financial performance will depend on future developments, all of which are uncertain and cannot be predicted. However, based on our current business forecast for 2020, including revenue and earnings prospects and other cost management actions taken in response to market conditions, we anticipate that our cash and cash equivalents on hand, existing borrowing capacity under our senior secured credit facility, other available financing alternatives, and future cash flows from operations will provide sufficient funds to enable us to meet our debt repayment obligations, fund ongoing operating needs, facilitate our ability to pay any future dividends we declare, fund acquisitions or strategic investments that facilitate the long-term growth and sustainability of our business, and fund essential capital expenditures during 2020. In addition, we may seek to access the capital markets from time to time to raise additional capital, increase liquidity as necessary, refinance or extend the term of our existing indebtedness and otherwise fund our capital needs. Our ability to access the capital markets depends on a number of factors, including our financial performance and financial position, our credit rating, industry conditions, general economic conditions, our backlog, capital expenditure commitments, market conditions and market perceptions of us and our industry. For additional information regarding the current impact and potential risks related to the COVID-19 pandemic, see COVID-19 Pandemic - Response and Impact above and Item 1A. Risk Factors of Part II of this Quarterly Report. Cash Requirements Our available commitments and cash and cash equivalents atJune 30, 2020 were as follows (in thousands): June 30, 2020 Total capacity available for revolving loans and letters of credit$ 2,135,000 Less: Borrowings of revolving loans under our senior secured credit facility
152,622
Letters of credit outstanding under our senior secured credit facility
374,700
Available commitments under senior secured credit facility for issuing revolving loans or new letters of credit
1,607,678
Plus:
Cash and cash equivalents
530,670
Total available commitments under senior secured credit facility and cash and cash equivalents
$
2,138,348
We also had borrowings of term loans under our senior secured credit facility of$1.21 billion as ofJune 30, 2020 , and we are required to make quarterly principal payments of$16.1 million with respect to these loans. Our industry is capital intensive, and we expect substantial capital expenditures and commitments under equipment lease and rental arrangements to be needed into the foreseeable future in order to meet anticipated demand for our services. We expect capital expenditures for the year endedDecember 31, 2020 to be approximately$250 million , which is$50 million less than our original estimate at the beginning of 2020. We also continue to evaluate opportunities for stock repurchases. Refer to Contractual Obligations below for a summary of our future contractual obligations as ofJune 30, 2020 and Off-Balance Sheet Transactions and Contingencies below for a description of certain contingent obligations. Although some of these contingent obligations could require the use of cash in future periods, they are excluded from the Contractual Obligations table because we are unable to accurately predict the timing and amount of any such obligations as ofJune 30, 2020 . 62 -------------------------------------------------------------------------------- Sources and Uses of Cash In summary, our cash flows for each period were as follows (in thousands): Three Months Ended Six Months Ended June 30, June 30, 2020 2019 2020 2019 Net cash provided by (used in) operating activities$ 497,479 $ (108,664 ) $ 725,028 $ (191,414 ) Net cash used in investing activities$ (36,614 ) $ (68,171 ) $ (125,747 ) $ (215,327 ) Net cash provided by (used in) financing activities$ (310,636 ) $ 165,378 $ (236,710 ) $ 401,638 Operating Activities Cash flow from operating activities is primarily influenced by demand for our services and operating margins but is also influenced by working capital needs associated with the various types of services that we provide. Our working capital needs may increase when we commence large volumes of work under circumstances where project costs, primarily labor, equipment and subcontractors, are required to be paid before the associated receivables are billed and collected. Accordingly, changes within working capital in accounts receivable, contract assets and contract liabilities are normally related and are typically affected on a collective basis by changes in revenue due to the timing and volume of work performed and variability in the timing of customer billings and payments. Additionally, working capital needs are generally higher during the summer and fall due to increased demand for our services when favorable weather conditions exist in many of our operating regions. Conversely, working capital assets are typically converted to cash during the winter. These seasonal trends can be offset by changes in project timing due to delays or accelerations and other economic factors that may affect customer spending. Net cash provided by operating activities during the three months endedJune 30, 2020 was favorably impacted by the decline in revenues during the three months endedJune 30, 2020 as compared to the three months endedMarch 31, 2020 , which decreased working capital requirements at quarter end. As discussed below, improved billings and collections, as well as the timing and amounts of retention balances, also contributed to the net cash provided by operating activities in the three months endedJune 30, 2020 . Additionally, as permitted under the CARES Act and related state actions, during the three months endedJune 30, 2020 , we deferred the payment of$58.0 million of federal and state income taxes, which were subsequently paid inJuly 2020 , and payment of$30.7 million of payroll taxes, 50% of which are due byDecember 31, 2021 and the remainder of which are due byDecember 31, 2022 . Although there is currently no legislation that would permit further deferrals of income taxes, the CARES Act permits deferral of payroll taxes throughDecember 31, 2020 , and we currently intend to continue such deferrals. Net cash provided by operating activities during the six months endedJune 30, 2020 also included the receipt of$82.0 million of insurance proceeds associated with the settlement of two pipeline project claims in the fourth quarter of 2019. Net cash provided by operating activities during the three and six months endedJune 30, 2019 included the payment of$112 million as a result of the exercise of on-demand advance payment and performance bonds in connection with the termination of the large telecommunications project inPeru , which is described in further detail in Note 11 of the Notes to Condensed Consolidated Financial Statements in Item 1. Financial Statements. Net cash used in operating activities for the three and six months endedJune 30, 2019 were also impacted by higher working capital requirements, including mobilization and tooling costs, to support business growth and due to extended billing and collection cycles for certain utility customers. These items were partially offset by the collection of$109 million of pre-petition receivables related to the PG&E bankruptcy proceedings during the three months endedJune 30, 2019 . Days sales outstanding (DSO) represents the average number of days it takes revenues to be converted into cash, which management believes is an important metric for assessing liquidity. A decrease in DSO has a favorable impact on cash flow from operating activities, while an increase in DSO has a negative impact on cash flow from operating activities. DSO is calculated by using the sum of current accounts receivable, net of allowance (which includes retainage and unbilled balances), plus contract assets less contract liabilities, divided by average revenues per day during the quarter. DSO atJune 30, 2020 was 82 days, as compared to 91 days atJune 30, 2019 . The decrease in DSO was partially due to collection of a large retainage balance outstanding atJune 30, 2019 associated with a larger electric transmission project, as well as billing process changes for certain customers that negatively impacted DSO throughout 2019. Investing Activities Net cash used in investing activities in the three months endedJune 30, 2020 included$48.1 million of capital expenditures and$1.6 million used for acquisitions. These items were partially offset by$7.8 million of proceeds from the sale of property and equipment and$8.4 million of proceeds from the disposition of businesses. Net cash used in investing activities in the three months endedJune 30, 2019 included$72.8 million of capital expenditures and$3.8 million used for acquisitions. These items were partially offset by$8.6 million of proceeds from the sale of property and equipment. Net cash used in investing activities in the six months endedJune 30, 2020 included$116.3 million of capital expenditures,$24.4 million used for acquisitions and$8.8 63 -------------------------------------------------------------------------------- million of cash paid for investments in unconsolidated affiliates and other entities. These items were partially offset by$12.6 million of proceeds from the sale of property and equipment and$10.9 million of proceeds from the disposition of businesses. Net cash used in investing activities in the six months endedJune 30, 2019 included$141.4 million used for capital expenditures,$55.3 million used for acquisitions; and$37.9 million of cash paid for investments in unconsolidated affiliates and other entities. These items were partially offset by$19.4 million of proceeds from the sale of property and equipment. Our industry is capital intensive, and we expect substantial capital expenditures and commitments under equipment lease and rental arrangements to be needed into the foreseeable future. We also have various contractual obligations related to investments in unconsolidated affiliates and other capital commitments that are detailed in Contractual Obligations below. In addition, we expect to continue to pursue strategic acquisitions and investments, although we cannot predict the timing or amount of the cash needed for these initiatives. Financing Activities Net cash used in financing activities in the three months endedJune 30, 2020 included$282.3 million of net repayments under our senior secured credit facility,$9.4 million of payments to settle certain contingent consideration liabilities,$7.7 million of payments to satisfy tax withholding obligations associated with stock-based compensation and$7.2 million of cash dividends and dividend equivalents. Net cash provided by financing activities in the three months endedJune 30, 2019 included$167.0 million of net borrowings under our senior secured credit facility and$7.3 million of net short-term borrowings, partially offset by$5.8 million of cash payments of dividends and cash dividend equivalents. Net cash used in financing activities in the six months endedJune 30, 2020 included$200.0 million of cash payments for common stock repurchases,$23.6 million of cash payments to satisfy tax withholding obligations associated with stock-based compensation,$14.5 million of cash payments of dividends and cash dividend equivalents and$10.4 million of payments to settle certain contingent consideration liabilities, partially offset by$21.1 million of net borrowings under our senior secured credit facility. Net cash provided by financing activities in the six months endedJune 30, 2019 included$466.7 million of net borrowings under our senior secured credit facility, partially offset by$20.1 million of cash payments for common stock repurchases,$15.9 million of net short-term repayments,$15.3 million of payments to satisfy tax withholding obligations associated with stock-based compensation, and$11.6 million of cash payments of dividends and cash dividend equivalents. Contingent Consideration Liabilities Certain of our acquisitions include the potential payment of contingent consideration, payable in the event certain performance objectives are achieved by the acquired businesses during designated post-acquisition periods. The majority of these contingent consideration liabilities are subject to a maximum outstanding payment amount, which totaled$148.5 million for liabilities with measurement periods that end subsequent toJune 30, 2020 . The significant majority of these liabilities would be paid at least 70% to 85% in cash. Cash payments up to the amount recognized for these liabilities at the respective acquisition dates, including measurement-period adjustments, will be classified as financing activities in our consolidated statements of cash flows. Any cash payments in excess of such amounts will be classified as operating activities in our consolidated statements of cash flows. The aggregate fair value of all of our contingent consideration liabilities was$75.8 million as ofJune 30, 2020 , of which$68.5 million is included in "Accounts payable and accrued expenses" and$7.3 million is included in "Insurance and other non-current liabilities." We made a$10.0 million interim cash payment to partially settle certain contingent consideration liabilities during the three months endedJune 30, 2020 and$11.0 million of cash payments and the issuance of 4,277 shares of Quanta common stock during the six months endedJune 30, 2020 . The majority of cash payments have been classified as financing activities in our condensed consolidated statements of cash flows for the three and six months endedJune 30, 2020 . Stock Repurchases We repurchased the following shares of common stock in the open market under our stock repurchase programs (in thousands): Quarter ended: Shares Amount June 30, 2020 - $ - March 31, 2020 5,960$ 200,000 December 31, 2019 - $ - September 30, 2019 - $ - June 30, 2019 - $ - March 31, 2019 376$ 11,953 Our policy is to record a stock repurchase as of the trade date; however, the payment of cash related to a repurchase is made on the settlement date of the trade. During the three months endedJune 30, 2020 and 2019, cash payments related to stock 64 -------------------------------------------------------------------------------- repurchases were none and$0.2 million , and during the six months endedJune 30, 2020 and 2019, cash payments related to stock repurchases were$200.0 million and$20.1 million . As ofJune 30, 2020 ,$86.8 million remained authorized under our stock repurchase program approved during the third quarter of 2018, which permits us to repurchase outstanding common stock from time to time throughJune 30, 2021 . InAugust 2020 , our board of directors authorized us to repurchase, from time to time throughJune 30, 2023 , up to an additional$500 million in shares of our outstanding common stock under a new stock repurchase program, for an aggregate stock repurchase authorization of$586.8 million . Repurchases under our repurchase programs may be implemented through open market or privately negotiated transactions, at management's discretion, based on market and business conditions, applicable contractual and legal requirements, including restrictions under our senior secured credit facility, and other factors. We are not obligated to acquire any specific amount of common stock and the repurchase programs may be modified or terminated by our Board of Directors at any time at its sole discretion and without notice. For additional detail about our stock repurchases, refer to Note 9 of the Notes to Condensed Consolidated Financial Statements in Item 1. Financial Statements. Dividends We declared the following cash dividends and cash dividend equivalents during 2019 and the first six months of 2020 (in thousands, except per share amounts): Declaration Record Payment Dividend Dividends Date Date Date Per Share Declared May 28, 2020 July 1, 2020 July 15, 2020$ 0.05 $ 7,182 March 26, 2020 April 6, 2020 April 15, 2020$ 0.05 $ 7,184
7,371
5,564
6,233
5,896
A significant majority of dividends declared were paid on the corresponding payment dates. Holders of restricted stock units (RSUs) awarded under theQuanta Services, Inc. 2011 Omnibus Equity Incentive Plan (the 2011 Plan) generally received cash dividend equivalent payments equal to the cash dividend payable on account of the underlying Quanta common stock. Holders of exchangeable shares of certain Canadian subsidiaries of Quanta received a cash dividend per exchangeable share equal to the cash dividend per share paid to Quanta common stockholders. Holders of RSUs awarded under theQuanta Services, Inc. 2019 Omnibus Equity Incentive Plan (the 2019 Plan) and holders of unearned and unvested performance stock units (PSUs) awarded under the 2011 Plan and the 2019 Plan receive cash dividend equivalent payments only to the extent such RSUs and PSUs become earned and/or vest. Additionally, cash dividend equivalent payments related to certain stock-based awards that have been deferred pursuant to the terms of a deferred compensation plan maintained by us are recorded as liabilities in such plans until the deferred awards are settled. The declaration, payment and amount of future cash dividends will be at the discretion of Quanta's Board of Directors after taking into account various factors, including Quanta's financial condition, results of operations, cash flows from operations; current and anticipated capital requirements and expansion plans; the current and potential impact of the COVID-19 pandemic and other market, industry, economic and political conditions; income tax laws then in effect; and the requirements ofDelaware law. In addition, as discussed below, Quanta's credit agreement restricts the payment of cash dividends unless certain conditions are met. Debt Instruments Senior Secured Credit Facility We have a credit agreement with various lenders that provides for (i) a$2.14 billion revolving credit facility and (ii) a term loan facility with term loans in the aggregate initial principal amount of$1.29 billion . In addition, subject to the conditions specified in the credit agreement, we have the option to increase the capacity of the credit facility, in the form of an increase in the revolving credit facility, incremental term loans or a combination thereof, from time to time, upon receipt of additional commitments from new or existing lenders by up to an additional (i)$400.0 million plus (ii) additional amounts so long as the Incremental Leverage Ratio Requirement (as defined in the credit agreement) is satisfied at the time of such increase. The Incremental Leverage Ratio Requirement requires, among other things, after giving pro forma effect to such increase and the use of proceeds therefrom, compliance with the credit agreement's financial covenants as of the most recent fiscal quarter end for which financial statements 65 -------------------------------------------------------------------------------- were required to be delivered and that our Consolidated Leverage Ratio (as defined below) does not exceed 2.5 to 1.0, subject to the conditions specified in the credit agreement. Borrowings under the credit agreement are to be used to refinance existing indebtedness and for working capital, capital expenditures, acquisitions and other general corporate purposes. The maturity date for both the revolving credit facility and the term loan facility isOctober 31, 2022 ; however, we may voluntarily prepay the term loans from time to time in whole or in part, without premium or penalty. We are required to make quarterly principal payments of$16.1 million on the term loan facility. During the three months endedJune 30, 2020 and 2019, our weighted average interest rates associated with our senior secured credit facility were 1.65% and 3.88%, and during the six months endedJune 30, 2020 and 2019, our weighted average interest rates associated with our senior secured credit facility were 2.37% and 3.90%. We borrowed$600.0 million under the term loan facility inOctober 2018 and borrowed an additional$687.5 million under the term loan facility inSeptember 2019 and used the majority of such proceeds to repay outstanding revolving loans under the credit agreement. As ofJune 30, 2020 , we had$1.36 billion of borrowings outstanding under the credit agreement, which included$1.21 billion borrowed under the term loan facility and$152.6 million of outstanding revolving loans. We also had$374.7 million of letters of credit issued under our revolving credit facility as of such date. As ofJune 30, 2020 , the remaining$1.61 billion of available commitments under the revolving credit facility was available for additional revolving loans or letters of credit inU.S. dollars and certain alternative currencies. The credit agreement contains certain covenants, including (i) a maximum Consolidated Leverage Ratio of 3.0 to 1.0 (except that in connection with certain permitted acquisitions in excess of$200.0 million , such ratio is 3.5 to 1.0 for the fiscal quarter in which the acquisition is completed and the two subsequent fiscal quarters) and (ii) a minimum Consolidated Interest Coverage Ratio of 3.0 to 1.0. As ofJune 30, 2020 , we were in compliance with all of the financial covenants under the credit agreement. Consolidated Leverage Ratio is the ratio of our Consolidated Funded Indebtedness to Consolidated EBITDA (as those terms are defined in the credit agreement). For purposes of calculating our Consolidated Leverage Ratio, Consolidated Funded Indebtedness is reduced by available cash and Cash Equivalents (as defined in the credit agreement) in excess of$25.0 million . Consolidated Interest Coverage Ratio is the ratio of (i) Consolidated EBIT (as defined in the credit agreement) for the four fiscal quarters most recently ended to (ii) Consolidated Interest Expense (as defined in the credit agreement) for such period (excluding all interest expense attributable to capitalized loan costs and the amount of fees paid in connection with the issuance of letters of credit on our behalf during such period). The credit agreement provides for customary events of default and generally contains cross-default provisions with other debt instruments exceeding$150.0 million in borrowings or availability. Additionally, subject to certain exceptions, (i) all borrowings are secured by substantially all the assets of Quanta and its wholly-ownedU.S. subsidiaries and by a pledge of all of the capital stock of Quanta's wholly-ownedU.S. subsidiaries and 65% of the capital stock of direct foreign subsidiaries of Quanta's wholly-ownedU.S. subsidiaries and (ii) Quanta's wholly-ownedU.S. subsidiaries guarantee the repayment of all amounts due under the credit agreement. The credit agreement also limits certain acquisitions, mergers and consolidations, indebtedness, asset sales and prepayments of indebtedness and, subject to certain exceptions, prohibits liens on our assets. The credit agreement allows cash payments for dividends and stock repurchases subject to compliance with the following requirements (including after giving effect to the dividend or stock repurchase): (i) no default or event of default under the credit agreement; (ii) continued compliance with the financial covenants in the credit agreement; and (iii) at least$100.0 million of availability under the revolving credit facility and/or cash and cash equivalents on hand. To address the transition in financial markets away from the London Interest Bank Offered Rate (LIBOR) by the end of 2021, our senior secured credit facility agreement includes provisions related to the replacement of LIBOR with a LIBOR Successor Rate (as defined in the credit agreement for such facility). If no LIBOR Successor Rate has been determined at the time certain circumstances are present, the lenders' obligation to make or maintain loans based on a Eurocurrency rate could be suspended, and loans inU.S. dollars would default to the Base Rate (as described in Senior Secured Credit Facility within Note 7 of the Notes to Consolidated Financial Statements in Item 1. Financial Statements) rather than a rate using the Eurocurrency Rate. Changing to an alternative interest rate or to the Base Rate may lead to additional volatility in interest rates and could cause our debt service obligations to increase significantly. 66 -------------------------------------------------------------------------------- Contractual Obligations and Contingencies The following table summarizes our future contractual obligations as ofJune 30, 2020 , excluding certain amounts discussed below (in thousands): Remainder of Total 2020 2021 2022 2023 2024 Thereafter Long-term debt - principal (1)$ 1,384,232 $ 34,385 $ 69,570 $ 1,269,160 $ 3,881 $ 3,881 $ 3,355 Long-term debt - cash interest (2) 2,918 831 747 577 428 279 56 Short-term debt (3) 1,761 1,761 - - - - - Operating lease obligations (4) 309,507 53,636 86,556 61,429 41,816 25,036 41,034 Operating lease obligations that have not yet commenced (5) 9,114 688 1,700 1,705 1,237 914 2,870 Finance lease obligations (6) 1,511 330 469 343 247 122 - Short-term lease obligations (7) 21,948 18,874 3,074 - - - - Deferral of tax payments (8) 88,729 58,039 15,345 15,345 - - - Equipment purchase commitments (9) 34,103 34,103 - - - - - Capital commitment related to investments in unconsolidated affiliates (10) 166 166 - - - - - Total contractual obligations$ 1,853,989 $ 202,813 $ 177,461 $ 1,348,559 $ 47,609 $ 30,232 $ 47,315
_______________________________________
(1) We had
credit facility, which included
facility and
bear interest at variable market rates. Assuming the principal amount
outstanding at
effect at
would be approximately
maturity date of the facility. Additionally, in connection with the term loan
facility, we are required to make quarterly principal payments of
million and pay the remaining balance on the maturity date for the facility.
(2) Amount represents cash interest expense on the liabilities associated with
financing transactions from the exercise of our equipment rental purchase
options and on fixed-rate, long-term debt, which does not include borrowings
under our senior secured credit facility.
(3) Amount represents short-term borrowings recorded on our
condensed consolidated balance sheet.
(4) Amounts represent undiscounted operating lease obligations at
The operating lease obligations recorded on our
consolidated balance sheet represent the present value of these amounts.
(5) Amounts represent undiscounted operating leases obligations that have not
commenced as of
recorded on our consolidated balance sheet beginning on the commencement date
of each lease.
(6) Amounts represent undiscounted finance lease obligations at
The finance lease obligations recorded on our
consolidated balance sheet represent the present value of these amounts.
(7) Amounts represent short-term lease obligations that are not recorded on our
policy election. Month-to-month rental expense associated primarily with
certain equipment rentals is excluded from these amounts because we are
unable to accurately predict future rental amounts.
(8) Amounts represent deferral of
payments, which were paid in
payroll tax payments, 50% of which are due by
remainder of which are due by
no legislation that would permit further deferrals of income taxes, the CARES
Act permits deferral of payroll taxes through
currently intend to continue such deferrals.
(9) Amount represents capital committed for the expansion of our vehicle fleet.
Although we have committed to the purchase of these vehicles at the time of
their delivery, we expect that these orders will be assigned to third-party
leasing companies and made available to us under certain of our master
equipment lease agreements.
(10) Amount represents outstanding capital commitments associated with
investments in unconsolidated affiliates. 67
-------------------------------------------------------------------------------- As discussed below and in Notes 2 and 11 of the Notes to Condensed Consolidated Financial Statements in Item 1. Financial Statements, we have various contingencies and commitments that may require the use of cash in future periods. The Contractual Obligations table excludes the contingencies described below, as we are unable to accurately predict the timing and amount of any of the following contingent obligations. Concentrations of Credit Risk We are subject to concentrations of credit risk related primarily to our cash and cash equivalents and our net receivable position with customers, which includes amounts related to billed and unbilled accounts receivable and contract assets net of advanced billings with the same customer. Substantially all of our cash and cash equivalents are managed by what we believe to be high credit quality financial institutions. In accordance with our investment policies, these institutions are authorized to invest cash and cash equivalents in a diversified portfolio of what we believe to be high quality cash and cash equivalent investments, which consist primarily of interest-bearing demand deposits, money market investments and money market mutual funds. Although we do not currently believe the principal amount of these cash and cash equivalents is subject to any material risk of loss, changes in economic conditions could impact the interest income we receive from these investments. In addition, we grant credit under normal payment terms, generally without collateral, to our customers, which include electric power and energy companies, governmental entities, general contractors, and builders, owners and managers of commercial and industrial properties located primarily inthe United States ,Canada andAustralia . While we generally have certain statutory lien rights with respect to services provided, we are subject to potential credit risk related to business, economic and financial market conditions that affect these customers and locations, which has been heightened as a result of the unfavorable and uncertain economic and financial market conditions resulting from the ongoing COVID-19 pandemic and the significant decline in commodity prices and volatility in commodity production volumes. Some of our customers have experienced significant financial difficulties (including bankruptcy), and customers may experience financial difficulties in the future. These difficulties expose us to increased risk related to collectability of billed and unbilled receivables and contract assets for services we have performed. For example, onJanuary 29, 2019 , PG&E Corporation and its primary operating subsidiary, Pacific Gas and Electric Company (collectively PG&E), one of our largest customers, filed for bankruptcy protection under Chapter 11 of theU.S. Bankruptcy Code, as amended. As of the bankruptcy filing date, we had$165 million of billed and unbilled receivables. During the bankruptcy case, the bankruptcy court approved the assumption by PG&E of certain contracts with our subsidiaries, pursuant to which PG&E had paid$128 million of our pre-petition receivables as ofJune 30, 2020 . PG&E subsequently assumed its remaining contracts with our subsidiaries as part of its Chapter 11 plan of reorganization, which was confirmed by the bankruptcy court inJune 2020 . We also sold$36 million of our pre-petition receivables to a third party in 2019 in exchange for cash consideration of$34 million , subject to certain claim disallowance provisions, the occurrence of which could result in our obligation to repurchase some or all of the pre-petition receivables sold. We expect the remaining$1 million of pre-petition receivables to be sold or ultimately collected under the terms of the plan of reorganization. AtJune 30, 2020 andDecember 31, 2019 , no customer represented 10% or more of our consolidated net receivable position. No customer represented 10% or more of our consolidated revenues for the three and six months endedJune 30, 2020 . PG&E, a customer within our Electric Power Infrastructure Services segment, represented 13.3% and 11.5% of our consolidated revenues for the three and six months endedJune 30, 2019 . Legal Proceedings We are from time to time party to various lawsuits, claims and other legal proceedings that arise in the ordinary course of business. These actions typically seek, among other things, compensation for alleged personal injury, breach of contract, negligence or gross negligence and/or property damages, wage and hour claims and other employment-related damages, punitive and consequential damages, civil penalties or other losses, or injunctive or declaratory relief. With respect to all such lawsuits, claims and proceedings, we record a reserve when it is probable that a loss has been incurred and the amount of loss can be reasonably estimated. In addition, we disclose matters for which management believes a material loss is at least reasonably possible. See Note 11 of the Notes to Condensed Consolidated Financial Statements in Item 1. Financial Statements for additional information regarding litigation, claims and other legal proceedings. Multiemployer Pension Plans Certain of our operating units are parties to collective bargaining agreements with unions that represent certain of their employees, which require the operating units to pay specified wages, provide certain benefits to union employees and contribute certain amounts to multiemployer pension plans and employee benefit trusts. Our multiemployer pension plan contribution rates generally are made to the plans on a "pay-as-you-go" basis based on our union employee payrolls. The location and number of union employees that we employ at any given time and the plans in which they may participate vary depending on our need for union resources in connection with our ongoing projects. Therefore, we are unable to accurately predict our union employee payroll and the resulting multiemployer pension plan contribution obligations for future periods. 68 -------------------------------------------------------------------------------- We may also be required to make additional contributions to our multiemployer pension plans if they become underfunded, and these additional contributions will be determined based on our union employee payrolls. Special funding and operational rules are generally applicable to certain of these multiemployer plans that are classified as "endangered," "seriously endangered" or "critical" status based on multiple factors. The amount, if any, that we may be obligated to contribute to these plans cannot be reasonably estimated and is not included in the above table due to uncertainty regarding the amount of future work involving covered union employees, future contribution levels and possible surcharges on plan contributions. Furthermore, we may be subject to additional liabilities imposed by law as a result of our participation in multiemployer defined benefit pension plans, including in connection with a withdrawal or deemed withdrawal from a plan or a plan being terminated or experiencing a mass withdrawal. These liabilities include an allocable share of the unfunded vested benefits in the plan for all plan participants, not merely the benefits payable to a contributing employer's own retirees. As a result, participating employers may bear a higher proportion of liability for unfunded vested benefits if other participating employers cease to contribute or withdraw, with the reallocation of liability being more acute in cases when a withdrawn employer is insolvent or otherwise fails to pay its withdrawal liability. We are not currently aware of any material withdrawal liabilities that have been incurred or asserted and that remain outstanding. However, our future contribution obligations and potential withdrawal liability exposure could vary based on the investment and actuarial performance of the multiemployer pension plans to which we contribute and other factors, which could be negatively impacted as a result of the unfavorable and uncertain economic and financial market conditions resulting from the ongoing COVID-19 pandemic and related issues. We have been subject to significant withdrawal liabilities in the past, including in connection with our withdrawal from the Central States, Southeast and Southwest Areas Pension Plan. To the extent we are subject to material withdrawal liabilities in the future, such liability could adversely affect our business, financial condition, results of operations or cash flows. Performance Bonds and Parent Guarantees Many customers, particularly in connection with new construction, require us to post performance and payment bonds. These bonds provide a guarantee that we will perform under the terms of a contract and pay our subcontractors and vendors. If we fail to perform, the customer may demand that the surety make payments or provide services under the bond, and we must reimburse the surety for any expenses or outlays it incurs. Under our underwriting, continuing indemnity and security agreement with our sureties, we have granted security interests in certain of our assets as collateral for our obligations to the sureties. We may be required to post letters of credit or other collateral in favor of the sureties or our customers in the future, which would reduce the borrowing availability under our senior secured credit facility. We have not been required to make any material reimbursements to our sureties for bond-related costs except in connection with the exercise of approximately$112.0 million of advance payment and performance bonds related to the terminated telecommunications project inPeru , which is described further in Legal Proceedings - Peru Project Dispute in Note 11 of the Notes to Condensed Consolidated Financial Statements in Item 1. Financial Statements. To the extent further reimbursements are required, the amounts could be material and could adversely affect our consolidated business, financial condition, results of operations or cash flows. As ofJune 30, 2020 , we are not aware of any outstanding material obligations for payments related to bond obligations. Performance bonds expire at various times ranging from mechanical completion of a project to a period extending beyond contract completion in certain circumstances, and as such a determination of maximum potential amounts outstanding requires the use of certain estimates and assumptions. Such amounts can also fluctuate from period to period based upon the mix and level of our bonded operating activity. As ofJune 30, 2020 , the total amount of the outstanding performance bonds was estimated to be approximately$3.0 billion . Our estimated maximum exposure as it relates to the value of the performance bonds outstanding is lowered on each bonded project as the cost to complete is reduced, and each commitment under a performance bond generally extinguishes concurrently with the expiration of our related contractual obligation. The estimated cost to complete these bonded projects was approximately$1.1 billion as ofJune 30, 2020 . Additionally, from time to time, we guarantee certain obligations and liabilities of our subsidiaries that may arise in connection with, among other things, contracts with customers, equipment lease obligations, joint venture arrangements and contractor licenses. These guarantees may cover all of the subsidiary's unperformed, undischarged and unreleased obligations and liabilities under or in connection with the relevant agreement. For example, with respect to customer contracts, a guarantee may cover a variety of obligations and liabilities arising during the ordinary course of the subsidiary's business or operations, including, among other things, warranty and breach of contract claims, third-party and environmental liabilities arising from the subsidiary's work and for which it is responsible, liquidated damages, or indemnity claims. We are not aware of any claims under any of these guarantees that are material, except as set forth in Legal Proceedings - Maurepas Project Dispute within Note 11 of the Notes to Condensed Consolidated Financial Statements in Item 1. Financial Statements. To the extent a subsidiary incurs a material obligation or liability and we have guaranteed the performance or payment of such liability, the recovery by a customer or other counterparty or a third party will not be limited to the assets of the subsidiary. As a result, responsibility under a guarantee could adversely affect our consolidated business, financial condition, results of operations and cash flows. 69 --------------------------------------------------------------------------------
Insurance
Insurance Coverage. Losses under our insurance programs are accrued based upon our estimate of the ultimate liability for claims reported and an estimate of claims incurred but not reported, with assistance from third-party actuaries. These insurance liabilities are difficult to assess and estimate due to unknown factors, including the severity of an injury, the extent of damage, the determination of our liability in proportion to other parties and the number of incidents not reported. The accruals are based upon known facts and historical trends, and management believes such accruals are adequate. As ofJune 30, 2020 andDecember 31, 2019 , the gross amount accrued for insurance claims totaled$298.4 million and$287.6 million , with$220.1 million and$212.9 million considered to be long-term and included in "Insurance and other non-current liabilities." Related insurance recoveries/receivables as ofJune 30, 2020 andDecember 31, 2019 were$31.6 million and$35.1 million , of which$0.3 million and$0.3 million are included in "Prepaid expenses and other current assets" and$31.3 million and$34.8 million are included in "Other assets, net." We renew our insurance policies on an annual basis, and therefore deductibles and levels of insurance coverage may change in future periods. In addition, insurers may cancel our coverage or determine to exclude certain items from coverage, or we may elect not to obtain certain types or incremental levels of insurance based on the potential benefits considered relative to the cost of such insurance, or coverage may not be available at reasonable and competitive rates. In any such event, our overall risk exposure would increase, which could negatively affect our results of operations, financial condition and cash flows. For example, due to the increased occurrence and future risk of wildfires inCalifornia and other areas in the westernUnited States ,Australia and other locations, insurers have reduced coverage availability and increased the cost of insurance coverage for such events in recent years. As a result, our level of insurance coverage for wildfire events decreased, including in connection with our annual insurance renewals in the spring of 2020 and 2019, and our levels of coverage may not be sufficient to cover potential losses. Our third-party insurers could also decide to further reduce or exclude coverage for wildfires or other events in the future. Hallen Acquisition Assumed Liability. As discussed in further detail in Legal Proceedings within Note 11 of the Notes to Condensed Consolidated Financial Statements in Item 1. Financial Statements, we assumed certain contingent liabilities in connection with the acquisition of Hallen. Hallen's liabilities associated with this matter are expected to be covered under applicable insurance policies or contractual remedies negotiated by us with the former owners of Hallen. As ofJune 30, 2020 , we had not recorded an accrual for any probable and estimable loss related to this matter. However, the ultimate amount of liability in connection with this matter remains subject to uncertainties associated with pending litigation, including, among other things, the apportionment of liability among the defendants and other responsible parties and the likelihood and amount of potential damages claims. As a result, this matter could result in a loss that is in excess of, or not covered by, such insurance or contractual remedies, which could have a material adverse effect on our consolidated results of operations and cash flows. Contingent Consideration Liabilities The liabilities recorded represent the estimated fair values of future amounts payable to the former owners of the acquired businesses and are estimated by management based on entity-specific assumptions that are evaluated on an ongoing basis. Because acquisition-related contingent consideration liabilities are contingent upon future events, we include these liabilities in the contractual obligations table when the contingencies are resolved. We expect a significant portion of these liabilities to be settled by late 2020 or early 2021. Aggregate fair values of these outstanding and unearned contingent consideration liabilities and their classification in the Consolidated Balance Sheets in Item 1. Financial Statements were as follows (in thousands): June 30, 2020 December 31, 2019 Accounts payable and accrued expenses$ 68,466 $
77,618
Insurance and other non-current liabilities 7,304
6,542
Total contingent consideration liabilities
84,160
The fair values of these liabilities were primarily determined using a Monte Carlo simulation valuation methodology based on probability-weighted performance projections and other inputs, including a discount rate and an expected volatility factor for each acquisition. The expected volatility factor ranged from 20.4% to 30.0% and had a weighted average of 22.6% based on historical asset volatility of selected guideline public companies. Depending on contingent consideration payment terms, the present values of the estimated payments are discounted based on a risk-free rate and/or our cost of debt, ranging from 0.2% to 3.9% and had a weighted average of 2.1%. The fair value determinations incorporate significant inputs not observable in the market. Accordingly, the level of inputs used for these fair value measurements is the lowest level (Level 3), as further described in Note 2 of the Notes to Condensed Consolidated Financial Statements in Item 1. Financial Statements. Significant changes in any of these assumptions could result in a significantly higher or lower potential liability. 70 -------------------------------------------------------------------------------- The majority of our contingent consideration liabilities are subject to a maximum outstanding payment amount, which aggregated to$148.5 million for those liabilities whose measurement periods end subsequent toJune 30, 2020 . One contingent consideration liability is not subject to a maximum payment amount, and such liability had a fair value of$1.0 million as ofJune 30, 2020 . Our aggregate contingent consideration liabilities can change due to additional business acquisitions, settlement of outstanding liabilities, changes in the fair value of amounts owed based on performance in post-acquisition periods and accretion in present value. During the three and six months endedJune 30, 2020 , we recognized a net decrease of$2.2 million and a net increase of$0.5 million in the fair value of our aggregate contingent consideration liabilities. During the three and six months endedJune 30, 2019 we recognized net increases of$4.4 million and$4.3 million in the fair value of our aggregate contingent consideration liabilities. These changes are reflected in "Change in fair value of contingent consideration liabilities" in our consolidated statements of operations. We made a$10.0 million interim cash payment to partially settle certain contingent consideration liabilities during the three months endedJune 30, 2020 and$11.0 million of cash payments and the issuance of 4,277 shares of Quanta common stock during the six months endedJune 30, 2020 . The majority of the cash payments have been classified as a financing activity, with the remainder classified as an operating activity, in our condensed consolidated statements of cash flows for the three and six months endedJune 30, 2020 . Undistributed Earnings of Foreign Subsidiaries and Unrecognized Tax Benefits We generally do not provide for taxes related to undistributed earnings of our foreign subsidiaries because such earnings either would not be taxable when remitted or they are considered to be indefinitely reinvested. We could also be subject to additional foreign withholding taxes if we were to repatriate cash that is indefinitely reinvested outsidethe United States , but we do not expect such amounts to be material. Quanta and certain subsidiaries remain under examination by variousU.S. state, Canadian and other foreign tax authorities for multiple periods. We believe it is reasonably possible that within the next 12 months unrecognized tax benefits may decrease by up to$6.8 million as a result of settlement of these examinations or the expiration of certain statute of limitations periods. Letters of Credit Fees and Commitment Fees The Contractual Obligations table excludes letters of credit and commitment fees under our senior secured credit facility because the amount of outstanding letters of credit, availability and applicable fees are all variable. Assuming that the amount of letters of credit outstanding and the fees as ofJune 30, 2020 remained the same, the annual cash expense for our letters of credit would be approximately$4.6 million . For additional information regarding our letters of credit and the associated fees and our borrowings under our senior secured credit facility, see Liquidity and Capital Resources - Debt Instruments above. Off-Balance Sheet Transactions As is common in our industry, we have entered into certain off-balance sheet arrangements in the ordinary course of business that result in risks not directly reflected in our balance sheets. Our significant off-balance sheet transactions include certain obligations relating to our investments and joint venture arrangements; short-term, non-cancelable leases; letters of credit obligations; surety guarantees related to performance bonds; committed expenditures for the purchase of equipment; and certain multiemployer pension plan liabilities. See Contractual Obligations above and Note 11 of the Notes to Condensed Consolidated Financial Statements in Item 1. Financial Statements for a description of these arrangements. Critical Accounting Estimates and Policies Update The discussion and analysis of our financial condition and results of operations are based on our condensed consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities known to exist as of the date the condensed consolidated financial statements are published and the reported amounts of revenues and expenses recognized during the periods presented. We review all significant estimates affecting our condensed consolidated financial statements on a recurring basis and record the effect of any necessary adjustments prior to their publication. Judgments and estimates are based on our 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. There can be no assurance that actual results will not differ from those estimates. Management has reviewed its development and selection of critical accounting estimates with the audit committee of our Board of Directors. Our accounting policies are primarily described in Note 2 of the Notes to Condensed Consolidated Financial Statements in Item 1. Financial Statements and should be read in conjunction with our critical accounting estimates detailed in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations in Part II of our 2019 Annual Report. Significant changes to our critical accounting policies as a result of adopting new guidance related to credit losses effectiveJanuary 1, 2020 are referenced below: 71 -------------------------------------------------------------------------------- Revenue Recognition - See Current and Long-Term Accounts Receivable, Notes Receivable and Allowance for Credit Losses in Note 2 of the Notes to Condensed Consolidated Financial Statements in Item 1. Financial Statements of Part I of this Quarterly Report for information on the new accounting standard related to current expected credit losses. Uncertainty of Forward-Looking Statements and Information This Quarterly Report includes "forward-looking statements" reflecting assumptions, expectations, projections, intentions or beliefs about future events that are intended to qualify for the "safe harbor" from liability established by the Private Securities Litigation Reform Act of 1995. You can identify these statements by the fact that they do not relate strictly to historical or current facts. They use words such as "anticipate," "estimate," "project," "forecast," "may," "will," "should," "could," "expect," "believe," "plan," "intend" and other words of similar meaning. In particular, these include, but are not limited to, statements relating to the following: • Projected revenues, net income, earnings per share, margins, cash flows,
liquidity, weighted average shares outstanding, capital expenditures, tax
rates and other projections of operating or financial results;
• Expectations regarding our business or financial outlook;
• Expectations regarding opportunities, trends and economic and regulatory
conditions in particular markets or industries;
• Expectations regarding the COVID-19 pandemic, including the potential
impact of the COVID-19 pandemic and of governmental responses to the
pandemic on our business, operations, supply chain, personnel, financial
condition, results of operations, cash flows and liquidity;
• Expectations regarding our plans and strategies, including plans, effects
and other matters relating to the COVID-19 pandemic and our exit, through
potential sale or otherwise, from our Latin American operations;
• The business plans or financial condition of our customers, including
with respect to or as a result of the COVID-19 pandemic;
• The potential impact of commodity prices and commodity production volumes
on our business, financial condition, results of operations and cash flows and demand for our services; • The potential benefits from, and future performance of, acquired businesses and our investments, including LUMA;
• Beliefs and assumptions about the collectability of receivables;
• The expected value of contracts or intended contracts with customers, as
well as the scope, services, term or results of any awarded or expected
projects;
• The development of and opportunities with respect to future projects,
including renewable energy projects and larger electric transmission and
pipeline projects;
• Future capital allocation initiatives, including the amount, timing and
strategies with respect to any future stock repurchases, and expectations
regarding the declaration, amount and timing of any future cash
dividends;
• The impact of existing or potential legislation or regulation;
• Potential opportunities that may be indicated by bidding activity or similar discussions with customers; • The future demand for and availability of labor resources in the industries we serve;
• The expected realization of remaining performance obligations or backlog;
• The expected outcome of pending or threatened legal proceedings; and
• Possible recovery of pending or contemplated insurance claims, change
orders and claims asserted against customers or third parties. 72
-------------------------------------------------------------------------------- These forward-looking statements are not guarantees of future performance, involve or rely on a number of risks, uncertainties, and assumptions that are difficult to predict or are beyond our control, and reflect management's beliefs and assumptions based on information available at the time the statements are made. We caution you that actual outcomes and results may differ materially from what is expressed, implied or forecasted by our forward-looking statements and that any or all of our forward-looking statements may turn out to be inaccurate or incorrect. Those statements can be affected by inaccurate assumptions and by known or unknown risks and uncertainties, including the following: • Market, industry, economic, financial or political conditions outside our
control, including weakness in the capital markets or the ongoing and
potential impact to financial markets and worldwide economic activity
resulting from the COVID-19 pandemic and related governmental actions;
• Quarterly variations in our operating and financial results, liquidity,
financial condition, cash flows, capital requirements, and reinvestment
opportunities, including the ongoing and potential impact to our business, operations and supply chains resulting from the COVID-19 pandemic and related governmental actions;
• The severity, magnitude and duration of the COVID-19 pandemic, including
impacts of the pandemic and of business and governmental responses to the pandemic (e.g., shelter-in-place and other mobility restrictions, business closures) on our operations, personnel and supply chains, and on
commercial activity and demand across our and our customers' businesses;
• Our inability to predict the extent to which the COVID-19 pandemic and
related impacts will adversely impact our business, financial
performance, results of operations, financial position, the prices of our
securities and the achievement of our strategic objectives, including
with respect to governmental restrictions on our ability to operate,
workforce and key personnel availability, regulatory and permitting
delays, and future demand for energy and the resulting impact on demand
for our services; • Trends and growth opportunities in relevant markets, including our ability to obtain future project awards;
• The time and costs required to exit our Latin American operations and our
ability to effect related transactions on acceptable terms, as well as the business and political climate inLatin America ;
• Delays, deferrals, reductions in scope or cancellations of anticipated,
pending or existing projects as a result of, among other things, the
COVID-19 pandemic, weather, regulatory or permitting issues (including
the recent court ruling vacating the
Nationwide Permit 12), environmental processes, project performance
issues, claimed force majeure events, protests or other political
activity, legal challenges, reductions or eliminations in governmental
funding or customer capital constraints;
• The effect of commodity prices and commodity production volumes on our
operations and growth opportunities and on our customers' capital
programs and demand for our services, including as a result of the recent
significant decrease in commodity prices; • The successful negotiation, execution, performance and completion of anticipated, pending and existing contracts;
• Risks associated with operational hazards that arise due to the nature of
the services we provide and the conditions in which we operate,
including, among others, wildfires and explosions;
• Unexpected costs, liabilities, fines or penalties that may arise from
legal proceedings, indemnity obligations, reimbursement obligations
associated with letters of credit or bonds, multiemployer pension plans
(e.g., underfunding of liabilities, termination or withdrawal liability)
or other claims or actions asserted against us, including amounts that are not covered by, or are in excess of, our third-party insurance; • Potential unavailability or cancellation of third-party insurance coverage, as well as the exclusion of coverage for certain losses, potential increases in premiums for coverage deemed beneficial to us, or
the unavailability of coverage deemed beneficial to us at reasonable and
competitive rates;
• Damage to our brands or reputation arising as a result of cyber-security
breaches, environmental and occupational health and safety matters,
corporate scandal, failure to successfully perform a high-profile
project, involvement in a catastrophic event (e.g., fire, explosion) or
other negative incidents; 73
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• Our dependence on suppliers, subcontractors, equipment manufacturers and
other third-party contractors and the impact of the COVID-19 pandemic on
these service providers;
• Estimates and assumptions related to our financial results, remaining
performance obligations and backlog;
• Our ability to attract and the potential shortage of skilled employees
and our ability to retain key personnel and qualified employees and the impact of the COVID-19 pandemic on the availability and performance of our workforce and key personnel;
• Our dependence on fixed price contracts and the potential to incur losses
with respect to these contracts;
• Adverse weather conditions, natural disasters and other emergencies,
including wildfires, pandemics (including the ongoing COVID-19 pandemic),
hurricanes, tropical storms, floods, earthquakes and other geological-
and weather-related hazards;
• Our ability to generate internal growth;
• Competition in our business, including our ability to effectively compete
for new projects and market share
• The future development of natural resources;
• The failure of existing or potential legislative actions and initiatives
to result in increased demand for our services; • Fluctuations of prices of certain materials used in our and our customers' businesses, including as a result of the imposition of tariffs, governmental regulations affecting the sourcing of certain
materials and equipment and other changes in
with other countries;
• Cancellation provisions within our contracts and the risk that contracts
expire and are not renewed or are replaced on less favorable terms; • Loss of customers with whom we have long-standing or significant relationships;
• The potential that participation in joint ventures or similar structures
exposes us to liability and/or harm to our reputation for acts or omissions by our partners;
• Our inability or failure to comply with the terms of our contracts, which
may result in additional costs, unexcused delays, warranty claims,
failure to meet performance guarantees, damages or contract terminations;
• The inability or refusal of our customers or third-party contractors to
pay for services, which could be attributable to, among other things, the
COVID-19 pandemic or the recent decrease in commodity prices and which
could include the failure to collect our outstanding receivables, failure
to recover amounts billed to customers in bankruptcy, or failure to recover on change orders or contract claims; • Budgetary or other constraints that may reduce or eliminate tax incentives or government funding for projects, which may result in project delays or cancellations; • Our ability to successfully complete our remaining performance obligations or realize our backlog;
• Risks associated with operating in international markets, including
instability of foreign governments, currency exchange fluctuations, and
compliance with unfamiliar foreign legal systems and cultural practices,
the
and anti-corruption laws, and complex
and international treaties;
• Our ability to successfully identify, complete, integrate and realize
synergies from acquisitions, including the ability to retain key personnel from acquired businesses;
• The potential adverse impact resulting from uncertainty surrounding
acquisitions and investments, including the potential increase in risks already existing in our operations and poor performance or decline in value of our investments; 74
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• The adverse impact of impairments of goodwill, other intangible assets,
receivables, long-lived assets or investments;
• Our growth outpacing our decentralized management and infrastructure;
• Inability to enforce our intellectual property rights or the obsolescence
of such rights;
• The impact of our unionized workforce on our operations, including labor
stoppages or interruptions due to strikes or lockouts;
• The ability to access sufficient funding to finance desired growth and
operations, including our ability to access capital markets on favorable
terms, as well as fluctuations in the price and trading volume of our common stock, debt covenant compliance, interest rate fluctuations and other factors affecting our financing and investing activities;
• Our ability to obtain performance bonds and other project security;
• Our ability to meet the regulatory requirements applicable to us and our
subsidiaries, including the Sarbanes-Oxley Act of 2002 and theU.S. Investment Advisers Act of 1940;
• Rapid technological and other structural changes that could reduce the
demand for our services;
• Risks related to the implementation of new information technology systems;
• New or changed tax laws, treaties or regulations;
• Our ability to realize deferred tax assets;
• Legislative or regulatory changes that result in increased costs, including with respect of labor and healthcare costs;
• Significant fluctuations in foreign currency exchange rates; and
• The other risks and uncertainties described elsewhere herein and in Item
1A. Risk Factors of Part II of this Quarterly Report, Item 1A. Risk Factors of Part I of our 2019 Annual Report and as may be detailed from time to time in our other public filings with theSEC . All of our forward-looking statements, whether written or oral, are expressly qualified by these cautionary statements and any other cautionary statements that may accompany such forward-looking statements or that are otherwise included in this report. In addition, we do not undertake and expressly disclaim any obligation to update or revise any forward-looking statements to reflect events or circumstances after the date of this report or otherwise. Item 3. Quantitative and Qualitative Disclosures about Market Risk. The information in this section should be read in connection with the information on financial market risk related to changes in interest rates and currency exchange rates in Item 7A. Quantitative and Qualitative Disclosures About Market Risk of Part II of our 2019 Annual Report. Our primary exposure to market risk relates to unfavorable changes in concentration of credit risk, interest rates and currency exchange rates. Credit Risk. We are subject to concentrations of credit risk related to our cash and cash equivalents and net receivable position with customers, which includes amounts related to billed and unbilled accounts receivable and contract assets net of advanced billings with the same customer. Substantially all of our cash and cash equivalents are managed by what we believe to be high credit quality financial institutions. In accordance with our investment policies, these institutions are authorized to invest cash and cash equivalents in a diversified portfolio of what we believe to be high-quality investments, which primarily include interest-bearing demand deposits, money market investments and money market mutual funds. Although we do not currently believe the principal amounts of these cash and cash equivalents are subject to any material risk of loss, changes in economic conditions could impact the interest income we receive from these investments. In addition, we grant credit under normal payment terms, generally without collateral, and therefore are subject to potential credit risk related to our customers' inability to pay for services provided. For example, inJanuary 2019 one of our largest customers, PG&E, filed for bankruptcy protection under Chapter 11 of theU.S. Bankruptcy Code, as amended. See Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Concentration of Credit Risk for additional information regarding this bankruptcy matter. Furthermore, the risk of nonpayment may be heightened as a result of depressed economic and financial market conditions, including in connection with the ongoing COVID-19 pandemic and the significant 75 -------------------------------------------------------------------------------- decline in commodity prices and volatility in commodity production volumes. We believe the concentration of credit risk related to billed and unbilled receivables and contract assets is limited because of the diversity of our customers, and we perform ongoing credit risk assessments of our customers and financial institutions and in some cases obtain collateral or other security from our customers. Interest Rate Risk. As ofJune 30, 2020 , we had no derivative financial instruments to manage interest rate risk. As such, we were exposed to earnings and fair value risk due to changes in interest rates with respect to our long-term obligations. As ofJune 30, 2020 , the fair value of our variable rate debt of$1.36 billion approximated book value. Our weighted average interest rate on our variable rate debt for the three months endedJune 30, 2020 was 1.65%. The annual effect on our pretax earnings of a hypothetical 50 basis point increase or decrease in variable interest rates would be approximately$6.8 million based on ourJune 30, 2020 balance of variable rate debt. Foreign Currency Risk. TheU.S. dollar is the functional currency for the majority of our operations, which are primarily located withinthe United States . The functional currency for our foreign operations, which are primarily located inCanada andAustralia , is typically the currency of the country in which the foreign operating unit is located. Accordingly, our financial performance is subject to fluctuation due to changes in foreign currency exchange rates relative to theU.S. dollar. During the three and six months endedJune 30, 2020 , revenues from our foreign operations accounted for 11.9% and 15.1% of our consolidated revenues. Fluctuations in foreign exchange rates during the three and six months endedJune 30, 2020 caused decreases of approximately$13 million and$22 million in foreign revenues compared to the three and six months endedJune 30, 2019 . We are also subject to foreign currency risk with respect to sales, purchases and borrowings that are denominated in a currency other than the respective functional currencies of our operating units. To minimize the risk from changes in foreign currency exchange rates, we may enter into foreign currency derivative contracts to hedge our foreign currency risk on a cash flow basis. There were no outstanding foreign currency derivative contracts atJune 30, 2020 . We also have foreign exchange risk related to cash and cash equivalents in foreign banks. Based on the balance of cash and cash equivalents in foreign banks of$50.5 million as ofJune 30, 2020 , an assumed 5% adverse change to foreign exchange rates would result in a fair value decline of$2.2 million . Item 4. Controls and Procedures. Attached as exhibits to this Quarterly Report on Form 10-Q are certifications of Quanta's Chief Executive Officer and Chief Financial Officer that are required in accordance with Rule 13a-14 of the Securities Exchange Act of 1934, as amended (the Exchange Act). This item includes information concerning the controls and controls evaluation referred to in the certifications, and it should be read in conjunction with the certifications for a more complete understanding of the topics presented. Evaluation of Disclosure Controls and Procedures Our management has established and maintains a system of disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act, such as this Quarterly Report, is recorded, processed, summarized and reported within the time periods specified in theSEC rules and forms. The disclosure controls and procedures are also designed to provide reasonable assurance that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. As of the end of the period covered by this Quarterly Report, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15(b) of the Exchange Act. This evaluation was carried out under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer. Based on this evaluation, these officers have concluded that, as ofJune 30, 2020 , our disclosure controls and procedures were effective to provide reasonable assurance of achieving their objectives. Evaluation of Internal Control over Financial Reporting No change in our internal control over financial reporting occurred during the quarter endedJune 30, 2020 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Design and Operation of Control Systems Our management, including the Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system's objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and 76 -------------------------------------------------------------------------------- instances of fraud, if any, within the company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and breakdowns can occur because of simple errors or mistakes. Controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures. 77
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