The following discussion and analysis of the financial condition and results of
operations of Quanta Services, Inc. (together with its subsidiaries, Quanta, we,
us or our) should be read in conjunction with our condensed consolidated
financial statements and related notes included elsewhere in this Quarterly
Report on Form 10-Q (Quarterly Report) and with our Annual Report on Form 10-K
for the year ended December 31, 2020 (2020 Annual Report), which was filed with
the Securities and Exchange Commission (SEC) on March 1, 2021 and is available
on the SEC's website at www.sec.gov and on our website at
www.quantaservices.com. The discussion below contains forward-looking statements
that are based upon our current expectations and are subject to uncertainty and
changes in circumstances. Actual results may differ materially from these
expectations due to inaccurate assumptions and known or unknown risks and
uncertainties, including those identified in Cautionary Statement About
Forward-Looking Statements and Information above and 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,
communications, pipeline and energy industries in the United States, Canada,
Australia and select other international markets. The performance of our
business generally depends on our ability to obtain contracts with customers and
to effectively deliver the services provided under those contracts. The services
we provide include the design, engineering, new construction, upgrade and repair
and maintenance of infrastructure within each of the industries we serve, such
as electric power transmission and distribution networks; substation facilities;
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 telecommunications infrastructure services.
Current Quarter Financial Results and Significant Operational Trends and Events
Key financial results for the three months ended March 31, 2021 included:
•Consolidated revenues decreased 2.2% to $2.70 billion as compared to
consolidated revenues of $2.76 billion for the three months ended March 31,
2020;
•Operating income increased 40.9%, or $33.0 million, to $113.7 million as
compared to $80.7 million for the three months ended March 31, 2020;
•Net income attributable to common stock increased 132.0%, or $51.1 million, to
$89.8 million as compared to $38.7 million for the three months ended March 31,
2020;
•Diluted earnings per share increased 136.6%, or $0.36, to $0.62 as compared to
$0.26 for the three months ended March 31, 2020;
•EBITDA (a non-GAAP measure) increased 43.0%, or $60.4 million, to $200.8
million, as compared to $140.4 million for the three months ended March 31,
2020, and adjusted EBITDA (a non-GAAP measure) increased 35.4%, or $57.6
million, to $220.2 million, as compared to $162.6 million for the three months
ended March 31, 2020;
•Net cash provided by operating activities decreased by $101.9 million to $125.6
million, as compared to net cash provided by operating activities of $227.5
million for the three months ended March 31, 2020;
•Remaining performance obligations increased 3.8%, or $149.5 million, to $4.13
billion as of March 31, 2021 as compared to $3.99 billion as of December 31,
2020; and
•Total backlog (a non-GAAP measure) increased 4.6%, or $697.9 million, to $15.83
billion as of March 31, 2021, as compared to $15.13 billion as of December 31,
2020.
For a reconciliation of EBITDA and adjusted EBITDA to net income attributable to
common stock, the most comparable GAAP measure, and a reconciliation of backlog
to remaining performance obligations, the most comparable GAAP measure, see
Non-GAAP Reconciliations below.
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As described below, during the three months ended March 31, 2021, our results
were impacted by certain significant operational trends and events as compared
to the three months ended March 31, 2020.
Electric Power Infrastructure Solutions Segment
•Revenues increased by 16.6% to $2.06 billion, as compared to $1.77 billion.
•Operating income increased by 54.6% to $199.0 million, as compared to $128.8
million, and operating income as a percentage of revenues increased to 9.7%, as
compared to 7.3%.
•Revenues increased primarily due to continued favorable dynamics across our
core utility market and increased demand for our electric power services,
including larger transmission projects in Canada, and approximately $70 million
of revenues from acquired businesses.
•Revenues for the three months ended March 31, 2021 also included a $50 million
increase in emergency restoration services revenues and a $26 million positive
impact related to more favorable foreign currency exchange rates, primarily the
Canadian dollar and U.S. dollar exchange rate.
•Operating income and operating income as a percentage of revenues increased
primarily due to improved performance across the segment, including increased
revenues for larger transmission projects in Canada and emergency restoration
services revenues, both of which contributed to improved equipment utilization
and fixed cost absorption. Partially offsetting these positive impacts were
losses resulting from poor subcontractor performance, challenging site
conditions and weather and seasonal impacts on certain communications projects.
Underground Utility and Infrastructure Solutions Segment
•Revenues declined by 35.5% to $643.5 million, as compared to $997.1 million.
•Operating income decreased by 71.8% to $8.8 million, as compared to $31.3
million, and operating income as a percentage of revenues decreased to 1.4%, as
compared to 3.1%.
•Revenues declined primarily due to reduced revenues associated with larger
pipeline projects, lower demand for our services in end-markets where the price
of oil is influential and reduced capital spending and deferred regularly
scheduled maintenance by our midstream and industrial customers.
•Operating income and operating income as a percentage of revenues decreased
primarily due to the decline in revenues, including revenues related to larger
pipeline projects, which generally yield higher margins. The overall challenged
energy market and the COVID-19 pandemic also contributed to lower operating
income for the segment for the three months ended March 31, 2021.
See COVID-19 Pandemic, Results of Operations and Liquidity and Capital Resources
below for additional information and discussion related to consolidated and
segment results.
COVID-19 Pandemic
During 2020 and the first part of 2021, the COVID-19 pandemic has significantly
impacted global economies, resulting in workforce and travel restrictions,
supply chain and production disruptions and reduced demand and spending across
many sectors. 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,
among other things, the items set forth below.
•Broader challenges in the energy market that have been compounded by the
COVID-19 pandemic, which 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 are reducing and deferring regularly
scheduled maintenance and capital projects due to lack of demand for refined
products.
•Shut-down orders and limitations on work site practices implemented by the
Canadian government, which negatively impacted our Canadian operations and
financial results in 2020 and have continued to have a negative impact in 2021.
•Disruptions created by shelter-in-place restrictions in major U.S. metropolitan
markets that were meaningfully impacted by the pandemic, which had a significant
negative impact on our financial results in the first and second quarters of
2020, and in Latin America, which contributed to significant losses during 2020
for those operations.
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We are focused on maintaining a strong balance sheet as part of supporting our
strategic operations, but also to help us navigate the remaining challenges
presented by the COVID-19 pandemic. As of March 31, 2021, we had $200.2 million
of cash and cash equivalents and $1.87 billion of availability under our senior
credit facility. We generated $125.6 million of cash flow from operating
activities in the three months ended March 31, 2021 and $1.12 billion in cash
flow from operating activities in the year ended December 31, 2020. We plan to
continue to maintain capital discipline and monitor rapidly changing market
dynamics and adjust our costs and financing strategies accordingly, and we
expect capital expenditures for 2021 to be approximately $325 million.
Additionally, we continue to assess the expected negative impact of the
challenged energy market, which has been compounded by the COVID-19 pandemic, on
our goodwill, intangible assets, long-lived assets, and investments. We did not
recognize any impairments during the three months ended March 31, 2021; however,
the potential impacts remain uncertain and may change based on numerous factors.
We are continuing to monitor these conditions and should a reporting unit or
investment suffer additional significant declines in actual or forecasted
financial results, the risk of impairment would increase.
During 2020, the U.S. federal government also enacted the Coronavirus Aid,
Relief, and Economic Security Act (the CARES Act), which provides for various
tax relief and tax incentive measures. These measures are not expected to have a
material impact on our results of operations. However, pursuant to the CARES Act
, we deferred the payment of $108.9 million of the employer portion of payroll
taxes during the year ended December 31, 2020, 50% of which are due by December
31, 2021 and the remainder of which are due by December 31, 2022.
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 2021
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 development, availability and administration of effective
treatments and vaccines; the actions taken by governmental authorities,
customers, suppliers and other third parties and the consequences of those
actions; our workforce availability; and the timing and extent to which normal
economic and operating conditions resume and continue. For additional discussion
regarding risks associated with the COVID-19 pandemic, see Item 1A. Risk Factors
of Part I of our 2020 Annual Report.
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 Overview and in Cautionary Statement
About Forward-Looking Statements and Information and referred to in 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 Segment. 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.
Utilities are accommodating a changing fuel generation mix that is moving toward
more sustainable sources such as renewables and natural gas and replacing aging
infrastructure to support long-term economic growth. 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 electric vehicles. A number of utilities have
and continue to implement system upgrades or hardening programs in response to
recurring severe weather events, such as hurricanes and wildfires, and in
particular there are significant system resiliency initiatives in California and
other regions in the western U.S. underway that are designed to prevent and
manage the impact of wildfires. These resiliency initiatives provide additional
opportunities for our services; however, they also increase our potential
exposure to significant liabilities attributable to those events.
While the COVID-19 pandemic has resulted in an overall decline in electricity
usage in the near term, primarily related to commercial and industrial users, we
expect demand for electricity in North America to grow over the long term and
believe that certain segments of the North American electric power grid are not
adequate to efficiently serve the power needs of the future. Furthermore, to the
extent that electrification trends increase, including electric vehicle (EV)
adoption, demand for electricity could be greater than currently anticipated. As
demand for a carbon-neutral economy and cleaner power generation increases, we
also expect an increase in new power generation facilities powered by renewable
energy sources (e.g. solar and wind) and certain traditional energy sources
(e.g., natural gas). 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.
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With respect to our communications service offerings, consumer and commercial
demand for communication and data-intensive, high-bandwidth wireline and
wireless services and applications is driving significant investment in
infrastructure and the deployment of new technologies. In particular,
communications providers in North America are in the early stages of developing
new fifth generation wireless services (5G), which are intended to facilitate
bandwidth-intensive services at high speeds for consumers and commercial
applications. Additionally, the Federal Communications Commission has enacted
the Rural Digital Opportunity Fund for the purpose of deploying billions of
dollars in federal funds for high speed fixed broadband service to underserved
rural homes and small businesses. As a result of these industry trends, we
believe there will be meaningful demand for our engineering and construction
services. We also reoriented our communications service offerings to
strategically focus on the North American market, substantially completing the
exit of our Latin American communications operations during 2020, which we
anticipate will result in improved profitability.
Underground Utility and Infrastructure Solutions Segment. 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 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, lower natural gas prices,
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 or 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 existing pipeline infrastructure more
valuable, motivating owners to extend the useful life of existing pipeline
assets through integrity initiatives.
Our services to downstream industrial energy customers, which are primarily
located along the Gulf Coast of the United States and in other select markets in
North America, have been negatively impacted by the challenging overall energy
market conditions that resulted in an overall decline in global demand for
refined products during 2020 and thus far in 2021. While demand for our critical
path catalyst services has remained solid, in the second half of 2020 customers
began reducing onsite activity for our other services and have deferred
maintenance and certain turnaround projects to late 2021 and 2022. Despite the
current market conditions, we believe there are significant long-term
opportunities for these services, including our high-pressure and critical-path
turnaround services, as well as our capabilities with respect to instrumentation
and electrical services, piping, fabrication and storage tanks services, and
other industrial services, and that processing facilities located along the U.S.
Gulf Coast region should have certain long-term strategic advantages due to
their proximity to affordable hydrocarbon resources. However, these processing
facilities can also be negatively impacted for short-term periods due to severe
weather events, such as hurricanes, tropical storms and floods.
Furthermore, the broader oil and gas industry is highly cyclical and subject to
price and production volume volatility, such as the current low commodity price
environment, which can impact demand for our services. For example, certain of
our end markets where the price of oil is influential, such as Australia, the
Canadian Oil Sands and certain oil-driven U.S. shale formations, have been
materially impacted by the current challenged energy market. We have also
entered the late-stage of the current construction cycle of larger pipeline
projects, while the anticipated next cycle of larger projects has been delayed
due to various factors, including, among other things, permitting delays and
worksite access limitations related to environmental regulations. For example,
during 2020 an approximately 600-mile natural gas pipeline under construction in
the eastern United States, which we had been contracted to construct a portion
of, was terminated due to, among other things, continued regulatory delay and
risk. As a result of these dynamics, our revenues related to larger pipeline
projects have declined significantly over the last few years, including by
approximately $830 million from 2019 to 2020. This dynamic is an example of why
we have increased our focus on 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.
Lastly, we believe natural gas, due to its abundant supply and current low
price, will remain a fuel of choice for both primary power generation and backup
power generation for renewable power plants in North America, which we believe
could position the United States 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.
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Regulatory Challenges and Opportunities. The regulatory environment creates both
challenges and opportunities for our business, and in recent years electric
power 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, a recent challenge and changes to the U.S. Army Corps
of Engineers Clean Water Act Section 404 Nationwide Permit 12 have impacted
certain projects and could result in increased costs and project interruptions
or delays if we or our customers are forced to seek additional or revised
individual permits from the U.S. Army Corps of Engineers.
However, we believe that there are also several existing, pending or proposed
legislative or regulatory actions that may alleviate certain regulatory and
permitting issues and positively impact long-term demand, particularly in
connection with electric power infrastructure and renewable energy spending. For
example, regulatory changes affecting siting and right-of-way processes could
potentially accelerate construction for transmission projects, and state and
federal reliability standards are creating incentives for system investment and
maintenance. We also consider renewable energy, including solar and wind
generation facilities, to be an ongoing opportunity for our engineering, project
management and installation services; however, the economic feasibility of some
of these projects remains subject to the continued availability of tax incentive
programs.
Labor Resource Availability. 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 the point where
demand for labor resources will outpace supply. Furthermore, the cyclical nature
of the natural gas and oil industry can create shortages of qualified labor in
those markets during periods of high demand. 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.
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 and Item 1A.
Risk Factors of Part I of our 2020 Annual Report, and those factors have caused
fluctuations in our results in the past and are expected to cause fluctuations
in our results in the future. Additional information with respect to certain of
those factors is provided below.
Seasonality. Typically, our revenues are lowest in the first quarter of the year
because cold, snowy or wet conditions can create challenging working
environments that are more costly for our customers or cause delays on projects.
In addition, infrastructure projects often do not begin in a meaningful way
until our customers finalize their capital budgets, which typically occurs
during the first quarter. Second quarter revenues are typically higher than
those in the first quarter, as some projects begin, but continued cold and wet
weather can often impact productivity. Third quarter revenues are typically the
highest of the year, as a greater number of projects are underway and operating
conditions, including weather, are normally more accommodating. Generally,
revenues during the fourth quarter are lower than the third quarter but higher
than the second quarter, as many projects are completed and customers often seek
to spend their capital budgets before year end. However, the holiday season and
inclement weather can sometimes cause delays during the fourth quarter, reducing
revenues and increasing costs. These seasonal impacts are typical for our U.S.
operations, but seasonality for our international operations may differ. For
example, revenues in Canada are typically higher in the first quarter because
projects are often accelerated in order to complete work while the ground is
frozen and prior to the break up, or seasonal thaw, as productivity is adversely
affected by wet ground conditions during warmer months. Additionally, the
COVID-19 pandemic affected typical seasonality during 2020, and due to continued
uncertainty regarding the future impact of the pandemic, our typical seasonality
could also be impacted in 2021.
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, pandemics
(including the ongoing COVID-19 pandemic) and earthquakes. These conditions and
events can negatively impact
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our financial results due to, among other things, the termination, deferral or
delay of projects, reduced productivity and exposure to significant liabilities.
See Overview - COVID-19 Pandemic 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 - COVID 19 Pandemic, we have experienced
reductions in demand for certain services as a result of disruptions due to
shelter-in-place and worksite access restrictions and delays in regulatory
agency operations due to the COVID-19 pandemic, as well as the decline in
commodity prices and decreased demand for refined products. Examples of other
items that may cause demand for our services to fluctuate materially from
quarter to quarter include: the financial condition of our customers, their
capital spending and their access to capital; economic and political conditions
on a regional, national or global scale, including interest rates, governmental
regulations affecting the sourcing of materials and equipment, and other changes
in U.S. and global trade relationships; and project deferrals and cancellations.
Revenue mix and impact on margins. The mix of revenues based on the types of
services we provide in a given period will impact margins, as certain industries
and services provide higher-margin opportunities. Larger or more complex
projects with higher voltage capacities; larger-diameter throughput capacities;
increased engineering, design or construction complexities; more difficult
terrain or geographical requirements; or longer distance requirements typically
yield opportunities for higher margins than our recurring services 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 larger 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, and expect to
continue generating, 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 or the incurrence of losses on a project. 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.
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 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, including projects where we provide
engineering, procurement and construction (EPC) services, as our markup on
materials is generally lower than our markup on labor costs. Furthermore,
fluctuations in the price or availability of materials and equipment we or our
customers procure, including as a result of changes in U.S. or global trade
relationships, governmental regulations affecting the sourcing
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of certain materials and equipment or other economic or political conditions,
may impact our margins or cause delays. In a given period, an increase in the
percentage of work with higher materials procurement requirements may decrease
our overall margins.
Foreign currency risk. Our financial performance is reported on a U.S.
dollar-denominated basis but is partially subject to fluctuations in foreign
currency exchange rates. Fluctuations in exchange rates relative to the U.S.
dollar, primarily Canadian and Australian dollars, can materially impact margins
and comparisons of our results of operations between periods.

Results of Operations
The results of acquired businesses have been included in the following results
of operations beginning on their respective acquisition dates. The following
table sets forth selected statements of operations data, such data as a
percentage of revenues for the periods indicated, as well as the dollar and
percentage change from the prior period (dollars in thousands):
Consolidated Results
                                                                 Three Months Ended March 31,                                           Change
                                                          2021                                     2020                          $                  %
Revenues                                  $    2,703,581               100.0  %       $ 2,764,095            100.0  %       $ (60,514)             (2.2) %
Cost of services (including
depreciation)                                  2,330,691                86.2            2,431,899             88.0           (101,208)             (4.2) %
Gross profit                                     372,890                13.8              332,196             12.0             40,694              12.2  %
Equity in earnings of integral
unconsolidated affiliates                          5,183                 0.2                    -                -              5,183

*


Selling, general and administrative
expenses                                        (243,352)               (9.0)            (230,793)            (8.3)           (12,559)              5.4  %
Amortization of intangible assets                (21,355)               (0.8)             (17,908)            (0.7)            (3,447)

19.2 %



Change in fair value of contingent
consideration liabilities                            363                   -               (2,758)            (0.1)             3,121            (113.2) %
Operating income                                 113,729                 4.2               80,737              2.9             32,992              40.9  %
Interest expense                                 (12,475)               (0.5)             (14,006)            (0.4)             1,531             (10.9) %
Interest income                                      117                   -                  759                -               (642)            (84.6) %
Other income (expense), net                        3,672                 0.2               (9,827)            (0.4)            13,499            (137.4) %
Income before income taxes                       105,043                 3.9               57,663              2.1             47,380              82.2  %
Provision for income taxes                        13,724                 0.5               16,160              0.6             (2,436)            (15.1) %

Net income                                        91,319                 3.4               41,503              1.5             49,816             120.0  %
Less: Net income attributable to
non-controlling interests                          1,558                 0.1                2,817              0.1             (1,259)            (44.7) %
Net income attributable to common
stock                                     $       89,761                 3.3  %       $    38,686              1.4  %       $  51,075             132.0  %


* The percentage change is not meaningful.
Revenues. Revenues decreased primarily due to a reduction in services related to
larger pipeline transmission projects and the challenged energy market
conditions, exacerbated by the impact of the COVID-19 pandemic, which resulted
in lower revenues of $353.6 million from our Underground Utility and
Infrastructure Solutions segment. This decrease was partially offset by
increased revenues of $293.1 million from our Electric Power Infrastructure
Solutions segment due to strong demand for our electric power services. See
Segment Results below for additional information and discussion related to
segment revenues.
Gross profit. The increase in gross profit was 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
three months ended March 31, 2021 primarily relates to our portion of amounts
earned by LUMA Energy, LLC (LUMA) for transition services performed under the
agreement awarded in June 2020 for the operation and maintenance of the electric
transmission and distribution system in Puerto Rico.
Selling, general and administrative expenses. Selling, general and
administrative expenses as a percentage of revenues increased to 9.0% for the
three months ended March 31, 2021, as compared to 8.3% for the three months
ended March 31,
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2020, which was partially due to the decrease in revenues described above. The
increase in selling, general and administrative expenses was also attributable
to a $9.8 million increase in expenses associated with acquired businesses and a
$4.8 million increase in compensation expense, which was primarily due to
increased incentive and non-cash stock-based compensation awarded as a result of
higher levels of operating performance. These increases were partially offset by
certain cost containment measures we implemented in the current operating
environment, including a $5.8 million decrease in travel and related
expenses. Also contributing to the increase was a $2.4 million increase in the
fair market value of deferred compensation liabilities during the three months
ended March 31, 2021, as compared to a $7.8 million decrease in the fair market
value of deferred compensation liabilities during the three months ended
March 31, 2020. These 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 increased
amortization of intangible assets associated with recently acquired businesses,
partially offset by reduced amortization expense from previously acquired
intangible assets, as certain of those assets became fully amortized.
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 decreased primarily due to a lower weighted
average interest rate associated with our senior credit facility and a lower
average overall debt balance outstanding, considering both our senior credit
facility and senior notes.
Other income (expense), net. The net other income for the three months ended
March 31, 2021 includes a $1.6 million increase in the fair market value of
assets associated with our deferred compensation plan, as compared to a $7.4
million decrease in the fair market value of assets associated with our deferred
compensation plan during the three months ended March 31, 2020. These changes in
fair market value of the assets 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. Also impacting the three months ended March 31,
2021 was $0.7 million of equity in earnings of non-integral unconsolidated
affiliates, as compared to $2.7 million of equity in losses of non-integral
unconsolidated affiliates during the three months ended March 31, 2020, which
included the recognition of impairment losses of $3.1 million related to an
investment that was impacted by the decline in commodity prices and production
volumes.
Provision for income taxes. The effective tax rates for the three months ended
March 31, 2021 and 2020 were 13.1% and 28.0%. The lower rate for the three
months ended March 31, 2021 was primarily due to the recognition of an $18.0
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 $2.3 million associated with this tax benefit for the three
months ended March 31, 2020, which was due to a smaller difference between the
vest date fair market value and grant date fair market value of vested equity
incentive awards.
Other comprehensive income (loss). Other comprehensive income (loss) results
from translation of the balance sheets of our foreign operating units, which are
primarily located in Canada and Australia and have functional currencies other
than the U.S. dollar, and therefore are affected by the strengthening or
weakening of the U.S. dollar against such currencies. The gain in the three
months ended March 31, 2021 was primarily impacted by the weakening of the U.S.
dollar against the Canadian dollar as of March 31, 2021 when compared to
December 31, 2020. The loss in the three months ended March 31, 2020 was
primarily impacted by the strengthening of the U.S. dollar against the Canadian
dollar as of March 31, 2020 when compared to December 31, 2019.
Segment Results
Reportable segment information, including revenues and operating income by type
of work, is gathered from each operating unit for the purpose of evaluating
segment performance. Classification of our operating unit revenues by type of
work for segment reporting purposes can at times require judgment on the part of
management. Our operating units may perform joint projects for customers in
multiple industries, deliver multiple types of services under a single customer
contract or provide service offerings to various industries. For example, we
perform joint trenching projects to install distribution lines for electric
power and natural gas customers. Our integrated operations and common
administrative support for operating units require that certain allocations be
made to determine segment profitability, including allocations of shared and
indirect costs (e.g., facility costs), indirect operating expenses (e.g.,
depreciation), and general and administrative costs. Certain corporate costs are
not allocated, including payroll and benefits, employee travel expenses,
facility costs, professional fees, acquisition costs, non-cash
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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.
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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