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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 34 -------------------------------------------------------------------------------- Table of Contents 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 35 -------------------------------------------------------------------------------- Table of Contents 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 36-------------------------------------------------------------------------------- Table of Contents 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. 37-------------------------------------------------------------------------------- Table of Contents 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 38-------------------------------------------------------------------------------- Table of Contents 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 39-------------------------------------------------------------------------------- Table of Contents 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 % 40 -------------------------------------------------------------------------------- Table of Contents 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 41-------------------------------------------------------------------------------- Table of Contents 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 -------------------------------------------------------------------------------- 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. |