Quarterly report pursuant to Section 13 or 15(d)

Revenue Recognition and Related Balance Sheet Accounts

v3.22.1
Revenue Recognition and Related Balance Sheet Accounts
3 Months Ended
Mar. 31, 2022
Revenue from Contract with Customer [Abstract]  
Revenue Recognition and Related Balance Sheet Accounts REVENUE RECOGNITION AND RELATED BALANCE SHEET ACCOUNTS:
Contracts
Quanta’s services may be provided pursuant to master service agreements (MSAs), repair and maintenance contracts and fixed price and non-fixed price construction contracts. These contracts are classified into three categories.
The following tables present Quanta’s revenue disaggregated by contract type and by geographic location, as determined by the job location (in thousands):
Three Months Ended March 31,
2022 2021
By contract type:
Fixed price contracts $ 1,689,635  42.6  % $ 1,064,247  39.4  %
Unit-price contracts 1,357,602  34.2  % 976,562  36.1  %
Cost-plus contracts 918,288  23.2  % 662,772  24.5  %
Total revenues $ 3,965,525  100.0  % $ 2,703,581  100.0  %
Three Months Ended March 31,
2022 2021
By primary geographic location:
United States $ 3,323,969  83.8  % $ 2,206,116  81.6  %
Canada 550,905  13.9  % 413,846  15.3  %
Australia 55,201  1.4  % 55,107  2.0  %
Others 35,450  0.9  % 28,512  1.1  %
Total revenues $ 3,965,525  100.0  % $ 2,703,581  100.0  %

Under fixed-price contracts, as well as unit-price contracts with more than an insignificant amount of partially completed units, revenue is recognized as performance obligations are satisfied over time, with the percentage of completion generally measured as the percentage of costs incurred to total estimated costs for such performance obligation. Approximately 51.2% and 44.4% of Quanta’s revenues recognized during the three months ended March 31, 2022 and 2021 were associated with this revenue recognition method.
Performance Obligations
As of March 31, 2022 and December 31, 2021, the aggregate transaction price allocated to unsatisfied or partially satisfied performance obligations was approximately $6.84 billion and $5.90 billion, with 78.4% and 81.8% expected to be recognized in the subsequent twelve months. These amounts represent management’s estimates of the 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 had not yet begun as of such dates. For purposes of calculating remaining performance obligations, Quanta includes 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. Excluded from remaining performance obligations are potential orders under MSAs and non-fixed price contracts expected to be completed within one year.
Contract Estimates and Changes in Estimates
Actual revenues and project costs can vary, sometimes substantially, from previous estimates due to changes in a variety of factors, including unforeseen or changed circumstances not included in Quanta’s cost estimates or covered by its contracts. Some of the factors that can result in positive changes in estimates on projects include successful execution through project risks, reduction of estimated project costs or increases of estimated revenues. Some of the factors that can result in negative changes in estimates include concealed or unknown site conditions; changes to or disputes with customers regarding the scope of services; changes in estimates related to the length of time to complete a performance obligation; changes or delays with respect to permitting and regulatory requirements; changes in the cost of equipment, commodities, materials or skilled labor; unanticipated costs or claims due to delays or failure to perform by customers or third parties; customer failure to provide required materials or equipment; errors in engineering, specifications or designs; project modifications; adverse weather conditions, natural disasters, and other emergencies (including the COVID-19 pandemic); and performance and quality issues causing delay (including payment of liquidated damages) or requiring rework or replacement. Any changes in estimates could result in changes to profitability or losses associated with the related performance obligations.
Additionally, changes in cost estimates on certain contracts may result in the issuance of change orders, which can be approved or unapproved by the customer, or the assertion of contract claims. Quanta recognizes amounts associated with change orders and claims as revenue if it is probable that the contract price will be adjusted and the amount of any such adjustment can be reasonably estimated. As of March 31, 2022 and December 31, 2021, Quanta had recognized revenues of $443.7 million and $367.8 million related to change orders and claims included as contract price adjustments that were in the process of being negotiated in the normal course of business. The largest component of the revenues recognized is associated with change orders and claims arising from delays, administrative requirements and labor issues on two transmission projects in Canada that negatively impacted productivity, which were primarily attributable to governmental requirements and worksite restrictions related to the COVID-19 pandemic. Additionally, during the third quarter of 2021, both of the projects were negatively impacted by unrelated wildfires in the region, and one project was also negatively impacted by acceleration of the project timeline. Quanta believes that the contracts for these projects entitle it to recover certain amounts associated with these delays, which are the subject of certain change orders and claims described above.
Changes in estimated revenues, costs and profit are recognized on a cumulative catch-up basis and recorded in the period they are determined to be probable and can be reasonably estimated. Such changes in estimates can result in the recognition of revenue in a current period for performance obligations that were satisfied or partially satisfied in prior periods or the reversal of previously recognized revenue if the currently estimated revenue is less than the previous estimate. The impact of a change in contract estimate is measured as the difference between the revenue or gross profit recognized in the prior period as compared to the revenue or gross profit which would have been recognized had the revised estimate been used as the basis of recognition in the prior period. Changes in estimates can also result in contract losses, which are recognized in full when they are determined to be probable and can be reasonably estimated.
Revenues were positively impacted by $33.0 million and $54.3 million during the three months ended March 31, 2022 and 2021 as a result of changes in estimates associated with performance obligations on fixed price contracts partially satisfied prior to December 31, 2021 and 2020.
Operating results for the three months ended March 31, 2022 were favorably impacted by $29.3 million, or 5.3%, of gross profit as a result of aggregate changes in contract estimates related to projects that were in progress as of December 31, 2021. The overall favorable impact resulted from net positive changes in estimates across a large number of projects, primarily as a result of favorable performance and successful mitigation of risks and contingencies as the projects progressed to completion.
Operating results for the three months ended March 31, 2021 were favorably impacted by $42.9 million, or 11.5%, of gross profit as a result of aggregate changes in contract estimates related to projects that were in progress as of December 31, 2020. The overall favorable impact resulted from net positive changes in estimates across a large number of projects, primarily as a result of favorable performance and successful mitigation of risks and contingencies as the projects progressed to completion. Partially offsetting the net favorable impact to gross profit for the three months ended March 31, 2021 was a negative change in estimate of $14.8 million associated with a communications project in the United States that arose from challenges with subcontractor performance and site conditions. This project has a total contract value of $117.9 million and was approximately 63% complete as of March 31, 2022.
Contract Assets and Liabilities
Contract assets and liabilities consisted of the following (in thousands):
March 31, 2022 December 31, 2021
Contract assets $ 975,342  $ 803,453 
Contract liabilities $ 800,578  $ 802,872 
Contract assets and liabilities fluctuate period to period based on various factors, including, among others, changes in the number and size of projects in progress at period end; variability in billing and payment terms, such as up-front or advance billings, interim or milestone billings, or deferred billings; and unapproved change orders and contract claims recognized as revenues. The increase in contract assets from December 31, 2021 to March 31, 2022 was primarily due to increased working capital requirements and the timing of billings related to progress on the two large transmission projects in Canada described above, as well as the recognition of certain change orders and claims for such projects. Both of the projects were negatively impacted by delays and labor issues related to the COVID-19 pandemic and unrelated wildfires in the region, and one project was also negatively impacted by acceleration of the project timeline, all of which resulted in change orders and an increase in contract assets. This project was substantially complete as of March 31, 2022.
During the three months ended March 31, 2022 and 2021, Quanta recognized revenue of approximately $507.2 million and $245.7 million related to contract liabilities outstanding as of December 31, 2021 and 2020.
Accounts Receivable, Allowance for Credit Losses and Concentrations of Credit Risk
Quanta’s historical loss ratio and its determination of its risk pool, which are used to calculate expected credit losses, may be adjusted for changes in customer credit concentrations within its portfolio of financial assets, its customers’ ability to pay, and other considerations, such as economic and market changes, changes to regulatory or technological environments affecting customers and the consistency between current and forecasted economic conditions and historical economic conditions used to derive historical loss ratios. At the end of each quarter, management reassesses these and other relevant factors, including any
potential effects from the uncertainties and challenges in the energy market and overall economy caused by the COVID-19 pandemic.
Quanta considers accounts receivable delinquent after 30 days but does not generally consider such amounts delinquent in its credit loss analysis unless the accounts receivable are at least 90 days past due. In addition to monitoring delinquent accounts, management monitors the credit quality of its receivables and contract assets by, among other things, obtaining credit ratings of significant customers, assessing economic and market conditions and evaluating material changes to a customer’s business, cash flows and financial condition. Should anticipated recoveries relating to receivables fail to materialize, including anticipated recoveries relating to bankruptcies or other workout situations, Quanta could experience reduced cash flows and losses in excess of current allowances provided.
Activity in Quanta’s allowance for credit losses consisted of the following (in thousands):
  Three Months Ended
March 31,
  2022 2021
Balance at beginning of period $ 49,749  $ 16,546 
Provision for credit losses 133  43 
Direct write-offs charged against the allowance (recoveries of uncollectible receivables) 34  (140)
Balance at end of period $ 49,916  $ 16,449 
Provision for credit losses is included in “Selling, general and administrative expenses” in the consolidated statements of operations.
Quanta is subject to concentrations of credit risk related primarily to its cash and cash equivalents and its 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. Quanta grants credit under normal payment terms, generally without collateral, to its customers, which primarily include utilities, renewable energy developers, communications providers, industrial companies and energy delivery companies located primarily in the United States, Canada and Australia. One customer represented 13% of Quanta’s consolidated net receivable position as of March 31, 2022 and 11% of Quanta’s consolidated net receivable position as of December 31, 2021. Another customer, when combined with the net receivable position of a joint venture in which such customer owns a 50% interest, also represented 10% of Quanta’s consolidated net receivable position as of March 31, 2022 and 11% of Quanta’s consolidated net receivable position as of December 31, 2021. The same customer represented 11% of Quanta’s consolidated revenues for the three months ended March 31, 2022. The projects associated with these customers were primarily in Quanta’s Electric Power Infrastructure Solutions and Renewable Energy Infrastructure Solutions segments and are the same customers on the two large transmission projects in Canada described above. No customers represented 10% or more of Quanta’s consolidated revenues for the three months ended March 31, 2021.
Certain contracts allow customers to withhold a small percentage of billings pursuant to retainage provisions, and such amounts are generally due upon completion of the contract and acceptance of the project by the customer. Based on Quanta’s experience in recent years, the majority of these retainage balances are expected to be collected within approximately one year. Retainage balances with expected settlement dates within one year of March 31, 2022 and December 31, 2021 were $353.6 million and $406.7 million, which are included in “Accounts receivable.” Retainage balances with expected settlement dates beyond one year were $108.4 million and $93.9 million and are included in “Other assets, net.”
Quanta recognizes unbilled receivables for non-fixed price contracts within “Accounts receivable” in certain circumstances, such as when revenues have been earned and recorded but the amount cannot be billed under the terms of the contract until a later date or when amounts arise from routine lags in billing (for example, work completed during one month but not billed until the next month). These balances do not include revenues recognized for work performed under fixed-price contracts, as these amounts are recorded as “Contract assets.” As of March 31, 2022 and December 31, 2021, unbilled receivables included in “Accounts receivable” were $792.2 million and $679.0 million. The increase in unbilled receivables was primarily due to the ramp up of work and certain delays in billing related to certain large customers. Quanta also recognizes unearned revenues for non-fixed price contracts when cash is received prior to recognizing revenues for the related performance obligation. Unearned revenues, which are included in “Accounts payable and accrued expenses,” were $47.2 million and $51.8 million as of March 31, 2022 and December 31, 2021.