The following discussion and analysis of the financial condition and results of operations ofQuanta Services, Inc. (together with its subsidiaries, Quanta, we, us or our) should be read in conjunction with our condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q (Quarterly Report) and with our Annual Report on Form 10-K for the year endedDecember 31, 2020 (2020 Annual Report), which was filed with theSecurities and Exchange Commission (SEC) onMarch 1, 2021 and is available on theSEC's website at www.sec.gov and on our website at www.quantaservices.com. The discussion below contains forward-looking statements that are based upon our current expectations and are subject to uncertainty and changes in circumstances. Actual results may differ materially from these expectations due to inaccurate assumptions and known or unknown risks and uncertainties, including those identified in Cautionary Statement About Forward-Looking Statements and Information above 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 inthe United States ,Canada ,Australia and select other international markets. The performance of our business generally depends on our ability to obtain contracts with customers and to effectively deliver the services provided under those contracts. The services we provide include the design, engineering, new construction, upgrade and repair and maintenance of infrastructure within each of the industries we serve, such as electric power transmission and distribution networks; substation facilities; 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 endedMarch 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 endedMarch 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 endedMarch 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 endedMarch 31, 2020 ; •Diluted earnings per share increased 136.6%, or$0.36 , to$0.62 as compared to$0.26 for the three months endedMarch 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 endedMarch 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 endedMarch 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 endedMarch 31, 2020 ; •Remaining performance obligations increased 3.8%, or$149.5 million , to$4.13 billion as ofMarch 31, 2021 as compared to$3.99 billion as ofDecember 31, 2020 ; and •Total backlog (a non-GAAP measure) increased 4.6%, or$697.9 million , to$15.83 billion as ofMarch 31, 2021 , as compared to$15.13 billion as ofDecember 31, 2020 . For a reconciliation of EBITDA and adjusted EBITDA to net income attributable to common stock, the most comparable GAAP measure, and a reconciliation of backlog to remaining performance obligations, the most comparable GAAP measure, see Non-GAAP Reconciliations below. 49 -------------------------------------------------------------------------------- As described below, during the three months endedMarch 31, 2021 , our results were impacted by certain significant operational trends and events as compared to the three months endedMarch 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 inCanada , and approximately$70 million of revenues from acquired businesses. •Revenues for the three months endedMarch 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 andU.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 inCanada 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 endedMarch 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 majorU.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 inLatin America , which contributed to significant losses during 2020 for those operations. 50 -------------------------------------------------------------------------------- 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 ofMarch 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 endedMarch 31, 2021 and$1.12 billion in cash flow from operating activities in the year endedDecember 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 endedMarch 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, theU.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 endedDecember 31, 2020 , 50% of which are due byDecember 31, 2021 and the remainder of which are due byDecember 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 inCalifornia and other regions in the westernU.S. underway that are designed to prevent and manage the impact of wildfires. These resiliency initiatives provide additional opportunities for our services; however, they also increase our potential exposure to significant liabilities attributable to those events. 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 inNorth America to grow over the long term and believe that certain segments of the North American electric power grid are not adequate to efficiently serve the power needs of the future. 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. 51 -------------------------------------------------------------------------------- With respect to our communications service offerings, consumer and commercial demand for communication and data-intensive, high-bandwidth wireline and wireless services and applications is driving significant investment in infrastructure and the deployment of new technologies. In particular, communications providers inNorth America are in the early stages of developing new fifth generation wireless services (5G), which are intended to facilitate bandwidth-intensive services at high speeds for consumers and commercial applications. Additionally, theFederal Communications Commission has enacted theRural Digital Opportunity Fund for the purpose of deploying billions of dollars in federal funds for high speed fixed broadband service to underserved rural homes and small businesses. As a result of these industry trends, we believe there will be meaningful demand for our engineering and construction services. We also reoriented our communications service offerings to strategically focus on the North American market, substantially completing the exit of our Latin American communications operations during 2020, which we anticipate will result in improved profitability. 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 theGulf Coast ofthe United States and in other select markets inNorth America , have been negatively impacted by the challenging overall energy market conditions that resulted in an overall decline in global demand for refined products during 2020 and 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 theU.S. Gulf Coast region should have certain long-term strategic advantages due to their proximity to affordable hydrocarbon resources. However, these processing facilities can also be negatively impacted for short-term periods due to severe weather events, such as hurricanes, tropical storms and floods. Furthermore, the broader oil and gas industry is highly cyclical and subject to price and production volume volatility, 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 asAustralia , the Canadian Oil Sands and certain oil-drivenU.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 easternUnited 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 inNorth America , which we believe could positionthe 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. 52 -------------------------------------------------------------------------------- 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 theU.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 theU.S. Army Corps of Engineers . However, we believe that there are also several existing, pending or proposed legislative or regulatory actions that may alleviate certain regulatory and permitting issues and positively impact long-term demand, particularly in connection with electric power infrastructure and renewable energy spending. For example, regulatory changes affecting siting and right-of-way processes could potentially accelerate construction for transmission projects, and state and federal reliability standards are creating incentives for system investment and maintenance. 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 ourU.S. operations, but seasonality for our international operations may differ. For example, revenues inCanada are typically higher in the first quarter because projects are often accelerated in order to complete work while the ground is frozen and prior to the break up, or seasonal thaw, as productivity is adversely affected by wet ground conditions during warmer months. Additionally, the COVID-19 pandemic affected typical seasonality during 2020, and 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 53 -------------------------------------------------------------------------------- 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 inU.S. and global trade relationships; and project deferrals and cancellations. Revenue mix and impact on margins. The mix of revenues based on the types of services we provide in a given period will impact margins, as certain industries and services provide higher-margin opportunities. 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 inU.S. or global trade relationships, governmental regulations affecting the sourcing 54 -------------------------------------------------------------------------------- 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 aU.S. dollar-denominated basis but is partially subject to fluctuations in foreign currency exchange rates. Fluctuations in exchange rates relative to theU.S. dollar, primarily Canadian 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 ourElectric 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 endedMarch 31, 2021 primarily relates to our portion of amounts earned byLUMA Energy, LLC (LUMA) for transition services performed under the agreement awarded inJune 2020 for the operation and maintenance of the electric transmission and distribution system inPuerto Rico . Selling, general and administrative expenses. Selling, general and administrative expenses as a percentage of revenues increased to 9.0% for the three months endedMarch 31, 2021 , as compared to 8.3% for the three months endedMarch 31 , 55 -------------------------------------------------------------------------------- 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 endedMarch 31, 2021 , as compared to a$7.8 million decrease in the fair market value of deferred compensation liabilities during the three months endedMarch 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 endedMarch 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 endedMarch 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 endedMarch 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 endedMarch 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 endedMarch 31, 2021 and 2020 were 13.1% and 28.0%. The lower rate for the three months endedMarch 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 endedMarch 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 inCanada andAustralia and have functional currencies other than theU.S. dollar, and therefore are affected by the strengthening or weakening of theU.S. dollar against such currencies. The gain in the three months endedMarch 31, 2021 was primarily impacted by the weakening of theU.S. dollar against the Canadian dollar as ofMarch 31, 2021 when compared toDecember 31, 2020 . The loss in the three months endedMarch 31, 2020 was primarily impacted by the strengthening of theU.S. dollar against the Canadian dollar as ofMarch 31, 2020 when compared toDecember 31, 2019 . Segment Results Reportable segment information, including revenues and operating income by type of work, is gathered from each operating unit for the purpose of evaluating segment performance. Classification of our operating unit revenues by type of work for segment reporting purposes can at times require judgment on the part of management. Our operating units may perform joint projects for customers in multiple industries, deliver multiple types of services under a single customer contract or provide service offerings to various industries. For example, we perform joint trenching projects to install distribution lines for electric power and natural gas customers. Our integrated operations and common administrative support for operating units require that certain allocations be made to determine segment profitability, including allocations of shared and indirect costs (e.g., facility costs), indirect operating expenses (e.g., depreciation), and general and administrative costs. Certain corporate costs are not allocated, including payroll and benefits, employee travel expenses, facility costs, professional fees, acquisition costs, non-cash 56
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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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