QUANTA SERVICES, INC. 
The following discussion and analysis of the financial condition and results of operations ofQuanta 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 theSEC onMarch 1, 2021 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 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 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, 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 endedSeptember 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 endedSeptember 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 endedSeptember 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 endedSeptember 30, 2020 ; •Diluted earnings per share increased 7.1%, or$0.08 , to$1.21 as compared to$1.13 for the three months endedSeptember 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 endedSeptember 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 endedSeptember 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 endedSeptember 30, 2020 ; •Remaining performance obligations increased 9.6%, or$382.9 million , to$4.37 billion as ofSeptember 30, 2021 as compared to$3.99 billion as ofDecember 31, 2020 ; and •Total backlog (a non-GAAP financial measure) increased 12.5%, or$1.89 billion , to$17.02 billion as ofSeptember 30, 2021 , as compared to$15.13 billion as ofDecember 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. 43 -------------------------------------------------------------------------------- As described below, during the three months endedSeptember 30, 2021 , our results reflected certain significant operational trends and events as compared to the three months endedSeptember 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 andU.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 endedSeptember 30, 2021 as compared to lower than normal levels for the three months endedSeptember 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 endedSeptember 30, 2021 primarily due to adjustments on certain large pipeline projects that favorably impacted the three months endedSeptember 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 OnOctober 13, 2021 , we completed the acquisition of Blattner, a large utility-scale renewable energy infrastructure solutions provider that is located in and primarily operates inNorth 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 inJanuary 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 endedDecember 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 44 -------------------------------------------------------------------------------- electrification trends inNorth 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 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. 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 inCalifornia and other regions in the westernU.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 inCalifornia , 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 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 commercial applications. Additionally, theFederal Communications Commission has enacted theRural 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 45 -------------------------------------------------------------------------------- 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 theGulf Coast ofthe United States and in other select markets inNorth 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 theU.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 asAustralia , the Canadian Oil Sands and certain oil-drivenU.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 inNorth America , which we believe could positionNorth 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 majorU.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. InSeptember 2021 , theOccupational 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 onNovember 5, 2021 and fully applicable byJanuary 2022 . The standard will apply to us and the costs related to mandatory testing could represent a substantial expense to us. Additionally, inSeptember 2021 ,President Biden issued an executive order that requires federal contractors and subcontractors to mandate their employees be fully vaccinated against COVID-19 byJanuary 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 46 -------------------------------------------------------------------------------- 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 theU.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 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 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 inthe 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 47 -------------------------------------------------------------------------------- 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 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. 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 inU.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 48 -------------------------------------------------------------------------------- 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 inU.S. or global trade relationships; or other economic or political conditions. 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 dollars and Australian dollars, can materially impact our results of operations and impact comparability between periods. 49 -------------------------------------------------------------------------------- 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 endedSeptember 30, 2021 compared to the three months endedSeptember 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 ourElectric 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 endedSeptember 30, 2021 primarily relates to our portion of amounts earned byLUMA 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 endedSeptember 30, 2021 , as compared to 8.3% for the three months endedSeptember 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 -------------------------------------------------------------------------------- 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 endedSeptember 30, 2021 primarily due to higher levels of debt and a higher weighted average interest rate as compared to the three months endedSeptember 30, 2020 . Other income (expense), net. The net other income for the three months endedSeptember 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 endedSeptember 30, 2020 . Also included in other income (expense), net for the three months endedSeptember 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 endedSeptember 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 endedSeptember 30, 2021 and 2020 were 26.0% and 30.1%. The lower rate for the three months endedSeptember 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 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 three months endedSeptember 30, 2021 was primarily impacted by the strengthening of theU.S. dollar against the Canadian and Australian dollars as ofSeptember 30, 2021 when compared toJune 30, 2021 . The gain in the three months endedSeptember 30, 2020 was primarily impacted by the weakening of theU.S. dollar against the Canadian and Australian dollars as ofSeptember 30, 2020 when compared toJune 30, 2020 . 51 -------------------------------------------------------------------------------- Nine months endedSeptember 30, 2021 compared to the nine months endedSeptember 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 endedSeptember 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 endedSeptember 30, 2021 primarily relates to our portion of amounts earned byLUMA . Selling, general and administrative expenses. Selling, general and administrative expenses as a percentage of revenues increased to 8.7% for the nine months endedSeptember 30, 2021 from 8.6% for the nine months endedSeptember 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 inJuly 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 endedSeptember 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 inOctober 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 endedSeptember 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 endedSeptember 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 endedSeptember 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 endedSeptember 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 endedSeptember 30, 2020 also included a$9.3 million impairment associated with an investment in a water and gas pipeline infrastructure contractor located inAustralia 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 endedSeptember 30, 2021 and 2020 were 23.2% and 29.9%. The lower rate for the nine months endedSeptember 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 endedSeptember 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 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 nine months endedSeptember 30, 2021 was impacted primarily by the strengthening of theU.S. dollar against the Australian dollar as ofSeptember 30, 2021 when compared toDecember 31, 2020 . The loss in the nine months endedSeptember 30, 2020 was impacted by the strengthening of theU.S. dollar against both the Canadian and Australian dollars as ofSeptember 30, 2020 when compared toDecember 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 endedSeptember 30, 2021 compared to the three months endedSeptember 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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