(EDGAR Online via COMTEX) -- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
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 ended December 31, 2018 (2018 Annual Report), which was filed with the Securities and Exchange Commission (SEC) on February 28, 2019 and is available on the SEC's website at www.sec.gov and on our website, which is 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 2018 Annual Report. Introduction
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 in support of our market strategies. 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 and amortization related to intangible assets.
During the three months ended June 30, 2019, we entered into a definitive agreement to sell our interest in a limited partnership that was selected during 2014 to build, own and operate a new 500 kilometer electric transmission line and two 500 kV substations in Alberta, Canada. The sale is expected to close in the fourth quarter of 2019 or early 2020, subject to receipt of regulatory approvals and satisfaction of customary closing conditions. Remaining Performance Obligations and Backlog A performance obligation is a promise in a contract with a customer to transfer a distinct good or service. As of June 30, 2019, our remaining performance obligations were $4.65 billion, 76.8% of which was expected to be recognized in the subsequent twelve months. Our remaining performance obligations represent management's estimate of consolidated revenues that are expected to be realized from the remaining portion of firm orders under fixed price contracts not yet completed or for which work has not yet begun. For purposes of calculating remaining performance obligations, we include all estimated revenues attributable to consolidated joint ventures and variable interest entities, 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 additional contract revenues will be earned and are deemed probable of collection.
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, 2019 December 31, 2018 12 Month Total 12 Month Total Electric Power Infrastructure Services Remaining performance obligations $ 2,243,327 $ 2,853,309 $ 2,093,461 $ 3,045,553 Estimated orders under MSAs and short-term, non-fixed price contracts 2,713,272 5,831,908 2,467,654 5,499,887 Backlog 4,956,599 8,685,217 4,561,115 8,545,440 Pipeline and Industrial Infrastructure Services Remaining performance obligations 1,329,172 1,798,081 1,003,543 1,635,918 Estimated orders under MSAs and short-term, non-fixed price contracts 1,195,755 2,287,327 1,411,329 2,161,275 Backlog 2,524,927 4,085,408 2,414,872 3,797,193 Total Remaining performance obligations 3,572,499 4,651,390 3,097,004 4,681,471 Estimated orders under MSAs and short-term, non-fixed price contracts 3,909,027 8,119,235 3,878,983 7,661,162 Backlog $ 7,481,526 $ 12,770,625 $ 6,975,987 $ 12,342,633
Seasonality; Fluctuations of Results; Economic Conditions Our revenues and results of operations can be subject to seasonal and other variations. These variations are influenced by weather, customer spending patterns, bidding seasons, receipt of required regulatory approvals, permits and rights of way, project timing and schedules, and holidays. Typically, our revenues are lowest in the first quarter of the year because cold, snowy or wet conditions can create challenging working conditions that are more costly for our customers or cause delays on projects. In addition, many of our customers develop their annual capital budgets during the first quarter and do not begin infrastructure projects in a meaningful way until those budgets are finalized. 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 second quarter productivity. Third quarter revenues are typically the highest of the year, as a greater number of projects are underway, and weather is normally more accommodating. Generally, revenues during the fourth quarter of the year are lower than the third quarter but higher than the second quarter. Many projects are completed in the fourth quarter, and revenues are often impacted positively by customers seeking to spend their capital budgets before the end of the year. However, the holiday season and inclement weather can sometimes cause delays during the fourth quarter, reducing revenues and increasing costs. Productivity and operating activity in any quarter may be positively or negatively affected by atypical weather patterns in the areas we serve, such as severe weather, excessive rainfall or unusual winter weather, as well as the timing of project awards, unanticipated changes in project schedules as a result of delays or accelerations and project cancellations and project terminations.
relationships with other countries; our customers' capital spending, including on larger pipeline and electrical infrastructure projects; oil, natural gas and natural gas liquids prices; liabilities and costs that are not covered by or that are in excess of, third party insurance coverage; reimbursements associated with letters of credit and performance or payment bonds; the timing of and costs associated with acquisitions; changes in the fair value of acquisition-related contingent consideration liabilities; project payment disputes; project cancellations; dispositions; equity in earnings (losses) of unconsolidated affiliates; impairments of goodwill, intangible assets, long-lived assets or investments; effective tax rates; and interest rates. Accordingly, our operating results in any particular period may not be indicative of the results that can be expected for any other period. Please read Outlook and Understanding Margins for additional discussion of trends and challenges that may affect our financial condition, results of operations and cash flows. Understanding Margins
Subcontract work. Work that is subcontracted to other service providers generally yields lower margins. An increase in subcontract work in a given period may contribute to a decrease in margins. In recent years, we have subcontracted approximately 15% to 20% of our work to other service providers. Materials versus labor. Typically, our customers are responsible for supplying the materials for their projects; however, for some of our contracts we may 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 of materials we are required to procure, including as a result of changes in U.S. trade relationships with other countries or other economic or political conditions, may impact our margins. In a given period, an increase in the percentage of work with higher materials procurement requirements may decrease our overall margins.
Size, scope and complexity of projects. We may experience a decrease or fluctuations in margins when larger, more complex electric transmission and pipeline projects experience significant delays or other difficulties impacting performance. Larger 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. Conversely, smaller or less complex electric transmission and pipeline projects typically provide lower margin opportunities, as there are a greater number of competitors capable of performing in this market, and competitors at times may more aggressively pursue available volumes of work to absorb fixed costs. A greater percentage of smaller scale or less complex electric transmission and pipeline work also could negatively impact margins due to the inefficiency of transitioning between a greater number of smaller projects versus continuous production on fewer larger projects. Our margins may be further impacted by delays in the timing of larger projects, extended bidding procedures for more complex EPC projects or temporary decreases in capital spending by our customers. Also, at times we may choose to maintain a portion of our workforce and equipment in an underutilized capacity . . .
Aug 02, 2019
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