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QUANTA SERVICES INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations.
(Edgar Glimpses Via Acquire Media NewsEdge)
The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our condensed consolidated
financial statements and related notes included elsewhere in this Quarterly
Report on Form 10-Q and with our Annual Report on Form 10-K for the year ended
December 31, 2011, which was filed with the Securities and Exchange Commission
(SEC) on February 29, 2012 and is available on the SEC's website at www.sec.gov
and on our website, which is 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 under the
headings "Uncertainty of Forward-Looking Statements and Information" below in
this Item 2 and "Risk Factors" in Item 1A of Part II of this Quarterly Report.
Introduction
We are a leading provider of specialized contracting services, offering
infrastructure solutions primarily to the electric power, natural gas and oil
pipeline and telecommunications industries throughout North America and in
select international markets. The services we provide include the design,
installation, upgrade, repair and maintenance of infrastructure within each of
the industries we serve, such as electric power transmission and distribution
networks, substation facilities, renewable energy facilities, pipeline
transmission and distribution systems and facilities, and wireline and wireless
telecommunications networks used for video, data and voice transmission. We also
own fiber optic telecommunications infrastructure in select markets and license
the right to use these point-to-point fiber optic telecommunications facilities
to customers.
We report our results under four reportable segments: (1) Electric Power
Infrastructure Services, (2) Natural Gas and Pipeline Infrastructure Services,
(3) Telecommunications Infrastructure Services and (4) Fiber Optic Licensing.
This structure is generally focused on broad end-user markets for our services.
Our consolidated revenues for the nine months ended September 30, 2012 were
approximately $4.63 billion, of which 65.6% was attributable to the Electric
Power Infrastructure Services segment, 23.8% to the Natural Gas and Pipeline
Infrastructure Services segment, 8.8% to the Telecommunications Infrastructure
Services segment and 1.8% to the Fiber Optic Licensing segment.
Our customers include many of the leading companies in the industries we serve.
We have developed strong strategic alliances with numerous customers and strive
to develop and maintain our status as a preferred vendor to our customers. We
enter into various types of contracts, including competitive unit price, hourly
rate, cost-plus (or time and materials basis), and fixed price (or lump sum
basis), the final terms and prices of which we frequently negotiate with the
customer. Although the terms of our contracts vary considerably, most are made
on either a unit price or fixed price basis in which we agree to do the work for
a price per unit of work performed (unit price) or for a fixed amount for the
entire project (fixed price). We complete a substantial majority of our fixed
price projects, other than certain large transmission projects, within one year,
while we frequently provide maintenance and repair work under open-ended unit
price or cost-plus master service agreements that are renewable periodically.
We recognize revenue on our unit price and cost-plus contracts as units are
completed or services are performed. For our fixed price contracts, we record
revenues as work under the contract progresses on a percentage-of-completion
basis. Under this method, revenue is recognized based on the percentage of total
costs incurred to date in proportion to total estimated costs to complete the
contract. Fixed price contracts generally include retainage provisions under
which a percentage of the contract price is withheld until the project is
complete and has been accepted by our customer.
For internal management purposes, we are organized into three internal
divisions, namely, the electric power division, the natural gas and pipeline
division and the telecommunications division. These internal divisions are
closely aligned with the reportable segments described above based on the
predominant type of
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work provided by the operating units within each division. The operating units
providing predominantly telecommunications infrastructure services and fiber
optic licensing services are managed within the same internal division.
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 in support of our market strategies. These classifications
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 infrastructure service projects for customers in multiple
industries, deliver multiple types of infrastructure services under a single
customer contract or provide services across industries, for example, joint
trenching projects to install distribution lines for electric power, natural gas
and telecommunication customers. Our integrated operations and common
administrative support at each of our operating units requires certain
allocations, including allocations of shared and indirect costs, such as
facility costs, indirect operating expenses including depreciation and general
and administrative costs, to determine operating segment profitability.
Corporate costs, such as payroll and benefits, employee travel expenses,
facility costs, professional fees, acquisition costs and amortization related to
certain intangible costs are not allocated.
The Electric Power Infrastructure Services segment provides comprehensive
network solutions to customers in the electric power industry. Services
performed by the Electric Power Infrastructure Services segment generally
include the design, installation, upgrade, repair and maintenance of electric
power transmission and distribution networks and substation facilities along
with other engineering and technical services. This segment also provides
emergency restoration services, including the repair of infrastructure damaged
by inclement weather, the energized installation, maintenance and upgrade of
electric power infrastructure utilizing unique bare hand and hot stick methods
and our proprietary robotic arm technologies, and the installation of "smart
grid" technologies on electric power networks. In addition, this segment
designs, installs and maintains renewable energy generation facilities, in
particular solar and wind, and related switchyards and transmission networks. To
a lesser extent, this segment provides services such as the design,
installation, maintenance and repair of commercial and industrial wiring,
installation of traffic networks and the installation of cable and control
systems for light rail lines.
The Natural Gas and Pipeline Infrastructure Services segment provides
comprehensive network solutions to customers involved in the transportation of
natural gas, oil and other pipeline products. Services performed by the Natural
Gas and Pipeline Infrastructure Services segment generally include the design,
installation, repair and maintenance of pipeline transmission and distribution
systems, gathering systems and compressor and pump stations, as well as related
trenching, directional boring and automatic welding services. In addition, this
segment's services include pipeline protection, integrity testing,
rehabilitation and replacement, and fabrication of pipeline support systems and
related structures and facilities. To a lesser extent, this segment designs,
installs and maintains airport fueling systems as well as water and sewer
infrastructure.
The Telecommunications Infrastructure Services segment provides comprehensive
network solutions to customers in the wireline and wireless telecommunications
industry and the cable television industry. Services performed by the
Telecommunications Infrastructure Services segment generally include the design,
installation, repair and maintenance of fiber optic, copper and coaxial cable
networks used for video, data and voice transmission, as well as the design,
installation and upgrade of wireless communications networks, including towers,
switching systems and "backhaul" links from wireless systems to voice, data and
video networks. This segment also provides emergency restoration services,
including the repair of telecommunications infrastructure damaged by inclement
weather. To a lesser extent, services provided under this segment include cable
locating, splicing and testing of fiber optic networks and residential
installation of fiber optic cabling.
The Fiber Optic Licensing segment designs, procures, constructs, maintains and
owns fiber optic telecommunications infrastructure in select markets and
licenses the right to use these point-to-point fiber optic telecommunications
facilities to our customers pursuant to licensing agreements, typically with
terms from five
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to twenty-five years, inclusive of certain renewal options. Under those
agreements, customers are provided the right to use a portion of the capacity of
a fiber optic network, with the network owned and maintained by us. The Fiber
Optic Licensing segment provides services to enterprise, education, carrier,
financial services and healthcare customers, as well as other entities with high
bandwidth telecommunication needs. The telecommunication services provided
through this segment are subject to regulation by the Federal Communications
Commission and certain state public utility commissions.
Recent Investments and Acquisitions
On April 12, 2012, we acquired Service Electric Company (Service Electric), an
electric power infrastructure services company with operations primarily in the
Southeastern United States. The aggregate consideration paid consisted of
approximately $20.3 million in cash, 662,426 shares of our common stock valued
at approximately $12.5 million and the repayment of approximately $5.9 million
in debt. As this transaction was effective April 12, 2012, the results of
Service Electric have been included in our consolidated financial statements
beginning on such date. This acquisition enables us to further enhance our
electric power infrastructure service offerings. Service Electric's financial
results will generally be included in our Electric Power Infrastructure Services
segment.
On March 1, 2012, we acquired Phasor Engineering, Inc. (Phasor), which provides
engineering, procurement, construction, testing and maintenance services in
Western Canada. The aggregate consideration paid consisted of approximately $2.9
million in cash and 87,963 shares of our common stock valued at approximately
$1.7 million. As this transaction was effective March 1, 2012, the results of
the acquired business have been included in our consolidated financial
statements beginning on such date. This acquisition enables us to further
enhance our engineering service offerings. The financial results of Phasor will
generally be included in our Electric Power Infrastructure Services segment.
On January 9, 2012, we acquired the assets, operations and business of Crux
Subsurface, Inc. (Crux), which is a geotechnical exploration and construction
business providing contract drilling, micropile foundation and related services.
The aggregate consideration paid consisted of approximately $27.5 million in
cash, 856,105 shares of our common stock valued at approximately $16.7 million
and the repayment of approximately $4.2 million in debt. As this transaction was
effective January 9, 2012, the results of the acquired business have been
included in our consolidated financial statements beginning on such date. This
acquisition enables us to further enhance our electric power infrastructure
service offerings. The financial results of Crux will generally be included in
our Electric Power Infrastructure Services segment.
On January 4, 2012, we acquired Microline Technology Corporation and its
affiliates, Inline Devices, LLC and IonEarth, LLC (collectively Microline), an
engineering, research and development business that provides natural gas and oil
downhole technical and engineering support services and develops and
manufactures related inspection tools, along with replacement parts and repair
services. The aggregate consideration paid consisted of approximately $6.8
million in cash, 320,619 shares of our common stock valued at approximately $6.4
million and the repayment of approximately $0.9 million in debt. As this
transaction was effective January 4, 2012, the results of Microline have been
included in our consolidated financial statements beginning on such date. This
acquisition enables us to further enhance our natural gas and pipeline
infrastructure service offerings. Microline's financial results will generally
be included in our Natural Gas and Pipeline Infrastructure Services segment.
In the third and fourth quarters of 2011, we acquired five businesses, which
included three electric power infrastructure services companies based in Canada,
one electric power infrastructure services company based in the United States
and one natural gas and pipeline infrastructure services company based in
Australia. These businesses have been reflected in our consolidated financial
statements as of their respective acquisition dates. The aggregate consideration
for these acquisitions consisted of approximately $80.8 million in cash,
1,939,813 shares of our common stock valued at approximately $32.4 million and
the repayment of approximately $3.4 million in debt. These acquisitions allow us
to further expand our capabilities and scope of
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services internationally and in the United States. The financial results of four
of these businesses will generally be included in our Electric Power
Infrastructure Services segment, while the results of one of the businesses will
generally be included in our Natural Gas and Pipeline Infrastructure Services
segment.
On June 22, 2011, we acquired an equity ownership interest of approximately 39%
in Howard Midstream Energy Partners, LLC (HEP) for an initial capital
contribution of $35.0 million. HEP is engaged in the business of owning,
operating and constructing midstream plant and pipeline assets in the natural
gas and oil industry. HEP commenced operations in June 2011 with the
acquisitions of Texas Pipeline LLC, a pipeline operator in the Eagle Ford shale
region of South Texas, and Bottom Line Services, LLC, a construction services
company. Our investment in HEP is expected to provide strategic growth
opportunities in the ongoing development of the Texas Eagle Ford shale region.
We contributed an additional $52.3 million in the aggregate to HEP in March and
April 2012 toward the acquisition of 45,435 Class D units of HEP. Howard
Midstream Energy Partners, LLC, used the proceeds of our investment, together
with capital contributed by other third party investors, to purchase additional
pipeline assets in the Eagle Ford shale region. As a result of this transaction
and other third party investments in HEP, our total equity ownership interest in
HEP decreased from approximately 39% at March 31, 2012 to approximately 31%. We
account for this investment using the equity method of accounting.
Backlog
Backlog represents the amount of revenue that we expect to realize from work to
be performed in the future on uncompleted contracts, including new contractual
agreements on which work has not begun. Our backlog includes estimates of
revenues to be realized under long-term maintenance contracts in addition to
construction contracts. We determine the amount of backlog for work under
long-term maintenance contracts, or master service agreements (MSAs), by using
recurring historical trends inherent in the current MSAs, factoring in seasonal
demand and projected customer needs based upon ongoing communications with the
customer. The following tables present our total backlog by reportable segment
as of September 30, 2012 and December 31, 2011, along with an estimate of the
backlog amounts expected to be realized within 12 months of each balance sheet
date (in thousands):
Backlog as of Backlog as of
September 30, 2012 December 31, 2011
12 Month Total 12 Month Total
Electric Power Infrastructure
Services $ 2,857,161 $ 4,803,868 $ 2,365,531 $ 4,959,964
Natural Gas and Pipeline
Infrastructure Services 867,486 1,517,733 768,152 1,347,173
Telecommunications Infrastructure
Services 349,047 519,440 336,030 529,589
Fiber Optic Licensing 97,717 431,537 102,773 402,007
Total $ 4,171,411 $ 7,272,578 $ 3,572,486 $ 7,238,733
As discussed above, our backlog includes estimates of revenues to be realized
under MSAs. Generally, our customers are not contractually committed to specific
volumes of services under our MSAs, and many of our contracts may be terminated
with notice, typically 30 to 90 days, even if we are not in default under the
contract. There can be no assurance as to our customers' requirements or that
our estimates are accurate. In addition, many of our MSAs, as well as contracts
for fiber optic licensing, are subject to renewal options. For purposes of
calculating backlog, we have included future renewal options only to the extent
the renewals can reasonably be expected to occur. Projects included in backlog
can be subject to delays as a result of commercial issues, regulatory
requirements, adverse weather and other factors, which could cause revenue
amounts to be realized in periods later than originally expected.
Seasonality; Fluctuations of Results; Economic Conditions
Our revenues and results of operations can be subject to seasonal and other
variations. These variations are influenced by weather, customer spending
patterns, bidding seasons, project timing and schedules, and holidays.
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Typically, our revenues are lowest in the first quarter of the year because
cold, snowy or wet conditions cause delays on projects. In addition, many of our
customers are developing their capital budgets for the coming year during the
first quarter and do not tend to begin infrastructure projects in a meaningful
way until their capital budgets are approved. 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 second quarter productivity.
Third quarter revenues are typically the highest of the year, as a greater
number of projects are underway and weather is more accommodating to work on
projects. Generally, revenues during the fourth quarter of the year are lower
than the third quarter but higher than the second quarter. Many projects are
completed in the fourth quarter, and revenues are often impacted positively by
customers seeking to spend their capital budgets before the end of the year;
however, the holiday season and inclement weather can sometimes cause delays,
reducing revenues and increasing costs. Any quarter may be positively or
negatively affected by atypical weather patterns in a given part of the country,
such as severe weather, excessive rainfall or warmer winter weather, making it
difficult to predict these variations and their effect on particular projects
quarter to quarter.
Additionally, our industry can be highly cyclical. As a result, our volume of
business may be adversely affected by declines or delays in new projects in
various geographic regions in the United States and Canada. Project schedules,
particularly in connection with larger, longer-term projects, can also create
fluctuations in the services provided, which may adversely affect us in a given
period. The financial condition of our customers and their access to capital,
variations in the margins of projects performed during any particular period,
regional, national and global economic and market conditions, timing of
acquisitions, the timing and magnitude of acquisition and integration costs
associated with acquisitions and interest rate fluctuations are examples of
items that may also materially affect quarterly results. Accordingly, our
operating results in any particular period may not be indicative of the results
that can be expected for any other period.
We and our customers continue to operate in a challenging business environment,
with heightened regulatory and environmental requirements, stringent permitting
processes and only gradual recovery in the economy from recessionary levels. We
are closely monitoring our customers and the effect that changes in economic and
market conditions have had or may have on them. Certain of our customers have
reduced or delayed spending over the past three years, which we attribute
primarily to regulatory and permitting hurdles and negative economic and market
conditions, and we anticipate that these issues may continue to affect demand
for some of our services in the near-term. However, we believe that most of our
customers, many of whom are regulated utilities, remain financially stable in
general and will be able to continue with their business plans in the long-term.
Please read "Outlook" and "Understanding Margins" for additional discussion of
trends and challenges that may affect our financial condition, results of
operations and cash flows.
Understanding Margins
Our gross margin is gross profit expressed as a percentage of revenues, and our
operating margin is operating income expressed as a percentage of revenues. Cost
of services, which is subtracted from revenues to obtain gross profit, consists
primarily of salaries, wages and benefits to employees, depreciation, fuel and
other equipment expenses, equipment rentals, subcontracted services, insurance,
facilities expenses, materials and parts and supplies. Selling, general and
administrative expenses and amortization of intangible assets are then
subtracted from gross profit to obtain operating income. Various factors - some
controllable, some not - impact our margins on a quarterly or annual basis.
Seasonal and geographical. As discussed previously, seasonal patterns can have a
significant impact on margins. Generally, business is slower in the winter
months versus the warmer months of the year, resulting in lower productivity and
consequently reducing our ability to cover fixed costs. This can be offset
somewhat by increased demand for electrical service and repair work resulting
from severe weather. Additionally, project schedules, including when projects
begin and when they are completed, may impact margins. The mix of business
conducted in different parts of the country will also affect margins, as some
parts of the country offer the opportunity for higher margins than others due to
the geographic characteristics associated with the physical
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location where the work is being performed. Such characteristics include whether
the project is performed in an urban versus a rural setting or in a mountainous
area or in open terrain. Site conditions, including unforeseen underground
conditions, can also impact margins.
Weather. Adverse or favorable weather conditions can impact margins in a given
period. For example, snow or rainfall in the areas in which we operate may
negatively impact our revenues and margins due to reduced productivity, as
projects may be delayed or temporarily placed on hold until weather conditions
improve. Conversely, in periods when weather remains dry and temperatures are
accommodating, more work can be done, sometimes with less cost, which would have
a favorable impact on margins. In some cases, severe weather, such as hurricanes
and ice storms, can provide us with higher margin emergency restoration service
work, which generally has a positive impact on margins.
Revenue mix. The mix of revenues derived from the industries we serve will
impact margins, as certain industries provide higher margin opportunities.
Additionally, changes in our customers' spending patterns in each of the
industries we serve can cause an imbalance in supply and demand and, therefore,
affect margins and mix of revenues by industry served.
Service and maintenance versus installation. Installation work is often
performed on a fixed price basis, while maintenance work is often performed
under pre-established or negotiated prices or cost-plus pricing arrangements.
Margins for installation work may vary from project to project, and may be
higher than maintenance work, as work obtained on a fixed price basis has higher
risk than other types of pricing arrangements. We typically derive approximately
30% of our annual revenues from maintenance work, but a higher portion of
installation work in any given period may affect our margins for that period.
Subcontract work. Work that is subcontracted to other service providers
generally yields lower margins. An increase in subcontract work in a given
period may contribute to a decrease in margins. We typically subcontract
approximately 15% to 20% of our work to other service providers.
Materials versus labor. Typically, our customers are responsible for supplying
their own materials on projects; however, for some of our contracts, we may
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 mark-up on
materials is generally lower than on our labor costs. In a given period, an
increase in the percentage of work with higher materials procurement
requirements may decrease our overall margins.
Depreciation. We include depreciation in cost of services. This is common
practice in our industry, but it can make comparability of our margins to those
of other companies difficult. This must be taken into consideration when
comparing us to other companies.
Insurance. Margins could be impacted by fluctuations in insurance accruals as
additional claims arise and as circumstances and conditions of existing claims
change. We are insured for employer's liability, general liability, auto
liability and workers' compensation claims. Since August 1, 2009, all policy
deductible levels are $5.0 million per occurrence, other than employer's
liability, which is subject to a deductible of $1.0 million. We also have
employee health care benefit plans for most employees not subject to collective
bargaining agreements, of which the primary plan is subject to a deductible of
$350,000 per claimant per year.
Performance risk. Margins may fluctuate because of the volume of work and the
impacts of pricing and job productivity, which can be affected both positively
and negatively by weather, geography, customer decisions and crew productivity.
For example, when comparing a service contract between a current quarter and the
comparable prior year's quarter, factors affecting the gross margins associated
with the revenues generated by the contract may include pricing under the
contract, the volume of work performed under the contract, the mix of the type
of work specifically being performed and the productivity of the crews
performing the work. Productivity can be influenced by many factors, including
where the work is performed (e.g., rural versus urban area or
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mountainous or rocky area versus open terrain), whether the work is on an open
or encumbered right of way, the impacts of inclement weather or the effects of
environmental restrictions or regulatory delays. These types of factors are not
practicable to quantify through accounting data, but each of these items may
individually or in the aggregate have a direct impact on the gross margin of a
specific project.
Selling, General and Administrative Expenses
Selling, general and administrative expenses consist primarily of compensation
and related benefits to management, administrative salaries and benefits,
marketing, office rent and utilities, communications, professional fees, bad
debt expense, acquisition costs, gains and losses on the sale of property and
equipment, letter of credit fees and maintenance, training and conversion costs
related to the implementation of an information technology solution.
Results of Operations
As previously discussed, we completed the acquisition of one business in the
second quarter of 2012, three businesses in the first quarter of 2012 and five
businesses during the third and fourth quarters of 2011. The results of these
acquisitions 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 and such data as a percentage of revenues for the
three and nine month periods indicated (dollars in thousands):
Consolidated Results
Three Months Ended September 30, Nine Months Ended September 30,
2012 2011 2012 2011
Revenues $ 1,685,201 100.0 % $ 1,250,819 100.0 % $ 4,627,074 100.0 % $ 3,110,692 100.0 %
Cost of services (including
depreciation) 1,404,767 83.4 1,056,129 84.4 3,915,718 84.6 2,691,021 86.5
Gross profit 280,434 16.6 194,690 15.6 711,356 15.4 419,671 13.5
Selling, general and
administrative expenses 124,276 7.4 92,414 7.4 345,633 7.5 273,444 8.8
Amortization of intangible
assets 10,504 0.6 8,295 0.7 29,447 0.6 21,432 0.7
Operating income 145,654 8.6 93,981 7.5 336,276 7.3 124,795 4.0
Interest expense (967 ) - (738 ) (0.1 ) (2,510 ) - (1,248 ) -
Interest income 384 - 226 - 1,179 - 761 -
Other income (expense), net 1,138 0.1 (528 ) - 993 - (394 ) -
Income before income taxes 146,209 8.7 92,941 7.4 335,938 7.3 123,914 4.0
Provision for income taxes 45,353 2.7 37,341 3.0 115,291 2.5 50,306 1.6
Net income 100,856 6.0 55,600 4.4 220,647 4.8 73,608 2.4
Less: Net income
attributable to
noncontrolling interests 4,458 0.3 3,606 0.2 13,004 0.3 7,407 0.3
Net income attributable to
common stock $ 96,398 5.7 % $ 51,994 4.2 % $ 207,643 4.5 % $ 66,201 2.1 %
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Three months ended September 30, 2012 compared to the three months ended
September 30, 2011
Revenues. Revenues increased $434.4 million, or 34.7%, to $1.69 billion for the
three months ended September 30, 2012, primarily as a result of overall
increases in capital spending by our customers. Electric power infrastructure
services revenues increased $266.6 million, or 32.4%, to $1.09 billion and
natural gas and pipeline infrastructure services revenues increased $138.4
million, or 53.5%, to $397.5 million for the three months ended September 30,
2012 as compared to the three months ended September 30, 2011, both primarily as
a result of increases in the number and size of transmission projects that were
ongoing during the current period as compared to the three months ended
September 30, 2011. Also contributing to the overall revenue increase were
higher revenues from telecommunications infrastructure services, which increased
$29.2 million, or 20.7%, to $169.9 million, primarily as a result of increased
customer spending associated with stimulus funded fiber optic network projects.
Revenues for the three months ended September 30, 2012 were also favorably
impacted by the additional contribution of approximately $61.9 million in
revenues from acquired companies.
Gross profit. Gross profit increased $85.7 million, or 44.0%, to $280.4 million
for the three months ended September 30, 2012. This increase was primarily due
to the impact of higher overall revenues earned across all segments during the
current period. Gross profit as a percentage of revenues increased to 16.6% for
the three months ended September 30, 2012 from 15.6% for the three months ended
September 30, 2011. Contributing to this increase in gross margin were
performance improvements across all segments during the three months ended
September 30, 2012 including increased contributions from higher margin electric
power transmission projects and increased contributions from natural gas
pipeline transmission projects. In addition, the higher revenues earned during
the current period also provided for overall better ability to cover operating
overhead costs.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $31.9 million, or 34.5%, to $124.3 million for
the three months ended September 30, 2012. The increase was primarily
attributable to $16.7 million in higher salary and incentive compensation costs
associated with current levels of operating activity, an increase of $5.1
million in professional fees primarily associated with ongoing technology
development costs, business development initiatives and legal matters and $4.6
million in additional administrative expenses associated with acquired
companies. Selling, general and administrative expenses as a percentage of
revenues remained constant at 7.4% for the three months ended September 30, 2011
and 2012.
Amortization of intangible assets. Amortization of intangible assets increased
$2.2 million to $10.5 million for the three months ended September 30, 2012.
This increase is primarily due to increased amortization of intangibles
associated with businesses acquired during 2011 and 2012, partially offset by
reduced amortization expense from previously acquired intangible assets as
certain of these assets became fully amortized.
Interest expense. Interest expense increased $0.2 million to $1.0 million as
compared to the three months ended September 30, 2011, primarily due to higher
levels of borrowings under the credit facility during the three months ended
September 30, 2012 as compared to the three months ended September 30, 2011 and
increased commitment fees on higher levels of borrowing capacity under the
credit facility entered into during the third quarter of 2011.
Interest income. Interest income increased $0.2 million to $0.4 million for the
three months ended September 30, 2012. The increase is primarily due to higher
interest rates earned for the three months ended September 30, 2012 as compared
to the three months ended September 30, 2011. The increase was partially offset
by lower average cash balances during the quarter ended September 30, 2012
compared to the quarter ended September 30, 2011.
Other income (expense). Other income (expense) increased $1.7 million to $1.1
million as compared to the three months ended September 30, 2011, primarily due
to $1.3 million of equity in earnings of unconsolidated affiliates recorded
during the three months ended September 30, 2012.
Provision for income taxes. The provision for income taxes was $45.4 million for
the three months ended September 30, 2012, with an effective tax rate of 31.0%.
The provision for income taxes was $37.3 million for the
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three months ended September 30, 2011, with an effective tax rate of 40.2%. The
lower effective tax rate for the three months ended September 30, 2012 was
primarily due to the recording of tax benefits in the amount of $7.1 million
associated with decreases in reserves for uncertain tax positions resulting from
the expiration of various federal and state statutes of limitations, higher
projected earnings for 2012 as compared to 2011 and a higher proportion of
income before taxes earned from international jurisdictions which are taxed at
lower statutory rates.
Nine months ended September 30, 2012 compared to the nine months ended
September 30, 2011
Revenues. Revenues increased $1.52 billion, or 48.7%, to $4.63 billion for the
nine months ended September 30, 2012, primarily as a result of overall increases
in capital spending by our customers. Electric power infrastructure services
revenues increased $980.8 million, or 47.7%, to $3.04 billion and natural gas
and pipeline infrastructure services revenues increased $450.8 million, or
69.8%, to $1.10 billion for the nine months ended September 30, 2012 as compared
to the nine months ended September 30, 2011. These increases were primarily the
result of increases in the number and size of electric and natural gas
transmission projects that were ongoing during the current period as compared to
the nine months ended September 30, 2011. Also contributing to the overall
revenue increase were higher revenues from telecommunications infrastructure
services, which increased $82.9 million, or 25.4%, to $409.4 million, primarily
as a result of increased customer spending associated with stimulus funded fiber
optic network projects and higher revenues from fiber to cell site and wireless
initiatives. Revenues for the nine months ended September 30, 2012 were also
favorably impacted by the contribution of approximately $162.0 million in
revenues from acquired companies.
Gross profit. Gross profit increased $291.7 million, or 69.5%, to $711.4 million
for the nine months ended September 30, 2012. This increase was primarily due to
the impact of higher overall revenues earned across all segments during the
current period. Gross profit as a percentage of revenues increased to 15.4% for
the nine months ended September 30, 2012 from 13.5% for the nine months ended
September 30, 2011. Contributing to the increase in gross margin from 2011 to
2012 were overall performance improvements across all segments during the nine
months ended September 30, 2012 including increased contributions from higher
margin electric power transmission projects, as well as the impact of prior year
losses on certain natural gas transmission pipeline projects incurred during the
nine months ended September 30, 2011 as a result of adverse winter weather
conditions, project delays and regulatory restrictions. In addition, the higher
revenues earned during the current period also enhanced our ability to cover
operating overhead costs.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $72.2 million, or 26.4%, to $345.6 million for
the nine months ended September 30, 2012. The increase was primarily
attributable to $38.1 million in higher salary and incentive compensation costs
associated with current levels of operating activity, $13.5 million in
professional fees associated with ongoing technology development costs, business
development initiatives and certain legal matters and an increase of $13.2
million in additional administrative expenses associated with acquired
companies. Selling, general and administrative expenses as a percentage of
revenues decreased from 8.8% for the nine months ended September 30, 2011 to
7.5% for the nine months ended September 30, 2012 primarily due to the impact of
higher overall revenues described above.
Amortization of intangible assets. Amortization of intangible assets increased
$8.0 million to $29.4 million for the nine months ended September 30, 2012. This
increase is primarily due to increased amortization of intangibles associated
with businesses acquired during 2011 and 2012, partially offset by reduced
amortization expense from previously acquired intangible assets as certain of
these assets became fully amortized.
Interest expense. Interest expense increased $1.3 million to $2.5 million for
the nine months ended September 30, 2012, primarily due to higher levels of
borrowings under the credit facility during the nine months ended September 30,
2012 as compared to the nine months ended September 30, 2011 and increased
commitment fees on higher levels of borrowing capacity under the credit facility
entered into during the third quarter of 2011. The increased commitment fees are
due to higher rates and increased unused availability under our current credit
facility.
42
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Table of Contents
Interest income. Interest income increased $0.4 million to $1.2 million for the
nine months ended September 30, 2012. The increase is primarily due to higher
interest rates earned for the nine months ended September 30, 2012 as compared
to the nine months ended September 30, 2011. The increase was partially offset
by lower average cash balances during the nine months ended September 30, 2012
compared to the nine months ended September 30, 2011.
Other income (expense). Other income (expense) increased $1.4 million from the
nine months ended September 30, 2011, primarily due to $1.3 million of equity in
earnings of unconsolidated affiliates recorded during the nine months ended
September 30, 2012.
Provision for income taxes. The provision for income taxes was $115.3 million
for the nine months ended September 30, 2012, with an effective tax rate of
34.3%. The provision for income taxes was $50.3 million for the nine months
ended September 30, 2011, with an effective tax rate of 40.6%. The lower
effective tax rate for the nine months ended September 30, 2012 was primarily
due to the recording of tax benefits associated with decreases in reserves for
uncertain tax positions resulting from the expiration of various federal and
state statutes of limitations, higher projected earnings for 2012 as compared to
2011 and a higher proportion of income before taxes earned from international
jurisdictions which are taxed at lower statutory rates.
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