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OFFON

QUANTA SERVICES, INC.

(PWR)
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QUANTA SERVICES, INC. Management's Discussion and Analysis of Financial Condition and Results of Operations. (form 10-Q)

11/04/2021 | 04:06pm EST
The following discussion and analysis of the financial condition and results of
operations of Quanta Services, Inc. (together with its subsidiaries, Quanta, we,
us or our) should be read in conjunction with our condensed consolidated
financial statements and related notes included elsewhere in this Quarterly
Report and with our 2020 Annual Report, which was filed with the SEC on March 1,
2021 and is available on the SEC'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 Cautionary Statement About
Forward-Looking Statements and Information above, in Item 1A. Risk Factors of
Part II of this Quarterly Report and in Item 1A. Risk Factors of Part I of our
2020 Annual Report.
Overview
We are a leading provider of specialty contracting services, delivering
comprehensive infrastructure solutions for the electric and gas utility,
renewable energy, communications, pipeline and energy industries in the 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, engineering, new
construction, upgrade and repair and maintenance of infrastructure within each
of the industries we serve, such as electric power transmission and distribution
networks; substation facilities; wind and solar energy generation and battery
storage facilities; communications and cable multi-system operator networks; gas
utility systems; and pipeline transmission systems and facilities. 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 new construction contracts.
We report our results under two reportable segments: (1) Electric Power
Infrastructure Solutions and (2) Underground Utility and Infrastructure
Solutions. This structure is generally focused on broad end-user markets for our
services. Included within the Electric Power Infrastructure Solutions segment
are the results related to our communications infrastructure services.
Current Quarter Financial Results and Significant Operational Trends and Events
Key financial results for the three months ended September 30, 2021 included:
•Consolidated revenues increased 11.0%, or $333.1 million, to $3.35 billion as
compared to consolidated revenues of $3.02 billion for the three months ended
September 30, 2020;
•Operating income increased 2.4%, or $5.9 million, to $248.1 million as compared
to $242.2 million for the three months ended September 30, 2020;
•Net income attributable to common stock increased 7.0%, or $11.5 million, to
$174.4 million as compared to $162.9 million for the three months ended
September 30, 2020;
•Diluted earnings per share increased 7.1%, or $0.08, to $1.21 as compared to
$1.13 for the three months ended September 30, 2020;
•EBITDA (a non-GAAP financial measure) increased 5.8%, or $18.8 million, to
$340.3 million, as compared to $321.6 million for the three months ended
September 30, 2020, and adjusted EBITDA (a non-GAAP financial measure) increased
3.8%, or $13.6 million, to $366.9 million, as compared to $353.3 million for the
three months ended September 30, 2020;
•Net cash provided by operating activities decreased by $97.0 million to $17.9
million, as compared to net cash provided by operating activities of $114.9
million for the three months ended September 30, 2020;
•Remaining performance obligations increased 9.6%, or $382.9 million, to $4.37
billion as of September 30, 2021 as compared to $3.99 billion as of December 31,
2020; and
•Total backlog (a non-GAAP financial measure) increased 12.5%, or $1.89 billion,
to $17.02 billion as of September 30, 2021, as compared to $15.13 billion as of
December 31, 2020.
For a reconciliation of EBITDA and adjusted EBITDA to net income attributable to
common stock, the most comparable GAAP financial measure, and a reconciliation
of backlog to remaining performance obligations, the most comparable GAAP
financial measure, see Non-GAAP Financial Measures below.
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As described below, during the three months ended September 30, 2021, our
results reflected certain significant operational trends and events as compared
to the three months ended September 30, 2020.
Electric Power Infrastructure Solutions Segment
•Revenues increased by 10.5% to $2.33 billion, as compared to $2.11 billion.
•Operating income increased by 7.4% to $288.3 million, as compared to $268.4
million, and operating income as a percentage of revenues decreased to 12.4%, as
compared to 12.7%.
•Revenues increased primarily due to continued favorable dynamics across our
core utility market and increased demand for our electric power services, as
well as approximately $55 million of revenues from acquired businesses, $27
million in incremental emergency restoration services revenues and a $15 million
positive impact related to more favorable foreign currency exchange rates,
primarily the Canadian dollar and U.S. dollar exchange rate.
•Operating income increased primarily due to increased revenues and operating
income as a percentage of revenues decreased due to normal project variability
and higher general and administrative expenses during the three months ended
September 30, 2021 as compared to lower than normal levels for the three months
ended September 30, 2020.
Underground Utility and Infrastructure Solutions Segment
•Revenues increased by 12.3% to $1.02 billion, as compared to $912.5 million.
•Operating income decreased by 10.6% to $68.2 million, as compared to $76.2
million, and operating income as a percentage of revenues decreased to 6.7%, as
compared to 8.4%.
•Revenues increased primarily due to increased revenues from gas distribution
and industrial services and a $10 million increase in revenues attributable to
acquired businesses.
•Operating income and operating income as a percentage of revenues decreased in
the three months ended September 30, 2021 primarily due to adjustments on
certain large pipeline projects that favorably impacted the three months ended
September 30, 2020, which were associated with the recognition of previously
deferred milestone payments and reduced contingencies due to a reduction in the
scope of work on a project that is now complete, as well as the completion of
certain other projects earlier than anticipated.
See Business Environment, Results of Operations and Liquidity and Capital
Resources below for additional information and discussion related to
consolidated and segment results.
Recent Significant Acquisition
On October 13, 2021, we completed the acquisition of Blattner, a large
utility-scale renewable energy infrastructure solutions provider that is located
in and primarily operates in North America. Consideration for this transaction
consisted of approximately $2.29 billion paid in cash on the date of acquisition
and 3.3 million shares of Quanta common stock, which had a fair value of $345.4
million as of the date of the acquisition. The final amount of consideration for
this acquisition remains subject to certain post-closing adjustments, including
with respect to net working capital. Additionally, pursuant to the terms of the
agreement and plan of merger, the former Blattner owners are eligible for the
potential payment of up to $300 million of contingent consideration, payable to
the extent the acquired business achieves certain financial performance targets
over a three-year period beginning in January 2022. Blattner's results will be
included in our consolidated financial statements beginning on the acquisition
date. We are in the process of performing procedures to determine the fair value
of assets acquired and liabilities assumed related to the acquisition of
Blattner, including the fair value assessment of contingent consideration, and
will include the preliminary purchase price allocation in our Annual Report on
Form 10-K for the year ended December 31, 2021.
Business Environment
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 Cautionary Statement About
Forward-Looking Statements and Information, Item 1A. Risk Factors of Part II of
this Quarterly Report and Item 1A. Risk Factors of Part I of our 2020 Annual
Report, 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 Solutions. 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. As the overall
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electrification trends in North America support a transition toward a
carbon-neutral economy, utilities are accommodating a changing fuel generation
mix that is moving toward more sustainable sources such as renewables (e.g.,
wind, solar and battery storage) and natural gas and replacing aging
infrastructure to support long-term economic growth. We believe this trend will
generate significant demand in the near- and longer-term for our services,
including the development and construction of generation facilities powered by
renewable energy sources (e.g., wind and solar) and certain traditional energy
sources (e.g., natural gas), the development and construction of related
infrastructure (e.g., battery storage), and the modernization of existing
assets. While the demand for certain renewable energy services is expected to
fluctuate in the short term due to, among other things, supply chain and other
logistical difficulties that could delay projects, production tax credits and
sourcing restrictions on materials necessary for certain projects (e.g., solar
panels), we believe our recent acquisition of Blattner, together with the
renewable energy and related services performed by our other operating
companies, positions us to capitalize on the longer term growth trends with
respect to the development of wind, solar and storage capacity infrastructure.
Furthermore, while the COVID-19 pandemic resulted in a short-term overall
decline in electricity usage in 2020, primarily related to commercial and
industrial users, demand has recovered and continues to increase in 2021, and we
expect demand for electricity in North 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. To the extent that
electrification trends increase, including through electric vehicle (EV)
adoption, demand for electricity could be greater than currently anticipated. To
accommodate this growth, we expect continued demand for new or expanded
transmission and substation infrastructure to reliably 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.
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 EVs. A number
of utilities have and continue to implement system upgrades or hardening
programs in response to recurring severe weather events, such as hurricanes and
wildfires, and, in particular, there are significant system resiliency
initiatives in California and other regions in the western U.S. underway that
are designed to prevent and manage the impact of wildfires. These resiliency
initiatives provide additional opportunities for our services; however, they
also increase our potential exposure to significant liabilities attributable to
those events. Utilities are also executing significant initiatives to
underground critical infrastructure, including additional underground
transmission and distribution initiatives by utilities in California,
underground electric transmission projects in the northeast, underground
distribution circuits along the coastlines and underground transmission lines
for offshore wind generation projects.
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 in North 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 commercial
applications. Additionally, the Federal Communications Commission has enacted
the Rural Digital Opportunity Fund for the purpose of deploying billions of
dollars in federal funds for high speed fixed broadband service to underserved
rural homes and small businesses. As a result of these industry trends, we
believe there will be meaningful demand for our engineering and construction
services. We also reoriented our communications service offerings to
strategically focus on the North American market, substantially completing the
exit of our Latin American communications operations during 2020, which we
anticipate will result in improved profitability within our communications
services operations.
Underground Utility and Infrastructure Solutions. For several years we have
focused on increasing our underground utility and infrastructure solutions
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
service offerings include gas utility services, pipeline integrity services and
downstream industrial services. We believe focusing on these services helps to
offset the seasonality and cyclicality of our larger pipeline project business,
and although our strategic focus on larger pipeline projects has decreased, we
continue to pursue project opportunities to the extent they satisfy our margin
and risk profiles and support the needs of our customers. Though we experienced
short-term disruptions in 2020 and to a lesser extent to date in 2021 due to the
COVID-19 pandemic, we believe demand for our gas utility distribution services
will increase as a result of customer desire to upgrade and replace aging
infrastructure and increasing regulatory requirements. In particular, natural
gas utilities have implemented multi-decade modernization programs to replace
aging cast iron, bare steel, gas and plastic 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 and stringency of pipeline integrity testing requirements that
require our customers to test, inspect, repair, maintain and replace pipeline
infrastructure to ensure that it operates in a safe, reliable and
environmentally conscious manner. Further, permitting challenges associated with
construction of new pipelines can make
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existing pipeline infrastructure more valuable, motivating owners to extend the
useful life of existing pipeline assets through integrity initiatives.
Broader challenges in the energy market, which have been compounded by the
COVID-19 pandemic, have materially impacted, and are expected to continue to
materially impact, our Underground Utility and Infrastructure Solutions segment.
In particular, demand for our midstream and industrial services operations has
declined as customers reduced and deferred regularly scheduled maintenance and
capital projects due to lack of demand for refined products. Our services to
downstream industrial energy customers, which are primarily located along the
Gulf Coast of the United States and in other select markets in North America,
have been negatively impacted by the challenging overall energy market
conditions that resulted in an overall decline in global demand for refined
products during 2020 and 2021. While demand for our critical path catalyst
services has remained solid, in the second half of 2020 customers began reducing
onsite activity for our other services and have deferred maintenance and certain
turnaround projects to late 2021 and 2022. Despite the current market
conditions, we believe there are significant long-term opportunities for these
services, including our high-pressure and critical-path turnaround services, as
well as our capabilities with respect to instrumentation and electrical
services, piping, fabrication and storage tanks services, and other industrial
services, and that processing facilities located along the U.S. Gulf Coast
region should have certain long-term strategic advantages due to their proximity
to affordable hydrocarbon resources. However, these processing facilities can
also be negatively impacted for short-term periods due to severe weather events,
such as hurricanes, tropical storms and floods.
Furthermore, the broader oil and gas industry is highly cyclical and subject to
price and production volume volatility, which can impact demand for our
services. For example, certain of our end markets where the price of oil is
influential, such as Australia, the Canadian Oil Sands and certain oil-driven
U.S. shale formations, have been materially impacted by challenged energy market
conditions. We have also entered the late-stage of the current construction
cycle of larger pipeline projects, while the anticipated next cycle of larger
projects could be impacted by various factors, including, among other things,
permitting delays and worksite access limitations related to environmental
regulations. As a result of these dynamics, our revenues related to larger
pipeline projects have declined significantly over the last few years. This
dynamic is supportive of our increased focus on specialty services and
industries that 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.
Lastly, we believe there are also longer-term opportunities that may arise in
this segment. For example, we believe natural gas, due to its expected abundant
supply and attractive price over the long-term, will remain a fuel of choice for
both primary power generation and backup power generation for renewable power
plants in North America, which we believe could position North America as a
leading competitor in the global LNG export market. In certain areas, the
existing pipeline system infrastructure is insufficient to support any future
LNG export facilities, which could provide additional opportunities for our
business. We also believe that customers in this segment may implement
strategies to reduce carbon emissions produced from their operations, which
could provide incremental opportunities for our services, including developing
infrastructure for blending hydrogen into natural gas flow to customers, further
investment in renewable energy generation opportunities and carbon capture
projects that could include building or repurposing pipeline infrastructure.
While certain customers are in various stages of evaluating these types of
strategies, we expect that any meaningful opportunities would only arise in the
longer term.
COVID-19 Pandemic and Related Economic Impact. The effects of the COVID-19
pandemic continue to significantly impact global economies due to, among other
things, workforce and travel restrictions and supply chain, production and other
logistical disruptions. While we have continued to operate substantially all of
our activities as a provider of essential services, during the course of the
pandemic our operations and financial results have been adversely impacted by
reduced customer spending and demand for certain of our services (including as
described above), as well as governmental responses to the COVID-19 pandemic,
including shut-down orders and limitations on work site practices implemented by
governments, which have negatively impacted (i) our Canadian operations and
financial results during 2020 and to date in 2021; (ii) our Australian
operations and financial results during 2020 and to date in 2021; (iii) our
operations in certain major U.S. metropolitan markets that were meaningfully
impacted by the pandemic during the first and second quarters of 2020; and (iv)
our Latin American operations during 2020.
Additionally, vaccination and testing requirements related to COVID-19 could
impact our business in the future. In September 2021, the Occupational Safety
and Health Administration was directed to implement an emergency temporary
standard requiring employers with 100 or more employees to ensure their
workforce is fully vaccinated or to require unvaccinated workers to produce a
negative COVID-19 test result on at least a weekly basis. This standard has been
issued and is expected to be published on November 5, 2021 and fully applicable
by January 2022. The standard will apply to us and the costs related to
mandatory testing could represent a substantial expense to us. Additionally, in
September 2021, President Biden issued an executive order that requires federal
contractors and subcontractors to mandate their employees be fully vaccinated
against COVID-19 by January 2022. Some of our operating companies, as well as
many of our customers, are considered federal contractors, or are performing
work under contracts covered by the executive order. As such, employees of those
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operating companies may need to be fully vaccinated to perform related work. In
addition, many of our customers have established, or we believe are in the
process of establishing, vaccination requirements that would apply to our
employees performing work on their premises, or in proximity of their employees.
The implementation of these vaccination and testing requirements could have a
material adverse effect on our business, financial condition, results of
operations or cash flows in the event that, among other things, a significant
portion of our workforce does not choose to become vaccinated, the costs related
to mandatory testing for unvaccinated employees are significant, the time away
from work for testing is disruptive to our operations, or our unvaccinated
employees are unable to perform work for customers that require vaccination.
We also continue to monitor supply chain and other logistical challenges with
respect to certain materials and equipment necessary for the performance of our
business, including, among other things, availability and costs related to
steel, materials for renewable energy projects, new vehicles for our fleet (both
on-road and specialty vehicles) and vehicle parts (e.g., tires). For example, we
believe some participants in the renewable energy market are experiencing supply
chain challenges, resulting in delays and shortages of materials necessary for
the construction of renewable projects in the near term. While we believe many
of our renewable energy customers are generally better equipped to manage
near-term supply chain disruptions than smaller competitors, these challenges
could impact our ability to perform renewable services during this period.
Additionally, based on, among other things, the significant worldwide shortage
of semiconductors, vehicle manufacturers are experiencing production delays with
respect to vehicles we utilize in our operations. While we believe we have taken
steps to secure delivery of such vehicles in the near term and do not anticipate
any significant disruptions with respect to our fleet, to the extent the
production issues become worse than expected or become longer-term in nature,
our operations could be negatively impacted.
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 variable, and we expect continued operational challenges in the
remainder of 2021 and into 2022 for portions of our operations. The future
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 will depend on future developments, including, among
others, the duration and severity of the pandemic; the actions taken by
governmental authorities, customers, suppliers and other third parties in
response to the pandemic and the consequences of those actions; our workforce
availability; and the timing and extent to which normal economic and operating
conditions resume and continue.
Regulatory Challenges and Opportunities. The regulatory environment creates both
challenges and opportunities for our business, and in recent years electric
power infrastructure solutions and underground utility and infrastructure
solutions margins have been impacted by regulatory and permitting delays in
certain periods, 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 increased as the COVID-19 pandemic has impacted
regulatory agency operations. For example, recent changes to the U.S. Army Corps
of Engineers Clean Water Act Section 404 Nationwide Permit 12 and related
executive orders have impacted certain projects and resulted in increased costs
and project interruptions and delays as customers are increasingly forced to
seek additional or revised individual permits from the U.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 could
potentially accelerate construction for transmission projects, and state and
federal reliability standards are creating incentives for system investment and
maintenance. Additionally, as described above, we consider renewable energy,
including solar and wind generation facilities, to be an ongoing opportunity;
however, policy and economic incentives designed to support and encourage such
projects can create variability of project timing.
Labor Resource Availability and Cost. We continue to address the longer-term
need for additional labor resources in our markets, as 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 such
a degree that demand for labor resources will outpace supply. Furthermore, the
increased demand for our services based on the dynamics described above can
create shortages of qualified labor in our markets. Our ability to capitalize on
available opportunities is limited by our ability to employ, train and retain
the necessary skilled personnel, and therefore 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.
Additionally, we continue to monitor our labor markets and expect labor costs to
increase based on increased demand for our services and, to a lesser extent, the
recent escalated inflationary environment in the United States. Our labor costs
are passed through in certain of our contracts, and the portion of our workforce
that is represented by labor unions typically operate under
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multi-year collective bargaining agreements, which provide some visibility into
future labor costs. While we do not currently believe this environment will
present a material risk to our profitability and would expect to be able to
adjust contract pricing with certain customers to the extent wages and other
labor costs increase, whether due to renegotiation of collective bargaining
agreements or market conditions, meaningful increases in our labor costs could
have a material adverse effect on our business, financial condition, results of
operations or cash flows to the extent we cannot do so.
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 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 Cautionary
Statement About Forward-Looking Statements and Information above, Item 1A. Risk
Factors of Part II of this Quarterly Report and Item 1A. Risk Factors of Part I
of our 2020 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 our U.S.
operations, but seasonality for our international operations may differ. For
example, revenues in Canada 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. Additionally, the
COVID-19 pandemic affected typical seasonality during 2020, and our typical
seasonality could also be impacted during the remainder of 2021 due to continued
uncertainty regarding the future impact of the 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, post-wildfire
floods and debris flows, 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
Overview - Business Environment above for further discussion regarding the
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.
Demand for services. We perform the majority of our services under existing
contracts, including master service agreements (MSAs) and similar agreements
pursuant to which our customers are not committed to specific volumes of our
services. Therefore our volume of business can be positively or negatively
affected by fluctuations in the amount of work our customers assign us in a
given period, which may vary by geographic region. For example, to the extent
our customers accelerate grid modernization or hardening programs or face
deadlines to meet regulatory requirements for rehabilitation, reliability or
efficiency, our volume of work could increase under existing agreements. Also,
as described above in Overview - Business Environment, we have experienced
reductions in demand for certain services as a result of the COVID-19 pandemic,
as well as the currently challenged energy market. 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, their capital
spending and their access to capital; economic and political conditions on a
regional, national or global scale, including interest rates, governmental
regulations affecting the sourcing of materials and equipment, and other changes
in U.S. and global trade relationships; and project deferrals and cancellations.
Revenue mix and impact on margins. 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. Our larger or more complex
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projects typically include, among others, electric transmission projects with
higher voltage capacities; pipeline projects with larger-diameter throughput
capacities; large-scale renewable generation projects, which we expect to
increase subsequent to our acquisition of Blattner; and projects with increased
engineering, design or construction complexities, more difficult terrain or
geographical requirements, or longer distance requirements. These projects
typically yield opportunities for higher margins than our recurring services
under MSAs described above, as we assume a greater degree of performance risk
and there is greater utilization of our resources for longer construction
timeframes. However, larger projects are subject to additional risk of
regulatory delay and cyclicality. For example, our revenues with respect to
larger electric transmission and pipeline projects have declined significantly
in recent years, and a significant number of larger projects have been delayed
or cancelled during that same period. 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. 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 greater number of smaller projects versus continuous production on fewer
larger projects. As a result, 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 (including in connection with difficult geographic characteristics);
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. Moreover, we currently generate a significant
portion of our revenues under fixed price contracts, and fixed price contracts
are more common in connection with our larger and more complex projects that
typically involve greater performance risk. Furthermore, subsequent to our
acquisition of Blattner, we expect the portion of our revenues generated under
fixed price contracts to increase significantly. Under these contracts, we
assume risks related to project estimates and execution, and project revenues
can vary, sometimes substantially, from our original projections due to a
variety of factors, including the additional complexity, timing uncertainty or
extended bidding, regulatory and permitting processes associated with these
projects. These variations can result in a reduction in expected profit or the
incurrence of losses on a project or the issuance of change orders or assertion
of contract claims against customers. See Revenue Recognition - Contract
Estimates in Note 2 of the Notes to Condensed Consolidated Financial Statements
in Item 1. Financial Statements of Part I of this Quarterly Report for further
information regarding changes in estimated contract revenues and/or project
costs, including any significant project gains or losses in connection with
fixed price contracts that have impacted our results, and determinations with
respect to the recognition of change orders and claims as contract price
adjustments.
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, including contracts for projects
where we provide engineering, procurement and construction (EPC) services, 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, as our markup on
materials is generally lower than our markup on labor costs, and in a given
period an increase in the percentage of work with greater materials procurement
requirements may decrease our overall margins. Furthermore, fluctuations in the
price or availability of materials and equipment we or our customers procure may
impact our margins or cause delays on projects, including as a result of
inflation; supply chain and other logistical challenges resulting from the
COVID-19 pandemic or otherwise; governmental regulations affecting the sourcing
of materials and equipment and other changes in U.S. or global trade
relationships; or other economic or political conditions.
Foreign currency risk. Our financial performance is reported on a U.S.
dollar-denominated basis but is partially subject to fluctuations in foreign
currency exchange rates. Fluctuations in exchange rates relative to the U.S.
dollar, primarily Canadian dollars and Australian dollars, can materially impact
our results of operations and impact comparability between periods.
                                       49
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Results of Operations
The results of acquired businesses have been included in the following results
of operations beginning on their respective acquisition dates. 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):
Consolidated Results
Three months ended September 30, 2021 compared to the three months ended
September 30, 2020
                                                               Three Months Ended September 30,                                       Change
                                                          2021                                    2020                          $                 %
Revenues                                  $      3,353,278            100.0  %       $ 3,020,161            100.0  %       $ 333,117             11.0  %
Cost of services (including
depreciation)                                    2,818,602             84.1            2,512,647             83.2            305,955             12.2  %
Gross profit                                       534,676             15.9              507,514             16.8             27,162              5.4  %
Equity in earnings of integral
unconsolidated affiliates                           10,232              0.3                5,120              0.2              5,112             99.8  %
Selling, general and administrative
expenses                                          (274,846)            (8.2)            (250,654)            (8.3)           (24,192)             9.7  %
Amortization of intangible assets                  (22,772)            (0.6)             (19,687)            (0.7)            (3,085)            

15.7 %


Change in fair value of contingent
consideration liabilities                              787                -                  (78)               -                865                   *
Operating income                                   248,077              7.4              242,215              8.0              5,862              2.4  %
Interest expense                                   (17,259)            (0.5)             (11,049)            (0.4)            (6,210)            56.2  %
Interest income                                         72                -                   80                -                 (8)           (10.0) %
Other income (expense), net                          6,089              0.2                2,931              0.2              3,158            107.7  %
Income before income taxes                         236,979              7.1              234,177              7.8              2,802              1.2  %
Provision for income taxes                          61,581              1.9               70,477              2.4             (8,896)           (12.6) %

Net income                                         175,398              5.2              163,700              5.4             11,698              7.1  %
Less: Net income attributable to
non-controlling interests                            1,033                -                  787                -                246             31.3  %
Net income attributable to common
stock                                     $        174,365              5.2  %       $   162,913              5.4  %       $  11,452              7.0  %


* The percentage change is not meaningful.
Revenues. Revenues increased primarily due to a $220.8 million increase in
revenues from our Electric Power Infrastructure Solutions segment as a result of
strong demand for our electric power services and a $112.3 million increase in
revenues from our Underground Utility and Infrastructure Solutions segment as a
result of increased demand for gas distribution and industrial services. See
Segment Results below for additional information and discussion related to
segment revenues.
Gross profit. Gross profit increased due to the increase in revenues and
improved utilization and fixed cost absorption in both our Electric Power
Infrastructure Solutions segment and Underground Utility and Infrastructure
Solutions segment. 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 ended September 30, 2021 primarily relates to our portion of
amounts earned by LUMA Energy, LLC (LUMA).
Selling, general and administrative expenses. Selling, general and
administrative expenses as a percentage of revenues decreased to 8.2% for the
three months ended September 30, 2021, as compared to 8.3% for the three months
ended September 30, 2020. The increase in selling, general and administrative
expenses was partially attributable to a $15.2 million increase in compensation
expense, which was primarily due to increased personnel to support business
growth and increased incentive compensation expense as a result of higher levels
of operating performance, and a $5.0 million increase in travel and related
expenses, which were below historical levels in 2020 as a result of the COVID-19
pandemic. These increased expenses were partially offset by a $3.3 million
decrease in expense related to deferred compensation liabilities. The changes in
fair market value of deferred compensation liabilities were offset by
corresponding changes in the fair market value of assets associated with the
deferred compensation plan, and these corresponding changes are included in
other income (expense), net.
Amortization of intangible assets. The increase was primarily due to
amortization of intangible assets associated with recently acquired businesses,
partially offset by reduced amortization expense from older acquired intangible
assets, as certain of those assets became fully amortized.
                                       50
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Change in fair value of contingent consideration liabilities. Contingent
consideration liabilities are payable in the event certain performance
objectives are achieved by an acquired business during designated
post-acquisition periods. The change in fair value associated with these
liabilities was primarily due to changes in performance in post-acquisition
measurement 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.
Interest expense. Interest expense increased for the three months ended
September 30, 2021 primarily due to higher levels of debt and a higher weighted
average interest rate as compared to the three months ended September 30, 2020.
Other income (expense), net. The net other income for the three months ended
September 30, 2021 included $4.9 million related to foreign currency exchange
gains, as compared to $1.5 million related to foreign currency exchange gains
for the three months ended September 30, 2020. Also included in other income
(expense), net for the three months ended September 30, 2021 was $0.2 million of
expense associated with our deferred compensation plan, as compared to $2.8
million of income during the three months ended September 30, 2020. The amounts
associated with the deferred compensation plan were largely offset by
corresponding changes in the fair market value of the liabilities associated
with our deferred compensation plan, which are recorded in selling, general, and
administrative expenses, as discussed above.
Provision for income taxes. The effective tax rates for the three months ended
September 30, 2021 and 2020 were 26.0% and 30.1%. The lower rate for the three
months ended September 30, 2021 was primarily due to changes in the mix of
earnings among various taxing jurisdictions.
Other comprehensive income (loss). Other comprehensive income (loss) results
from translation of the balance sheets of our foreign operating units, which are
primarily located in Canada and Australia and have functional currencies other
than the U.S. dollar, and therefore are affected by the strengthening or
weakening of the U.S. dollar against such currencies. The loss in the three
months ended September 30, 2021 was primarily impacted by the strengthening of
the U.S. dollar against the Canadian and Australian dollars as of September 30,
2021 when compared to June 30, 2021. The gain in the three months ended
September 30, 2020 was primarily impacted by the weakening of the U.S. dollar
against the Canadian and Australian dollars as of September 30, 2020 when
compared to June 30, 2020.
                                       51
--------------------------------------------------------------------------------
Nine months ended September 30, 2021 compared to the nine months ended
September 30, 2020
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):
                                                         Nine Months Ended September 30,                           Change
                                                                                         2021                       2020                           $                  %
Revenues                                                                                               $ 9,056,675            100.0  %       $ 8,290,487            100.0  %       $ 766,188               9.2  %
Cost of services (including
depreciation)                                                                                            7,701,398             85.0            7,095,513             85.6            605,885               8.5  %
Gross profit                                                                                             1,355,277             15.0            1,194,974             14.4            160,303              13.4  %
Equity in earnings of integral
unconsolidated affiliates                                                                                   22,865              0.3                6,165              0.1             16,700             270.9  %
Selling, general and
administrative expenses                                                                                   (788,308)            (8.7)            (709,299)            (8.6)           (79,009)             11.1  %
Amortization of intangible assets                                                                          (65,418)            (0.8)             (55,374)            (0.6)           (10,044)             18.1  %
Asset impairment charges                                                                                    (2,319)               -                    -                -             (2,319)                   *
Change in fair value of contingent
consideration liabilities                                                                                    1,360                -                 (598)               -              1,958                    *
Operating income                                                                                           523,457              5.8              435,868              5.3             87,589              20.1  %
Interest expense                                                                                           (42,843)            (0.5)             (33,709)            (0.4)            (9,134)             27.1  %
Interest income                                                                                              3,098                -                1,114                -              1,984             178.1  %
Other income (expense), net                                                                                 18,232              0.2               (3,649)            (0.1)            21,881                    *
Income before income taxes                                                                                 501,944              5.5              399,624              4.8            102,320              25.6  %
Provision for income taxes                                                                                 116,256              1.2              119,626              1.4             (3,370)             (2.8) %

Net income                                                                                                 385,688              4.3              279,998              3.4            105,690              37.7  %
Less: Net income attributable to
non-controlling interests                                                                                    4,529              0.1                4,453              0.1                 76               1.7  %
Net income attributable to common
stock                                                                                                  $   381,159              4.2  %       $   275,545              3.3  %       $ 105,614              38.3  %


* The percentage change is not meaningful.
Revenues. The increase in revenues was primarily due to increased revenues of
$868.8 million from our Electric Power Infrastructure Solutions segment due to
strong demand for our electric power services, partially offset by decreased
revenues of $102.6 million from our Underground Utility and Infrastructure
Solutions segment, primarily due to a reduction in services related to large
pipeline transmission projects and the challenged energy market conditions,
which have been exacerbated by the COVID-19 pandemic. This reduction in services
in our Underground Utility and Infrastructure Solutions segment was partially
offset by an increase in demand for gas distribution and industrial services
during the nine months ended September 30, 2021. See Segment Results below for
additional information and discussion related to segment revenues.
Gross profit. Gross profit increased due to an increase in revenues and improved
utilization and fixed cost absorption from our Electric Power Infrastructure
Solutions segment, partially offset by reduced revenues and decreased
utilization and fixed cost absorption from our Underground Utility and
Infrastructure Solutions segment. 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
nine months ended September 30, 2021 primarily relates to our portion of amounts
earned by LUMA.
Selling, general and administrative expenses. Selling, general and
administrative expenses as a percentage of revenues increased to 8.7% for the
nine months ended September 30, 2021 from 8.6% for the nine months ended
September 30, 2020. The increase in selling, general and administrative expenses
was attributable to a $26.7 million increase in compensation expense, largely
associated with increased incentive and non-cash stock compensation expense as a
result of higher levels of operating performance and an increase in salaries and
benefits due to increased personnel to support business growth; a $21.9 million
increase in expenses associated with acquired businesses; and a $21.3 million
increase in provision for credit loss, primarily related to the recognition of
the provision for credit loss related to a receivable from a customer that
declared bankruptcy in July 2021 and its affiliate, which is described further
in Concentrations of Credit Risk within Note 2 of the Notes to Condensed
Consolidated Financial Statements in Item 1. Financial Statements of Part I of
this Quarterly Report. Also contributing to the increase were a $4.8 million
increase in travel and related expenses, which were below historical levels in
2020 as a result of the COVID-19 pandemic, and a $4.1 million increase in
expense related to deferred compensation liabilities. The fair market value
changes in deferred compensation liabilities were offset by changes in the fair
value of assets associated
                                       52
--------------------------------------------------------------------------------
with the deferred compensation plan, which are included in other income
(expense), net below. Partially offsetting these increases were $6.5 million of
incremental gains on sales of property and equipment.
Amortization of intangible assets. The increase was primarily due to
amortization of intangible assets associated with recently acquired businesses,
partially offset by reduced amortization expense associated with older acquired
intangible assets, as certain of these assets became fully amortized.
Asset impairment charges. During the nine months ended September 30, 2021, we
recognized a $2.3 million asset impairment charge related to certain equipment
that was not utilized in our core operations and was subsequently sold in
October 2021.
Change in fair value of contingent consideration liabilities. Contingent
consideration liabilities are payable in the event certain performance
objectives are achieved by an acquired business during designated
post-acquisition periods. The change in fair value associated with these
liabilities was primarily due to changes in performance in post-acquisition
measurement 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.
Interest expense. Interest expense increased primarily due to higher levels of
outstanding debt and a higher weighted average interest rate during the nine
months ended September 30, 2021 compared to 2020.
Interest income. Interest income increased primarily due to interest received
related to a settlement with a customer.
Other income (expense), net. The net other income for the nine months ended
September 30, 2021 included $6.5 million related to foreign currency exchange
gains, as compared to $4.9 million of foreign currency exchange gains for the
nine months ended September 30, 2020. Also favorably impacting other income was
$5.3 million of income associated with our deferred compensation plan, as
compared to $1.9 million of income in 2020. This income related to the deferred
compensation plan was largely offset by corresponding changes in the fair market
value of the liabilities associated with our deferred compensation plan, which
are recorded in selling, general, and administrative expenses, as discussed
above. Also favorably impacting the nine months ended September 30, 2021 were a
$2.5 million benefit payment from a company-owned life insurance policy held in
connection with our deferred compensation plan and $1.9 million of equity in
earnings of non-integral unconsolidated affiliates. The net other expense for
the nine months ended September 30, 2020 also included a $9.3 million impairment
associated with an investment in a water and gas pipeline infrastructure
contractor located in Australia that is accounted for using the cost method of
accounting and $8.7 million of impairments associated with two non-integral
equity investments that were negatively impacted by the decline in demand for
refined petroleum products, which were partially offset by an $8.9 million legal
settlement received.
Provision for income taxes. The effective tax rates for the nine months ended
September 30, 2021 and 2020 were 23.2% and 29.9%. The lower rate for the nine
months ended September 30, 2021 was primarily due to the recognition of an $19.7
million tax benefit that resulted from equity incentive awards vesting at a
higher fair market value than their grant date fair market value, as compared to
the recognition of $2.6 million associated with this tax benefit for the nine
months ended September 30, 2020, which was due to a smaller difference between
the vest date fair market value and grant date fair market value of vested
equity incentive awards.
Other comprehensive income (loss). Other comprehensive income (loss) results
from translation of the balance sheets of our foreign operating units, which are
primarily located in Canada and Australia and have functional currencies other
than the U.S. dollar, and therefore are affected by the strengthening or
weakening of the U.S. dollar against such currencies. The loss in the nine
months ended September 30, 2021 was impacted primarily by the strengthening of
the U.S. dollar against the Australian dollar as of September 30, 2021 when
compared to December 31, 2020. The loss in the nine months ended September 30,
2020 was impacted by the strengthening of the U.S. dollar against both the
Canadian and Australian dollars as of September 30, 2020 when compared to
December 31, 2019.
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
                                       53

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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.
Three months ended September 30, 2021 compared to the three months ended
September 30, 2020
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.

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