QUANTA SERVICES, INC. General
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 consolidated financial statements and related notes in Item 8. Financial Statements and Supplementary Data of this Annual Report. 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 and in Item 1A. Risk Factors of this Annual Report. The discussion summarizing the significant factors which affected the results of operations and financial condition for the year endedDecember 31, 2021 , including the changes in results of operations between the years endedDecember 31, 2021 and 2020, can be found in Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations of our Annual Report on Form 10-K for the year endedDecember 31, 2021 , which was filed with theSEC onFebruary 25, 2022 . Overview
Overall, our 2022 results reflect increased demand for our services, as revenue and operating income increased in all our segments as compared to 2021.
With respect to our Electric Power Infrastructure Services segment, utilities are continuing to invest significant capital in their electric power delivery systems through multi-year grid modernization and reliability programs, as well as with respect to system upgrades and hardening programs in response to recurring severe weather events. We have also experienced high demand for new and expanded transmission, substation and distribution infrastructure needed to reliably transport power. With respect to our Renewable Energy Infrastructure Solutions segment, the transition to a reduced-carbon economy is continuing to drive demand for renewable generation and related infrastructure (e.g., high-voltage electric transmission and substation infrastructure), as well as interconnection services necessary to connect and transmit renewable-generated electricity to existing electric power delivery systems. Our acquisition ofBlattner in the fourth quarter of 2021 had a significant incremental impact on our ability to perform these services during 2022. Despite these positive longer-term trends, certain of our customers experienced supply chain challenges during 2022 that resulted in delays and shortages of, and increased costs for, materials necessary for certain projects, particularly sourcing restrictions related to solar panels necessary for the utility scale solar industry. With respect to our Underground Utility and Infrastructure Solutions segment, in 2022 we continued to experience strong demand for our services focused on utility spending, in particular our gas distribution services to natural gas utilities that are implementing modernization programs, and our downstream industrial services, as these customers continued to move forward with certain maintenance and capital spending that was deferred during the course of the COVID-19 pandemic. Our revenues with respect to larger pipeline services have also fluctuated in recent years, and we had a significant increase in larger pipeline projects inCanada in 2022 as compared to 2021.
Increased revenues and operating income across all our segments during 2022
generated
We expect the strong demand for our services will continue. Our remaining performance obligations and backlog as ofDecember 31, 2022 of$8.8 billion and$24.1 billion increased 49.3%, and 25.0%, respectively, relative to 2021. For a reconciliation of backlog to remaining performance obligations, the most comparable financial measure prepared in conformity with generally accepted accounting principles inthe United States (GAAP), see Non-GAAP Financial Measures below.
For additional information regarding our overall business environment, see Overview in Part I, Item 1. Business of this Annual Report.
Significant Factors Impacting Results
Our revenues, profit, margins and other results of operations can be influenced
by a variety of factors in any given period, including those described in Item
1. Business and Item 1A. Risk Factors of this 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.
42
--------------------------------------------------------------------------------
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 for certain projects 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.
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 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. However, severe weather events can also 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 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. Examples of 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; acceleration of
any projects or programs by customers (e.g., modernization or hardening
programs); economic and political conditions on a regional, national or global
scale, including availability of renewable energy tax credits; interest rates;
governmental regulations affecting the sourcing and costs of materials and
equipment; 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
projects typically include, among others, transmission projects with higher
voltage capacities; pipeline projects with larger-diameter throughput
capacities; large-scale renewable generation projects; 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. 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; the
performance of third parties; and the impact of the COVID-19 pandemic. 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. 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,
43
--------------------------------------------------------------------------------the incurrence of losses on a project or the issuance of change orders and/or assertion of contract claims against customers. See Revenue Recognition - Contract Estimates and Changes in Estimates in Note 4 of the Notes to Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data in Part II of the 2022 Annual Report.
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 operating margins. In recent
years, we have subcontracted approximately 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 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, including in some cases our assuming price risk. Furthermore, as
described further in Item 1. Business, fluctuations in the price or availability
of materials, equipment and consumables that we or our customers utilize could
impact costs to complete projects.
Results of Operations
Consolidated Results
The following table sets forth selected statements of operations data, such data
as a percentage of revenues for the years indicated, as well as the dollar and
percentage change from the prior year (dollars in thousands). The results of
acquired businesses have been included in the following results of operations
since their respective acquisition dates.
Year Ended December 31, Change
2022 2021 $ %
Revenues $ 17,073,903 100.0 % $ 12,980,213 100.0 % $ 4,093,690 31.5 %
Cost of services (including related
depreciation) 14,544,748 85.2 11,026,954 85.0 3,517,794 31.9 %
Gross profit 2,529,155 14.8 1,953,259 15.0 575,896 29.5 %
Equity in earnings of integral
unconsolidated affiliates 52,466 0.3 44,061 0.3 8,405 19.1 %
Selling, general and administrative
expenses (1,336,711) (7.8) (1,155,956) (8.9) (180,755) 15.6 %
Amortization of intangible assets (353,973) (2.1) (165,366) (1.2) (188,607) 114.1 %
Asset impairment charges (14,457) (0.1) (5,743) - (8,714) 151.7 %
Change in fair value of contingent
consideration liabilities (4,422) - (6,734) (0.1) 2,312 (34.3) %
Operating income 872,058 5.1 663,521 5.1 208,537 31.4 %
Interest and other financing expenses (124,363) (0.7) (68,899) (0.5) (55,464) 80.5 %
Interest income 2,606 - 3,194 - (588) (18.4) %
Other (expense) income, net (46,415) (0.3) 25,085 0.2 (71,500) *
Income before income taxes 703,886 4.1 622,901 4.8 80,985 13.0 % Provision for income taxes 192,243 1.1 130,918 1.0 61,325 46.8 % Net income 511,643 3.0 491,983 3.8 19,660 4.0 % Less: Net income attributable to non-controlling interests 20,454 0.1 6,027 0.1 14,427 239.4 % Net income attributable to common stock$ 491,189 2.9 %$ 485,956 3.7 %$ 5,233
1.1 %
* The percentage change is not meaningful.
44
--------------------------------------------------------------------------------
Revenues. Revenues increased due to a $1.95 billion increase in revenues from
our Renewable Energy Infrastructure Solutions segment, a $1.32 billion increase
in revenues from our Electric Power Infrastructure Solutions segment, and a
$824.4 million increase in revenues from our Underground Utility and
Infrastructure Solutions segment. See Segment Results below for additional
information and discussion related to segment revenues.
Cost of services. Costs of services primarily includes wages, benefits, subcontractor costs, materials, equipment, and other direct and indirect costs, including related depreciation. The increase in cost of services generally correlates to the increase in revenues.
Equity in earnings of integral unconsolidated affiliates. The increase was
primarily driven by our
Selling, general and administrative expenses. The increase was primarily attributable to a$149.7 million increase in expenses associated with acquired businesses. Also contributing to the increase were the following items to support business growth: a$32.8 million increase in compensation expense, primarily associated with increased salaries and non-cash stock compensation expense; a$25.2 million increase in travel and related expenses; and a$7.7 million increase in rent and information technology expenses. Partially offsetting these increases was a$23.6 million decrease in expense related to deferred compensation liabilities. The fair market value changes in deferred compensation liabilities were largely offset by changes in the fair value of corporate-owned life insurance (COLI) assets associated with the deferred compensation plan, which are included in "Other (expense) income, net" as discussed below. Also partially offsetting these increases was a specific provision for credit loss of$31.7 million recorded in 2021. Amortization of intangible assets. The increase was primarily related to$196.3 million of incremental amortization of intangible assets associated with recently acquired businesses, driven by the acquisition ofBlattner , partially offset by reduced amortization expense associated with older acquired intangible assets, as certain of these assets became fully amortized. Asset impairment charges. The increase was primarily due to$11.7 million of asset impairment charges related to a software implementation project at an acquired company, which commenced prior to our acquisition and was discontinued in the fourth quarter of 2022. Change in fair value of contingent consideration liabilities. Contingent consideration liabilities are payable in the event prescribed performance objectives are achieved by certain acquired businesses during designated post-acquisition periods. Future changes in fair value are expected to be recorded periodically until the contingent consideration liabilities are settled. For additional information regarding these liabilities, see Note 6 of the Notes to Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data of this Annual Report. Operating income. Operating income for the Electric Power Infrastructure Solutions, Renewable Energy Infrastructure Solutions and Underground Utility and Infrastructure Solutions segments increased$93.4 million ,$122.4 million and$167.4 million , respectively. These increases were partially offset by an increase in Corporate and Non-Allocated Costs of$174.6 million , which includes amortization expense. Results for each of our business segments and Corporate and Non-Allocated Costs are discussed in the Segment Results section below. EBITDA and adjusted EBITDA. EBITDA increased 31.5%, or$350.9 million , to$1.46 billion as compared to$1.11 billion for the year endedDecember 31, 2021 , and adjusted EBITDA increased 33.8%, or$425.8 million , to$1.68 billion as compared to$1.26 billion for the year endedDecember 31, 2021 . For a reconciliation of EBITDA and adjusted EBITDA to net income attributable to common stock, the most comparable GAAP financial measure, see Non-GAAP Financial Measures below. Interest and other financing expenses. Approximately two-thirds of the increase resulted from higher debt outstanding during 2022 as compared to 2021. Our long-term debt increased significantly at the end of 2021 in connection with our acquisition ofBlattner . The remaining increase was primarily driven by higher interest rates impacting our variable rate debt. Interest income. Interest income decreased during the year endedDecember 31, 2022 primarily due to interest received during the year endedDecember 31, 2021 related to a settlement with a customer. Other (expense) income, net. The net other expense for the year endedDecember 31, 2022 was primarily the result of an unrealized loss of$91.5 million resulting from the remeasurement of the fair value of our investment in a publicly traded broadband technology provider, Starry Group Holdings, Inc. (Starry), based on the market price of Starry's common stock as ofDecember 31, 2022 . Also included in other (expense) income, net was a$13.8 million mark-to-market loss in 2022 compared to a$8.6 million mark-to-market gain in 2021 associated with our deferred compensation plan. This amount 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. Partially offsetting these increases in expenses 45 --------------------------------------------------------------------------------
were a
Provision for income taxes. The effective tax rates for the years endedDecember 31, 2022 and 2021 were 27.3% and 21.0%. The higher effective tax rate is primarily attributable to the recognition of a$22.7 million valuation allowance resulting from the unrealized loss on our investment in Starry described above, and a year over year increase in tax expense of$9.9 million driven by mark-to-market accounting on corporate-owned life insurance products associated with our deferred compensation plan. If the Starry losses become realized for tax purposes, we could release a portion of the valuation allowance by the amount Starry losses offset certain capital gains. For additional information regarding our provision for income taxes, see Note 12 of the Notes to Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data of this Annual Report. Net income attributable to non-controlling interests. The increase in net income attributable to non-controlling interests is primarily related to the$10.4 million gain on sale of the investment in a non-integral equity unconsolidated affiliate. See Note 8 of the Notes to Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data of this Annual Report. Comprehensive income. See Statements of Comprehensive Income in Item 8. Financial Statements and Supplementary Data of this Annual Report. Comprehensive income decreased by$63.1 million in 2022 as compared to 2021, primarily due to higher foreign currency translation adjustments losses and the aforementioned increase in net income attributable to non-controlling interests, partly offset by higher net income. The predominant functional currencies for our operations outside theU.S. are Canadian and Australian dollars. The$66.8 million increase in foreign currency translation loss in the year endedDecember 31, 2022 primarily resulted from the strengthening of theU.S. dollar against both the Canadian and Australian dollars as ofDecember 31, 2022 when compared toDecember 31, 2021 . 46 --------------------------------------------------------------------------------
Segment Results
We report our results under three reportable segments:Electric Power Infrastructure Solutions, Renewable Energy Infrastructure Solutions and Underground Utility and Infrastructure Solutions. Reportable segment information, including revenues and operating income by type of work, is gathered from each of our operating companies. Classification of our operating company revenues by type of work for segment reporting purposes can at times require judgment on the part of management. Our operating companies 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. Integrated operations and common administrative support for operating companies require that certain allocations be made to determine segment profitability, including allocations of corporate shared and indirect operating costs, as well as general and administrative costs. Certain corporate costs are not allocated, including corporate facility costs; non-allocated corporate salaries, benefits and incentive compensation; acquisition and integration costs; non-cash stock-based compensation; amortization related to intangible assets; asset impairments related to goodwill and intangible assets; and change in fair value of contingent consideration liabilities.
The following table sets forth segment revenues, segment operating income (loss) and operating margins for the periods indicated, as well as the dollar and percentage change from the prior period (dollars in thousands):
Year Ended December 31, Change
2022 2021 $ %
Revenues:
Electric Power Infrastructure
Solutions $ 8,940,276 52.4 % $ 7,624,240 58.7 % $ 1,316,036 17.3 %
Renewable Energy Infrastructure
Solutions 3,778,560 22.1 1,825,259 14.1 1,953,301 107.0 %
Underground Utility and Infrastructure
Solutions 4,355,067 25.5 3,530,714 27.2 824,353 23.3 %
Consolidated revenues $ 17,073,903 100.0 % $ 12,980,213 100.0 % $ 4,093,690 31.5 %
Operating income (loss):
Electric Power Infrastructure
Solutions $ 958,798 10.7 % $ 865,409 11.4 % $ 93,389 10.8 %
Renewable Energy Infrastructure
Solutions 304,308 8.1 % 181,908 10.0 % 122,400 67.3 %
Underground Utility and Infrastructure
Solutions 317,543 7.3 % 150,147 4.3 % 167,396 111.5 %
Corporate and Non-Allocated Costs (708,591) (4.2) % (533,943) (4.1) % (174,648) 32.7 %
Consolidated operating income $ 872,058 5.1 % $ 663,521 5.1 % $ 208,537 31.4 %
Electric Power Infrastructure Solutions Segment Results
Revenues. The increase in revenues for the year endedDecember 31, 2022 was primarily due to increased spending by our utility customers on grid modernization and hardening, resulting in increased demand for our electric power services, as well as approximately$280 million in revenues attributable to acquired businesses. This increase was partially offset by approximately$145 million in lower emergency restoration services revenues and foreign exchange impacts of approximately$23 million . Operating Income. Operating income increased for the year endedDecember 31, 2022 primarily due to the increase in revenues explained above. Operating margin decreased during the year endedDecember 31, 2022 from lower equipment utilization and fixed cost absorption and less favorable results associated with inefficiencies attributable to supply chain disruptions impacting certain operations, and elevated consumable costs. Lower emergency restoration services revenues, which generally deliver higher margin, also contributed to the decrease in operating margin, as well as less favorable results associated with variability across our portfolio of projects. The decrease in operating margin was partially offset by improved performance on various communication projects in 2022, and the absence of losses associated with certain communication projects in 2021 from various production issues, poor subcontractor performance, challenging site conditions, permitting delays, increased completion costs and adverse weather impacts. Equity in earnings fromLUMA and other integral unconsolidated affiliates increased$8.4 million in 2022 as compared to the year endedDecember 31, 2021 .
Renewable Energy Infrastructure Solutions Segment Results
Revenues. The increase in revenues for the year ended
47
--------------------------------------------------------------------------------
increase in revenues was primarily due to increased customer demand for
renewable transmission and interconnection construction services. These
increases were partially offset by foreign exchange impacts of approximately
Operating Income. The increase in operating income was primarily due to the increase in revenues associated with the acquisition ofBlattner . The decrease in operating margin was attributable to lower margins on a large renewable transmission project inCanada , a change in the mix of work due to acquisitions, primarilyBlattner , project delays and operating inefficiencies due to regulatory and supply chain challenges in the utility scale solar industry and less favorable results associated with normal variability in overall project timing. Partially offsetting these decreases, operating margin improved relative to 2021 as a result of a large renewable transmission project inthe United States . Operating income for the renewable segment also included$11.7 million of asset impairment charges related to a software implementation project at an acquired company, which commenced prior to our acquisition and was discontinued in the fourth quarter of 2022. Additionally, there were favorable close-outs of certain projects during the year endedDecember 31, 2021 as compared to the year endedDecember 31, 2022 .
Underground Utility and Infrastructure Solutions Segment Results
Revenues. The increase in revenues for the year endedDecember 31, 2022 was primarily due to increased revenues associated with higher demand from our gas utility and industrial customers, which began to move forward with certain deferred maintenance and capital spending during the year endedDecember 31, 2022 , as well as an increase in revenues associated with large pipeline projects inCanada andAustralia and approximately$40 million in revenues attributable to acquired businesses. These increases were partially offset by foreign exchange impacts of approximately$62 million . Operating Income. The increase in operating income and operating margin for the year endedDecember 31, 2022 was primarily due to the increase in revenues, which contributed to higher levels of fixed cost absorption. Also contributing to the increase were improved performance across the segment from better project execution and resource utilization, particularly with respect to our industrial services operations and large pipeline services inCanada , and more favorable results associated with normal variability in overall project timing and project mix. Additionally, our performance in this segment was impacted less by the COVID-19 pandemic and challenges in the overall energy market during the year endedDecember 31, 2022 as compared to the year endedDecember 31, 2021 . Also contributing to the increase in 2022 compared to 2021 was the recognition of a specific provision for credit loss of$31.7 million recorded in 2021.
Corporate and Non-Allocated Costs
The increase in corporate and non-allocated costs during the year endedDecember 31, 2022 was primarily due to a$188.6 million increase in intangible asset amortization, largely associated with the acquisition ofBlattner , and an increase in compensation expense along with general and administrative expenses resulting from the growth of the business. These increases were partially offset by a$23.0 million decrease in expense related to deferred compensation liabilities due to market fluctuations. Non-GAAP Financial Measures EBITDA and Adjusted EBITDA EBITDA and adjusted EBITDA, financial measures not recognized under GAAP, when used in connection with net income attributable to common stock, are intended to provide useful information to investors and analysts as they evaluate our performance. EBITDA is defined as earnings before interest and other financing expenses, taxes, depreciation and amortization, and adjusted EBITDA is defined as EBITDA adjusted for certain other items as described below. These measures should not be considered as an alternative to net income attributable to common stock or other financial measures of performance that are derived in accordance with GAAP. Management believes that the exclusion of these items from net income attributable to common stock enables Quanta and its investors to more effectively evaluate our operations period over period and to identify operating trends that might not be apparent when including the excluded items. As to certain of the items below, (i) non-cash stock-based compensation expense varies from period to period due to acquisition activity, changes in the estimated fair value of performance-based awards, forfeiture rates, accelerated vesting and amounts granted; (ii) acquisition and integration costs vary from period to period depending on the level of our acquisition activity; (iii) equity in (earnings) losses of non-integral unconsolidated affiliates varies from period to period depending on the activity and financial performance of such affiliates, the operations of which are not operationally integral to us; (iv) unrealized mark-to-market adjustments on our investment in a publicly traded company vary from period to period based on fluctuations in the market price of such company's common stock; (v) gains and losses on the sale of investments vary from period to period depending on activity; (vi) asset impairment charges vary from period to period depending on economic and other factors; and (vii) change in fair value of contingent consideration liabilities varies from period to period depending on the performance in 48 -------------------------------------------------------------------------------- post-acquisition periods of certain acquired businesses and the effect of present value accretion on fair value calculations. Because EBITDA and adjusted EBITDA, as defined, exclude some, but not all, items that affect net income attributable to common stock, such measures may not be comparable to similarly titled measures of other companies. The most comparable GAAP financial measure, net income attributable to common stock, and information reconciling the GAAP and non-GAAP financial measures, are included below. The following table shows dollars in thousands. Year Ended December 31, 2022 2021 Net income attributable to common stock (GAAP as reported)$ 491,189 $ 485,956 Interest and other financing expenses 124,363 68,899 Interest income (2,606) (3,194) Provision for income taxes 192,243 130,918 Depreciation expense 290,647 255,529 Amortization of intangible assets 353,973 165,366
Interest, income taxes, depreciation and amortization included in equity in earnings of integral unconsolidated affiliates
14,274 9,728
EBITDA 1,464,083 1,113,202
Non-cash stock-based compensation 105,600 88,259
Acquisition and integration costs (1) 47,431 47,368
Equity in earnings of non-integral unconsolidated affiliates (20,333) (2,121)
Unrealized loss from mark-to-market adjustment on investment (2) 91,500 -
Gains on sales of investments (3) (22,222) -
Asset impairment charges (4) 14,457 5,743
Change in fair value of contingent consideration liabilities 4,422 6,734
Adjusted EBITDA $ 1,684,938 $ 1,259,185
(1) The amounts for the years ended December 31, 2022 and 2021 include, among
other things, $35.9 million and $10.0 million of expenses that are associated
with change of control payments as a result of the acquisition of Blattner .
(2) The amount for the year ended December 31, 2022 is an unrealized loss from a
decrease in fair value of our investment in Starry, as further described in Note
8 of the Notes to Consolidated Financial Statements in Item 8. Financial
Statements and Supplementary Data of this Annual Report.
(3) The amount for the year ended December 31, 2022 is a gain as a result of the
sale of a non-integral equity method investment further described in Note 8 of
the Notes to Consolidated Financial Statements in Item 8. Financial Statements
and Supplementary Data of this Annual Report, and a non-marketable equity
security interest in a technology company.
(4) The amount for the year ended
Remaining Performance Obligations and Backlog
A performance obligation is a promise in a contract with a customer to transfer
a distinct good or service. Our remaining performance obligations represent
management's estimate of consolidated revenues that are expected to be realized
from the remaining portion of firm orders under fixed price contracts not yet
completed or for which work has not yet begun, which includes estimated revenues
attributable to consolidated joint ventures and variable interest entities,
revenues from funded and unfunded portions of government contracts to the extent
they are reasonably expected to be realized, and revenues from change orders and
claims to the extent management believes they will be earned and are probable of
collection.
We have also historically disclosed our backlog, a measure commonly used in our
industry but not recognized under GAAP. We believe this measure enables
management to more effectively forecast our future capital needs and results and
better identify future operating trends that may not otherwise be apparent. We
believe this measure is also useful for investors in forecasting our future
results and comparing us to our competitors. Our remaining performance
obligations are a component of backlog, which also includes estimated orders
under MSAs, including estimated renewals, and non-fixed price contracts expected
to be completed within one year. Our methodology for determining backlog may not
be comparable to the methodologies used by other companies.
49
--------------------------------------------------------------------------------
As of December 31, 2022 and 2021, MSAs accounted for 52% and 55% of our
estimated 12-month backlog and 65% and 67% of our total backlog. Generally, our
customers are not contractually committed to specific volumes of services under
our MSAs, and most of our contracts can be terminated on short notice even if we
are not in default. We determine the estimated backlog for these MSAs using
recurring historical trends, factoring in seasonal demand and projected customer
needs based upon ongoing communications. In addition, many of our MSAs are
subject to renewal, and these potential renewals are considered in determining
estimated backlog. As a result, estimates for remaining performance obligations
and backlog are subject to change based on, among other things, project
accelerations; project cancellations or delays, including but not limited to
those caused by commercial issues, regulatory requirements, natural disasters,
emergencies (including the COVID-19 pandemic) and adverse weather conditions;
and final acceptance of change orders by customers. These factors can cause
revenues to be realized in periods and at levels that are different than
originally projected.
The following table reconciles total remaining performance obligations to our
backlog (a non-GAAP financial measure) by reportable segment, along with
estimates of amounts expected to be realized within 12 months (in thousands):
December 31, 2022 December 31, 2021
12 Month Total 12 Month Total
Electric Power Infrastructure Solutions
Remaining performance obligations $ 2,124,820 $
3,033,472
5,415,427 10,049,435 4,492,038 9,447,765
Backlog $ 7,540,247 $
13,082,907
Renewable Energy Infrastructure Solutions Remaining performance obligations$ 3,183,568 $
4,638,115
57,555 84,094 65,618 120,237
Backlog $ 3,241,123 $
4,722,209
Underground Utility and Infrastructure Solutions Remaining performance obligations$ 1,038,543 $
1,129,837
1,973,982 5,158,814 1,934,826 3,810,829
Backlog $ 3,012,525 $ 6,288,651 $ 2,572,669 $ 4,508,710
Total
Remaining performance obligations $ 6,346,931 $
8,801,424
7,446,964 15,292,343 6,492,482 13,378,831
Backlog $ 13,793,895 $ 24,093,767 $ 11,312,033 $ 19,274,226 The increase in remaining performance obligations from
Liquidity and Capital Resources
Management monitors financial markets and national and global economic
conditions for factors that may affect our liquidity and capital resources. As
set forth below, we have various short-term and long-term cash requirements and
capital allocation priorities, and we intend to fund these requirements
primarily with cash flow from operating activities, as well as debt financing as
needed.
50
--------------------------------------------------------------------------------Cash Requirements and Capital Allocation
Cash Requirements. The following table summarizes, as ofDecember 31, 2022 , our cash requirements from contractual obligations that are due within the twelve months subsequent toDecember 31, 2022 and thereafter, excluding certain amounts discussed below (in thousands): Due in 2023 Due Thereafter Total Long-term debt, including current portion - principal$ 21,028 $ 3,648,201 $ 3,669,229 Long-term debt - cash interest (1) 60,978 582,493 643,471 Operating lease obligations (2) 80,899 184,242 265,141 Operating lease obligations that have not yet commenced (3) 834 6,635 7,469 Finance lease obligations (2) 1,517 2,111 3,628 Lease financing transactions (4) 15,034 68,557 83,591 Short-term lease obligations 22,264 - 22,264 Equipment purchase commitments (5) 172,313 - 172,313 Capital commitment related to investments in unconsolidated affiliates 607 10,495 11,102
Total cash requirements from contractual obligations
(1) Amounts represent cash interest and other financing expenses associated primarily with our senior notes. Interest payments related to our senior credit facility and notes issued under our commercial paper program are not included due to their variable interest rates, and as it relates to the commercial paper program, the short-term nature of the borrowings. With respect to this variable rate debt, assuming the principal amount outstanding and interest rate in effect as ofDecember 31, 2022 remained the same, the annual cash interest expense would be approximately$65.0 million , payable untilOctober 8, 2026 , the maturity date of our senior credit facility. (2) Amounts represent undiscounted operating and finance lease obligations as ofDecember 31, 2022 . The corresponding amounts recorded on ourDecember 31, 2022 consolidated balance sheet represent the present value of these amounts. (3) Amounts represent undiscounted operating lease obligations that have not commenced as ofDecember 31, 2022 . The operating lease obligations will be recorded on our consolidated balance sheet beginning on the commencement date of each lease. (4) Amounts represent lease financing transactions as further described in Note 11 of the Notes to Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data of this Annual Report. (5) Amounts represent capital committed for the expansion of our vehicle fleet. Although we have committed to the purchase of these vehicles/equipment at the time of their delivery, we expect that these orders will be assigned to third-party leasing companies and made available to us under certain of our master equipment lease agreements.
Contingent Obligations. We have various contingent obligations that could
require the use of cash or impact the collection of cash in future periods;
however, we are unable to accurately predict the timing and estimate the amount
of such contingent obligations as of
•contingent consideration liabilities, which are described further in Note 6 of
the Notes to Consolidated Financial Statements in Item 8. Financial Statements
and Supplementary Data of this Annual Report;
•undistributed earnings of foreign subsidiaries and unrecognized tax benefits,
which are described further in Note 12 of the Notes to Consolidated Financial
Statements in Item 8. Financial Statements and Supplementary Data of this Annual
Report;
•collective bargaining agreements and multiemployer pension plan liabilities, as
well as liabilities related to our deferred compensation and other employee
benefit plans, which are described further in Notes 15 and 16 of the Notes to
Consolidated Financial Statements in Item 8. Financial Statements and
Supplementary Data of this Annual Report; and
•obligations relating to our joint ventures, lawsuits and other legal
proceedings, uncollectible accounts receivable, insurance liabilities,
obligations relating to letters of credit, bonds and parent guarantees,
obligations relating to employment agreements, indemnities and assumed
liabilities, and residual value guarantees, which are described further in Notes
4, 10, 11 and 16 of the Notes to Consolidated Financial Statements in Item 8.
Financial Statements and Supplementary Data of this Annual Report.
Capital Allocation. Our capital deployment priorities that require the use of
cash include: (i) working capital to fund ongoing operating needs, (ii) capital
expenditures to meet anticipated demand for our services, (iii) acquisitions and
investments
51
--------------------------------------------------------------------------------
to facilitate the long-term growth and sustainability of our business, and (iv)
return of capital to stockholders, including through the payment of dividends
and repurchases of our outstanding common stock. Our industry is capital
intensive, and we expect substantial capital expenditures and commitments for
equipment purchases and equipment lease and rental arrangements to be needed
into the foreseeable future in order to meet anticipated demand for our
services. We expect capital expenditures for property and equipment purchases
for the year ended December 31, 2023 to be approximately $400 million . We also
expect to continue to allocate significant capital to strategic acquisitions and
investments, as well as to pay dividends and to repurchase our outstanding
common stock and/or debt securities. In January of 2023, we completed the
acquisition of three businesses in which a portion of the consideration
consisted of $465.0 million in cash funded with a combination of cash and cash
equivalents and borrowings from our commercial paper program. For additional
information regarding these acquisitions, refer to Note 6 of the Notes to
Consolidated Financial Statements in Item 8. Financial Statements and
Supplementary Data of this Annual Report.
Significant Sources of Cash
We anticipate that our future cash flows from operating activities, cash and cash equivalents on hand, existing borrowing capacity under our senior credit facility and commercial paper program and ability to access capital markets for additional capital will provide sufficient funds to enable us to meet our cash requirements described above for the next twelve months and over the longer term. Cash flow from operating activities is primarily influenced by demand for our services and operating margins but is also influenced by the timing of working capital needs associated with the various types of services that we provide. Our working capital needs may increase when we commence large volumes of work under circumstances where project costs are required to be paid before the associated receivables are billed and collected. Additionally, operating cash flows may be negatively impacted as a result of unpaid and delayed change orders and claims. Changes in project timing due to delays or accelerations and other economic, regulatory, market and political factors that may affect customer spending could also impact cash flow from operating activities. Further information with respect to our cash flow from operating activities is set forth below and in Note 18 of the Notes to Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data of this Annual Report.
Our available commitments under our senior credit facility and cash and cash
equivalents as of
$ 2,640,000 Less: Borrowings of revolving loans 36,910 Commercial paper program notes outstanding (1) 373,000 Letters of credit outstanding 227,836
Available commitments for revolving loans, credit support for commercial paper program and letters of credit
2,002,254
Plus:
Cash and cash equivalents (2) 428,505
Total available commitments under senior credit facility and cash and cash equivalents
(1) Represents unsecured notes issued under our commercial paper program, which allows for the issuance of notes up to a maximum aggregate face amount of$1.0 billion outstanding at any time. Available commitments for revolving loans under our senior credit facility must be maintained to provide credit support for notes issued under our commercial paper program, and therefore such notes effectively reduce the available borrowing capacity under our senior credit facility. (2) Further information with respect to our cash and cash equivalents is set forth in Note 17 of the Notes to Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data of this Annual Report. We consider our investment policies related to cash and cash equivalents to be conservative, as we maintain a diverse portfolio of what we believe to be high-quality cash and cash equivalent investments with short-term maturities. Additionally, subject to the conditions specified in the credit agreement for our senior credit facility, we have the option to increase the capacity of our senior credit facility, in the form of an increase in the revolving commitments, term loans or a combination thereof, from time to time, upon receipt of additional commitments from new or existing lenders by up to an additional (i)$400.0 million plus (ii) additional amounts so long as the Incremental Leverage Ratio Requirement (as defined in the credit 52 -------------------------------------------------------------------------------- agreement) is satisfied at the time of such increase. The Incremental Leverage Ratio Requirement requires, among other things, after giving pro forma effect to such increase and the use of proceeds therefrom, compliance with the credit agreement's financial covenants as of the most recent fiscal quarter end for which financial statements were required to be delivered. Further information with respect to our debt obligations is set forth in Note 10 of the Notes to Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data of this Annual Report. We may also seek to access the capital markets from time to time to raise additional capital, increase liquidity as necessary, refinance or extend the term of our existing indebtedness, fund acquisitions or otherwise fund our capital needs. While our financial strategy and consistent performance have allowed us to maintain investment grade ratings, our ability to access capital markets in the future depends on a number of factors, including our financial performance and financial position, our credit ratings, industry conditions, general economic conditions, our backlog, capital expenditure commitments, market conditions and market perceptions of us and our industry.
Sources and Uses of Cash, Cash Equivalents and Restricted Cash During the Years
Ended
In summary, our cash flows for each period were as follows (in thousands):
Year Ended
2022 2021
Net cash provided by operating activities$ 1,130,312
Net cash used in investing activities (617,191)
(2,898,613)
Net cash (used in) provided by financing activities (311,071) 2,360,877 Operating Activities Net cash provided by operating activities of$1.13 billion and$582.4 million in 2022 and 2021 primarily reflected earnings adjusted for non-cash items and cash used by the main components of working capital: "Accounts and notes receivable," "Contract assets," "Accounts payable and accrued expenses," and "Contract liabilities." Certain payments negatively impacted net cash provided by operating activities in both the years endedDecember 31, 2022 and 2021, including$45.4 million and$72.3 million related to certain change of control liabilities owed to employees ofBlattner and payable in connection with our acquisition ofBlattner ;$11.0 million and$37.4 million of cash payments for other acquisition and integration costs; and$54.4 million in each period for payments associated with deferred employer payroll taxes, which were due during the year endedDecember 31, 2020 but deferred pursuant to the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). Partially offsetting these negative impacts in 2022 was the receipt of$100.5 million pursuant to coverage under an insurance policy following a legal proceeding, as further described in Legal Proceedings -Peru Project Dispute in Note 16 of the Notes to Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data of this Annual Report. As discussed above, cash flow from operating activities is primarily influenced by demand for our services and operating margins but is also influenced by working capital needs. Our working capital needs may increase when we commence large volumes of work under circumstances where project costs, primarily labor, equipment and subcontractors, are required to be paid before the associated receivables are billed and collected and when we incur costs for work that is the subject of unpaid change orders and claims. Accordingly, changes within working capital in accounts receivable, contract assets and contract liabilities are normally related and are typically affected on a collective basis by changes in revenue due to the timing and volume of work performed and variability in the timing of customer billings and payments. Additionally, working capital needs are generally higher during the summer and fall due to increased demand for our services when favorable weather conditions exist in many of our operating regions. Conversely, working capital assets are typically converted to cash during the winter. These seasonal trends can be offset by changes in project timing due to delays or accelerations and other economic factors that may affect customer spending, including market conditions or the impact of certain unforeseen events (e.g., regulatory and other actions that impact the supply chain for certain materials). Days sales outstanding (DSO) represents the average number of days it takes revenues to be converted into cash, which management believes is an important metric for assessing liquidity. A decrease in DSO has a favorable impact on cash flow from operating activities, while an increase in DSO has a negative impact on cash flow from operating activities. DSO is calculated by using the sum of current accounts receivable, net of allowance (which includes retainage and unbilled balances), plus contract assets less contract liabilities, divided by average revenues per day during the quarter. DSO atDecember 31, 2022 was 75 days, which was lower than DSO of 80 days atDecember 31, 2021 and our five-year historical average DSO of 82 days. This decrease in DSO as compared toDecember 31, 2021 was primarily due to favorable billing positions on certain projects. 53 --------------------------------------------------------------------------------
This decrease was partially offset by high working capital requirements
primarily related to a large renewable transmission project in
Investing Activities
Net cash used in investing activities in 2022 included$427.6 million of capital expenditures;$195.1 million related to acquisitions, primarily related to a net working capital adjustment in connection with our acquisition ofBlattner ; and$78.1 million of cash paid primarily for equity method investments and non-marketable securities. Partially offsetting these items were$62.1 million of proceeds from the sale of property and equipment and$20.6 million of cash received from sale of investments. Net cash used in investing activities in 2021 included$2.45 billion used for acquisitions, most of which relates to our acquisition ofBlattner ;$385.9 million of capital expenditures; and$139.0 million of cash paid for equity and other investments, which was primarily related to the acquisition of our initial minority interest in Starry. These items were partially offset by$49.2 million of proceeds from the sale of property and equipment and$29.1 million of cash received primarily from sale of investments. Our industry is capital intensive, and we expect substantial capital expenditures and commitments for equipment purchases and equipment lease and rental arrangements to be needed for the foreseeable future in order to meet anticipated demand for our services. In addition, we expect to continue to pursue strategic acquisitions and investments, although we cannot predict the timing or amount of the cash needed for these initiatives. We also have various other capital commitments that are detailed in Cash Requirements and Capital Allocation above. Financing Activities Net cash used in financing activities in the year endedDecember 31, 2022 included$127.8 million common stock repurchases;$82.6 million payments to satisfy tax withholding obligations associated with stock-based compensation;$41.1 million of dividends;$23.4 million of net repayments under our senior credit facility and commercial paper program;$15.7 million of net repayments of short-term debt; and$9.7 million of distributions to non-controlling interests. Net cash provided by financing activities in 2021 included$1.49 billion of net proceeds from the issuance of the 0.950% senior notes dueOctober 2024 , the 2.350% senior notes dueJanuary 2032 and the 3.050% senior notes dueOctober 2041 , net of the original issue discount and underwriting discounts but not net of deferred financing costs paid or accrued by us. OnOctober 13, 2021 , we borrowed the full amount of a$750.0 million term loan facility under our senior credit facility and used such amount, together with the net proceeds from ourSeptember 2021 offering of the senior notes and approximately$50.9 million of revolving loans borrowed under our senior credit facility, to pay the cash consideration for the acquisition ofBlattner . Total net borrowings under our senior credit facility during the year endedDecember 31, 2021 were$1.05 billion , which included the$750.0 million term loan facility. Deferred financing costs paid directly by us during the year endedDecember 31, 2021 were$12.6 million ,$8.2 million of which related to theSeptember 2021 issuance of such senior notes, the term loan and amendment of our senior credit facility and$4.4 million of which related to the bridge facility commitment entered into, but ultimately not utilized, in connection with our acquisition ofBlattner . Net cash provided by financing activities in 2021 also included$11.4 million of net borrowings of short-term debt. Net cash provided by financing activities in 2021 was partially offset by$66.7 million of cash payments for common stock repurchases,$65.0 million of cash payments to satisfy tax withholding obligations associated with stock-based compensation and$34.0 million of cash payments for dividends and cash dividend equivalents. We expect to continue to utilize cash for similar financing activities in the future, including repayments under our senior credit facility and commercial paper program, payment of cash dividends and repurchases of our common stock and/or debt securities.
Critical Accounting Estimates
The discussion and analysis of our financial condition and results of operations
are based on our consolidated financial statements, which have been prepared in
accordance with GAAP. The preparation of these consolidated financial statements
requires us to make estimates and assumptions that affect the reported amounts
of assets and liabilities, disclosures of contingent assets and liabilities
known to exist as of the date the consolidated financial statements are
published and the reported amounts of revenues and expenses recognized during
the periods presented. We review all significant estimates affecting our
consolidated financial statements on a recurring basis and record the effect of
any necessary adjustments prior to their publication. Judgments and estimates
are based on our beliefs and assumptions derived from information available at
the time such judgments and estimates are made. Uncertainties with respect to
such estimates and assumptions are inherent in the preparation of financial
statements. There can be no assurance that actual results will not differ from
those estimates.
54--------------------------------------------------------------------------------
Management has reviewed its development and selection of critical accounting estimates with the audit committee of our Board of Directors. Our accounting policies are primarily described in Note 2 of the Notes to Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data of this Annual Report and should be read in conjunction with the accounting policies identified below that we believe affect our more significant judgments and estimates used in the preparation of our consolidated financial statements. Revenue Recognition - The estimation of contract revenues and costs, including changes in estimates; progress on construction projects; variable consideration; and collectability of accounts receivable, long-term accounts receivable, unbilled receivables, retainage and contract assets, including amounts related to unapproved change orders and claims in the process of being negotiated (refer to Note 4 of the Notes to Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data of this Annual Report). Property and Equipment - The valuation methods and assumptions used in assessing impairment, useful life determination and the related timing of depreciation and the determination of asset groupings (also refer to Note 17 of the Notes to Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data of this Annual Report).Goodwill - The valuation methods and assumptions used in assessing impairment, including determination of whether to perform a qualitative assessment on some or all of the reporting units, weighting of various methods of determining the fair value of each reporting unit, number of years of cash flows utilized before applying a terminal value, the weighted average cost of capital, transaction multiples, guideline public company multiples and five-year compounded annual growth rates. Other Intangible Assets - The valuation methods and assumptions used in assessing the fair value of intangible assets as of the date a business is acquired, as well as any impairment, including determining the future revenues, discount rates and customer attrition rates (also refer to Note 6 of the Notes to Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data of this Annual Report). Income Taxes - The identification and measurement of deferred tax assets and liabilities; the measurement of valuation allowances on deferred tax assets including estimates of future taxable income; estimates associated with tax liabilities in that tax laws and regulations are voluminous and often ambiguous; and benefits from uncertain tax positions (also refer to Note 12 of the Notes to Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data of this Annual Report). Insurance - The estimation of liabilities and related recoveries (also refer to Note 16 of the Notes to Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data of this Annual Report). Litigation Costs and Reserves and Loss Contingencies - The estimation of when a loss is probable or reasonably possible and whether any such loss is reasonably estimable or any range of possible loss is estimable, as well as uncertainties related to the outcome of litigation or other legal proceedings (also refer to Note 16 of the Notes to Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data of this Annual Report). Acquisitions - The assumptions used to determine the fair value of consideration transferred and to allocate this consideration to assets acquired and liabilities assumed in connection with our acquisitions, including the estimated useful lives of other intangible assets subject to amortization and the fair value of contingent consideration liabilities (also refer to Note 6 of the Notes to Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data of this Annual Report). Stock-based Compensation - The assumptions used to determine the grant date fair value and attainment percentages related to performance stock units (also refer to Note 14 of the Notes to Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data of this Annual Report).
© Edgar Online, source
