Item 2. Management’s Discussion and Analysis
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This management’s discussion and analysis provides a narrative on the Company’s financial performance and condition that should be read in conjunction with the accompanying unaudited consolidated financial statements and with our Annual Report on Form 10-K for the year ended December 31, 2021 (the “2021 Annual Report”). In addition to historical information, this discussion contains forward-looking statements that involve risks, uncertainties and assumptions that could cause actual results to differ materially from management’s expectations. Factors that could cause such differences are discussed herein under the captions “Cautionary Statement Concerning Forward-Looking Statements and Information” and “Risk Factors,” as well as in the 2021 Annual Report. We assume no obligation to update any of these forward-looking statements.
Overview and Outlook
We are a holding company of specialty electrical construction service providers that was established through the merger of long-standing specialty contractors. Through our subsidiaries, we serve the electric utility infrastructure, commercial and industrial construction markets. We manage and report our operations through two electrical contracting service segments: Transmission and Distribution (“T&D”) and Commercial and Industrial (“C&I”).
We have operated in the transmission and distribution industry since 1891. We are one of the largest U.S. contractors servicing the T&D sector of the electric utility industry and provide T&D services throughout the United States and in Ontario, Canada. Our T&D customers include many of the leading companies in the electric utility industry. We have provided electrical contracting services for commercial and industrial construction since 1912. Our C&I segment provides services in the United States and in western Canada. Our C&I customers include facility owners and general contractors.
We believe that we have a number of competitive advantages in both of our segments, including our skilled workforce, extensive centralized fleet, proven safety performance and reputation for timely completion of quality work that allows us to compete favorably in our markets. In addition, we believe that we are better capitalized than some of our competitors, which provides us with valuable flexibility to take on additional and more complex projects.
We believe legislative actions aimed at supporting infrastructure improvements in the United States may positively impact long-term demand, particularly in connection with electric power infrastructure, transportation and clean energy spending. We believe the legislative actions are likely to provide greater long-term opportunity in both of our reporting segments. However both of our segments and supporting operations may be subject to delays and cost volatility due to supply chain disruptions, inflationary pressures, tariffs, regulatory slowdowns and the continued market disruption from the COVID-19 pandemic, which may result in decelerations in project opportunities and awards.
We had consolidated revenues for the nine months ended September 30, 2022 of $2.14 billion, of which 57.5% was attributable to our T&D customers and 42.5% was attributable to our C&I customers. Our consolidated revenues for the nine months ended September 30, 2021 were $1.85 billion. For the nine months ended September 30, 2022, our net income and EBITDA (1) were $58.8 million and $123.8 million, respectively, compared to $64.3 million and $122.8 million, respectively, for the nine months ended September 30, 2021.
We believe there is an ongoing need for utilities to sustain investment in their transmission systems to improve reliability, reduce congestion and connect to new clean energy sources. Consequently, we anticipate that we will continue to see significant bidding activity on large transmission projects going forward. The timing of multi-year transmission project awards and substantial construction activity is difficult to predict due to regulatory requirements and the permitting needed to commence construction. Significant construction on any large, multi-year projects awarded in the remainder of 2022 will not likely begin until 2023. Bidding and construction activity for small to medium-size transmission projects and upgrades remain active, and we expect this trend to continue.
(1) EBITDA is a non-GAAP measure. Refer to “Non-GAAP Measure—EBITDA” for a discussion of this measure.
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As a result of reduced spending by United States utilities on their distribution systems for several years, we believe there is a need for sustained investment by utilities on their distribution systems to properly maintain or meet reliability requirements. We continue to see increased bidding activity in some of our electric distribution markets, as economic conditions improved in those areas. We believe the increased storm activity and destruction caused by wildfires will cause a push to strengthen utility distribution systems against catastrophic damage. Several industry and market trends are also prompting customers in the electric utility industry to seek outsourcing partners rather than performing projects internally. These trends include an aging electric utility workforce, increasing costs and staffing constraints. We believe electric utility employee retirements could increase, which may result in an increase in outsourcing opportunities. We expect to see an incremental increase in distribution opportunities in the markets we serve during the rest of 2022.
We expect C&I bidding opportunities to be impacted by continued market disruptions, and as a result, the growth of our C&I market will be heavily dependent on the timing and pace of the overall market recovery. We believe that the primary markets we serve may be somewhat less vulnerable to economic slowing, such as health care, transportation, data centers, warehousing, clean energy and water projects.
In addition, the United States has experienced decades of underfunded economic expansion and aging infrastructure which has challenged the capacity of public water and transportation infrastructure forcing states and municipalities to seek creative means to fund needed expansion and repair. We believe the need for expanding public infrastructure will offer opportunity in our C&I segment for several years. We expect the long-term growth in our C&I segment to generally track the overall growth of the regions we serve.
We strive to maintain our status as a preferred provider to our T&D and C&I customers. In an effort to support our growth strategy and maximize stockholder returns, we seek to efficiently manage our capital. We continue to implement strategies that further expand our capabilities and allow opportunities to provide prudent capital returns. During the nine months ended September 30, 2022, the Company repurchased 398,152 shares of its common stock under our current repurchase program at a weighted-average price of $83.81 per share. As of September 30, 2022, we had $41.6 million of remaining availability to purchase shares under the program, which continues in effect until November 7, 2022, or until the authorized funds are exhausted. Additionally, on January 4, 2022, we acquired all issued and outstanding shares of capital stock of Powerline Plus Ltd. and its affiliate (collectively, the “Powerline Plus Companies"), which expanded our distribution operations in Ontario, Canada.
We continue to manage our increasing costs for supporting our operations, including increasing insurance, equipment, labor and material costs. We believe that our financial position, positive cash flows and other operational strengths will enable us to manage our markets and give us the flexibility to successfully execute our strategies. We continue to invest in developing key management and craft personnel in both our T&D and C&I markets and in procuring the specific specialty equipment and tooling needed to win and execute projects of all sizes and complexity.
Backlog
We refer to our estimated revenue on uncompleted contracts, including the amount of revenue on contracts for which work has not begun, less the revenue we have recognized under such contracts, as “backlog.” A customer’s intention to award us work under a fixed-price contract is not included in backlog unless there is an actual written award to perform a specific scope of work at specific terms and pricing. For many of our unit-price, time-and-equipment, time-and-materials and cost plus contracts, we only include projected revenue for a three-month period in the calculation of backlog, although these types of contracts are generally awarded as part of master service agreements that typically have a one-year to three-year duration from execution. Backlog may not accurately represent the revenues that we expect to realize during any particular period. Several factors, such as the timing of contract awards, the type and duration of contracts, and the mix of subcontractor and material costs in our projects, can impact our backlog at any point in time. Some of our revenue does not appear in our periodic backlog reporting because the award of the project, as well as the execution of the work, may all take place within the period. Our backlog includes projects that have a written award, a letter of intent, a notice to proceed or an agreed upon work order to perform work on mutually accepted terms and conditions. Backlog should not be relied upon as a stand-alone indicator of future events.
The difference between our backlog and remaining performance obligations is due to the exclusion of a portion of our master service agreements under certain contract types from our remaining performance obligations as these contracts can be canceled for convenience at any time by us or the customer without considerable cost incurred by the customer. Our estimated backlog also includes our proportionate share of unconsolidated joint venture contracts. Additional information related to our remaining performance obligations is provided in Note 7–Revenue Recognition in the accompanying notes to our Consolidated Financial Statements.
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Our backlog was $2.48 billion at September 30, 2022, compared to $1.79 billion at December 31, 2021 and $1.63 billion at September 30, 2021. Our backlog at September 30, 2022 increased $31.4 million from June 30, 2022. Backlog in the T&D segment decreased $40.6 million and C&I backlog increased $72.0 million compared to June 30, 2022. Our backlog as of September 30, 2022 included our proportionate share of joint venture backlog totaling $23.6 million, compared to $3.7 million at June 30, 2022.
The following table summarizes that amount of our backlog that we believe to be firm as of the dates shown and the amount of our current backlog that we reasonably estimate will not be recognized within the next twelve months:
Backlog at September 30, 2022
(in thousands) Total Amount estimated to not
be recognized within 12 months Total backlog at December 31, 2021
T&D $ 1,021,795 $ 82,767 $ 676,130
C&I 1,454,462 346,235 1,113,014
Total $ 2,476,257 $ 429,002 $ 1,789,144
Consolidated Results of Operations
The following table sets forth selected consolidated statements of operations data and such data as a percentage of revenues for the periods indicated:
Three months ended
September 30, Nine months ended
September 30,
2022 2021 2022 2021
(dollars in thousands) Amount Percent Amount Percent Amount Percent Amount Percent
Contract revenues $ 799,848 100.0 % $ 610,182 100.0 % $ 2,144,586 100.0 % $ 1,852,241 100.0 %
Contract costs 713,502 89.2 526,259 86.2 1,896,893 88.5 1,610,343 86.9
Gross profit 86,346 10.8 83,923 13.8 247,693 11.5 241,898 13.1
Selling, general and administrative expenses 58,891 7.4 53,072 8.7 164,471 7.7 154,609 8.3
Amortization of intangible assets 827 0.1 578 0.1 6,847 0.3 1,734 0.1
Gain on sale of property and equipment (347) — (679) (0.1) (1,747) (0.1) (2,473) (0.1)
Income from operations 26,975 3.3 30,952 5.1 78,122 3.6 88,028 4.8
Other income (expense):
Interest income 44 — 23 — 58 — 51 —
Interest expense (1,134) (0.1) (305) — (2,235) (0.1) (1,458) (0.1)
Other income, net 223 — 69 — 2,485 0.1 190 —
Income before provision for income taxes 26,108 3.2 30,739 5.1 78,430 3.6 86,811 4.7
Income tax expense 7,672 0.9 7,568 1.3 19,622 0.9 22,493 1.2
Net income $ 18,436 2.3 % $ 23,171 3.8 % $ 58,808 2.7 % $ 64,318 3.5 %
Three Months Ended September 30, 2022 Compared to Three Months Ended September 30, 2021
Revenues. Revenues were $799.8 million for the three months ended September 30, 2022 compared to $610.2 million for the three months ended September 30, 2021. The increase of $189.6 million, or 31.1%, was primarily due to an increase in revenue on transmission projects, an increase in revenues on distribution projects, including incremental distribution revenues from the Powerline Plus Companies, and an increase in C&I revenue in certain geographical areas.
Gross margin. Gross margin was 10.8% for the three months ended September 30, 2022 compared to 13.8% for the three months ended September 30, 2021. The decrease in gross margin was primarily due to overall cost increases mainly associated with supply chain disruptions and inflation. Gross margin was also negatively impacted by labor inefficiencies and inclement weather experienced on certain projects. These margin decreases were partially offset by a favorable change order adjustment and better-than-anticipated productivity on certain projects. Changes in estimates of gross profit on certain projects resulted in a gross margin decrease of 0.3% and an increase of 1.4% for the three months ended September 30, 2022 and 2021, respectively.
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Gross profit. Gross profit was $86.3 million for the three months ended September 30, 2022 compared to $83.9 million for the three months ended September 30, 2021. The increase of $2.4 million, or 2.9%, was due to higher revenues, partially offset by lower margins.
Selling, general and administrative expenses. Selling, general and administrative expenses ("SG&A") were $58.9 million for the three months ended September 30, 2022 compared to $53.1 million for the three months ended September 30, 2021. The period-over-period increase of $5.8 million was primarily due to an increase in employee-related expenses to support the growth in our operations and the acquisition of the Powerline Plus Companies, partially offset by a decrease in employee incentive compensation costs.
Gain on sale of property and equipment . Gains from the sale of property and equipment for the three months ended September 30, 2022 were $0.3 million compared to $0.7 million for the three months ended September 30, 2021. Gains from the sale of property and equipment are attributable to routine sales of property and equipment no longer useful or valuable to our ongoing operations.
Interest expense. Interest expense was $1.1 million for three months ended September 30, 2022 compared to $0.3 million for the three months ended September 30, 2021. This increase was primarily attributable to higher outstanding debt and interest rates during the three months ended September 30, 2022 as compared to the three months ended September 30, 2021.
Income tax expense. Income tax expense was $7.7 million for the three months ended September 30, 2022, with an effective tax rate of 29.4%, compared to the expense of $7.6 million for the three months ended September 30, 2021, with an effective tax rate of 24.6%. The increase in the tax rate for the three months ended September 30, 2022 was primarily due to an increase in permanent difference items and a tax benefit associated with the reversal of the global intangible low tax income (“GILTI”) during the three months ended September 30, 2021.
Net income. Net income was $18.4 million for the three months ended September 30, 2022 compared to $23.2 million for the three months ended September 30, 2021. The decrease was primarily due to the reasons stated earlier.
Segment Results
The following table sets forth, for the periods indicated, statements of operations data by segment, segment net sales as percentage of total net sales and segment operating income as a percentage of segment net sales:
Three months ended September 30,
2022 2021
(dollars in thousands) Amount Percent Amount Percent
Contract revenues:
Transmission & Distribution $ 452,014 56.5 % $ 306,546 50.2 %
Commercial & Industrial 347,834 43.5 303,636 49.8
Total $ 799,848 100.0 % $ 610,182 100.0 %
Operating income (loss):
Transmission & Distribution $ 34,315 7.6 % $ 35,301 11.5 %
Commercial & Industrial 10,876 3.1 14,139 4.7
Total 45,191 5.7 49,440 8.1
General Corporate (18,216) (2.3) (18,488) (3.0)
Consolidated $ 26,975 3.4 % $ 30,952 5.1 %
Transmission & Distribution
Revenues for our T&D segment for the three months ended September 30, 2022 were $452.0 million compared to $306.5 million for the three months ended September 30, 2021, an increase of $145.5 million, or 47.5%. The increase in revenue was primarily related to an increase in revenue on transmission projects, an increase in revenues on distribution projects, including incremental distribution revenues from the Powerline Plus Companies. Revenues from transmission projects represented 58.4% and 54.1% of T&D segment revenue for the three months ended September 30, 2022 and 2021, respectively.
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Operating income for our T&D segment for the three months ended September 30, 2022 was $34.3 million, a decrease of $1.0 million, or 2.8%, from the three months ended September 30, 2021. The decrease in T&D operating income from the prior year was primarily due to labor inefficiencies on a project and overall cost increases from supply chain disruptions, inflation and inclement weather experienced on certain projects. These decreases were partially offset by higher revenues. As a percentage of revenues, operating income for our T&D segment was 7.6% for the three months ended September 30, 2022 compared to 11.5% for the three months ended September 30, 2021.
Commercial & Industrial
Revenues for our C&I segment for the three months ended September 30, 2022 were $347.8 million compared to $303.6 million for the three months ended September 30, 2021, an increase of $44.2 million, or 14.6%, primarily due to higher revenue in certain geographical areas.
Operating income for our C&I segment for the three months ended September 30, 2022 was $10.9 million, a decrease of $3.3 million, over the three months ended September 30, 2021. The period-over-period decrease in operating income was primarily due to overall cost increases mainly associated with supply chain disruptions and inflation. Operating income was also negatively impacted by labor inefficiencies on certain projects. The decrease in operating income was partially offset by a favorable change order adjustment and better-than-anticipated productivity on certain projects. As a percentage of revenues, operating income for our C&I segment was 3.1% for the three months ended September 30, 2022 compared to 4.7% for the three months ended September 30, 2021.
Nine Months Ended September 30, 2022 Compared to Nine Months Ended September 30, 2021
Revenues. Revenues were $2.14 billion for the nine months ended September 30, 2022 compared to $1.85 billion for the nine months ended September 30, 2021. The increase of $292.4 million, or 15.8%, was primarily due to an increase in revenue on transmission projects, an increase in revenues on distribution projects, including incremental distribution revenues from the Powerline Plus Companies, and an increase in C&I revenue in certain geographical areas.
Gross margin. Gross margin was 11.5% for the nine months ended September 30, 2022 compared to 13.1% for the nine months ended September 30, 2021. The decrease in gross margin was primarily due to overall cost increases mainly associated with supply chain disruptions, inflation and continued impacts from the COVID-19 pandemic, some of which also caused labor and material inefficiencies on certain projects. Gross margin was also negatively impacted by an unfavorable change order adjustment on a project and inclement weather experienced on certain projects. These margin decreases were partially offset by better-than-anticipated productivity, favorable job close outs and favorable change order adjustments on certain projects. Changes in estimates of gross profit on certain projects were not significant for the nine months ended September 30, 2022 and resulted in gross margin increase of 0.4% for the nine months ended September 30, 2021.
Gross profit. Gross profit was $247.7 million for the nine months ended September 30, 2022 compared to $241.9 million for the nine months ended September 30, 2021, the increase of $5.8 million, or 2.4% was due to higher revenues, partially offset by lower margins.
Selling, general and administrative expenses. SG&A was $164.5 million for the nine months ended September 30, 2022 compared to $154.6 million for the nine months ended September 30, 2021. The period-over-period increase of $9.9 million was primarily due to the acquisition of Powerline Plus Companies and an increase in employee-related expenses to support the growth in our operations, partially offset by a decrease in employee incentive compensation costs.
Amortization of intangible assets. Amortization of intangible assets was $6.8 million for the nine months ended September 30, 2022 compared to $1.7 million for the nine months ended September 30, 2021. The period-over-period increase of $5.1 million was primarily due to amortization related to certain intangibles acquired with the Powerline Plus Companies.
Gain on sale of property and equipment. Gains from the sale of property and equipment for the nine months ended September 30, 2022 were $1.7 million compared to $2.5 million for the nine months ended September 30, 2021. Gains from the sale of property and equipment are attributable to routine sales of property and equipment no longer useful or valuable to our ongoing operations.
Interest expense. Interest expense was $2.2 million for the nine months ended September 30, 2022 compared to $1.5 million for the nine months ended September 30, 2021. This increase was primarily attributable to higher outstanding debt and interest rates during the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021.
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Other income, net . Other income was $2.5 million for the nine months ended September 30, 2022 compared to other income of $0.2 million for the nine months ended September 30, 2021. The change was largely due to funds received under the Canadian Emergency Wage Subsidy program, which were attributable to a C&I segment company.
Income tax expense. Income tax expense was $19.6 million for the nine months ended September 30, 2022, with an effective tax rate of 25.0%, compared to the expense of $22.5 million for the nine months ended September 30, 2021, with an effective tax rate of 25.9%. The decrease in the tax rate for the nine months ended September 30, 2022 was primarily due to a favorable impact from stock compensation excess tax benefits, partially offset by an increase in other permanent difference items.
Net income . Net income was $58.8 million for the nine months ended September 30, 2022 compared to $64.3 million for the nine months ended September 30, 2021. The decrease was primarily due to the reasons stated earlier.
Segment Results
The following table sets forth, for the periods indicated, statements of operations data by segment, segment net sales as percentage of total net sales and segment operating income as a percentage of segment net sales:
Nine months ended September 30,
2022 2021
(dollars in thousands) Amount Percent Amount Percent
Contract revenues:
Transmission & Distribution $ 1,232,105 57.5 % $ 948,285 51.2 %
Commercial & Industrial 912,481 42.5 903,956 48.8
Total $ 2,144,586 100.0 % $ 1,852,241 100.0 %
Operating income (loss):
Transmission & Distribution $ 97,555 7.9 % $ 96,737 10.2 %
Commercial & Industrial 30,478 3.3 42,935 4.7
Total 128,033 5.9 139,672 7.5
General Corporate (49,911) (2.3) (51,644) (2.8)
Consolidated $ 78,122 3.6 % $ 88,028 4.7 %
Transmission & Distribution
Revenues for our T&D segment for the nine months ended September 30, 2022 were $1.23 billion compared to $948.3 million for the nine months ended September 30, 2021, an increase of $283.8 million, or 29.9%. The increase in revenue was primarily related to an increase in revenue on transmission projects, an increase in revenues on distribution projects, including incremental distribution revenues from the Powerline Plus Companies. Revenues from transmission projects represented 59.7% and 62.0% of T&D segment revenue for the nine months ended September 30, 2022 and 2021, respectively.
Operating income for our T&D segment for the nine months ended September 30, 2022 was $97.6 million, an increase of $0.9 million, or 0.8%, from the nine months ended September 30, 2021. The increase in T&D operating income from the prior year was primarily due to higher revenues and a favorable job close-out. These increases were partially offset by the additional $5.1 million of amortization related to certain intangibles acquired with the Powerline Plus Companies and an unfavorable change order adjustment on a project. Operating income was also negatively impacted by overall cost increases from supply chain disruptions, labor inefficiencies, inflation and inclement weather experienced on certain projects. As a percentage of revenues, operating income for our T&D segment was 7.9% for the nine months ended September 30, 2022 compared to 10.2% for the nine months ended September 30, 2021.
Commercial & Industrial
Revenues for our C&I segment for the nine months ended September 30, 2022 were $912.5 million compared to $904.0 million for the nine months ended September 30, 2021, an increase of $8.5 million, or 0.9%, primarily due to higher revenue in certain geographical areas.
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Operating income for our C&I segment for the nine months ended September 30, 2022 was $30.5 million, a decrease of $12.4 million over the nine months ended September 30, 2021. The period-over-period decrease in operating income was primarily due to overall cost increases mainly associated with supply chain disruptions, inflation and continued impacts from the COVID-19 pandemic some of which also caused labor and material inefficiencies on certain projects. The decrease in operating income was partially offset by better-than-anticipated productivity on various projects, favorable change order adjustments on certain projects and a favorable job close out. As a percentage of revenues, operating income for our C&I segment was 3.3% for the nine months ended September 30, 2022 compared to 4.7% for the nine months ended September 30, 2021.
Non-GAAP Measure—EBITDA
We define EBITDA, a performance measure used by management, as net income plus interest expense net of interest income, provision for income taxes and depreciation and amortization. EBITDA, a non-GAAP financial measure, does not purport to be an alternative to net income as a measure of operating performance or to net cash flows provided by operating activities as a measure of liquidity. We believe that EBITDA is useful to investors and other external users of our Consolidated Financial Statements in evaluating our operating performance and cash flow because EBITDA is widely used by investors to measure a company’s operating performance without regard to items such as interest expense, taxes, depreciation and amortization, which can vary substantially from company to company depending upon accounting methods and book value of assets, useful lives placed on assets, capital structure and the method by which assets were acquired. Because not all companies use identical calculations, this presentation of EBITDA may not be comparable to other similarly-titled measures of other companies. We use, and we believe investors benefit from, the presentation of EBITDA in evaluating our operating performance because it provides us and our investors with an additional tool to compare our operating performance on a consistent basis by removing the impact of certain items that management believes do not directly reflect our core operations.
Using EBITDA as a performance measure has material limitations as compared to net income, or other financial measures as defined under accounting principles generally accepted in the United States of America (“U.S. GAAP”), as it excludes certain recurring items, which may be meaningful to investors. EBITDA excludes interest expense net of interest income; however, as we have borrowed money to finance transactions and operations, or invested available cash to generate interest income, interest expense and interest income are elements of our cost structure and can affect our ability to generate revenue and returns for our stockholders. Further, EBITDA excludes depreciation and amortization; however, as we use capital and intangible assets to generate revenues, depreciation and amortization are a necessary element of our costs and ability to generate revenue. Finally, EBITDA excludes income taxes; however, as we are organized as a corporation, the payment of taxes is a necessary element of our operations. As a result of these exclusions from EBITDA, any measure that excludes interest expense net of interest income, depreciation and amortization and income taxes has material limitations as compared to net income. When using EBITDA as a performance measure, management compensates for these limitations by comparing EBITDA to net income in each period, to allow for the comparison of the performance of the underlying core operations with the overall performance of the company on a full-cost, after-tax basis. Using both EBITDA and net income to evaluate the business allows management and investors to (a) assess our relative performance against our competitors and (b) monitor our capacity to generate returns for our stockholders.
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The following table provides a reconciliation of net income to EBITDA:
Three months ended
September 30, Nine months ended
September 30,
(in thousands) 2022 2021 2022 2021
Net income $ 18,436 $ 23,171 $ 58,808 $ 64,318
Add:
Interest expense, net 1,090 282 2,177 1,407
Income tax expense 7,672 7,568 19,622 22,493
Depreciation & amortization 13,101 11,290 43,164 34,618
EBITDA $ 40,299 $ 42,311 $ 123,771 $ 122,836
We also use EBITDA as a liquidity measure. Certain material covenants contained within our credit agreement (the “Credit Agreement”) are based on EBITDA with certain additional adjustments. Non-compliance with these financial covenants under the Credit Agreement — our interest coverage ratio which is defined in the Credit Agreement as Consolidated EBITDA (as defined in the Credit Agreement) divided by interest expense (as defined in the Credit Agreement) and our leverage ratio, which is defined in the Credit Agreement as Consolidated Total Indebtedness (as defined in the Credit Agreement), divided by Consolidated EBITDA (as defined in the Credit Agreement) — could result in our lenders requiring us to immediately repay all amounts borrowed. If we anticipated a potential covenant violation, we would seek relief from our lenders, likely causing us to incur additional cost, and such relief might not be available, or if available, might not be on terms as favorable as those in the Credit Agreement. In addition, if we cannot satisfy these financial covenants, we would be prohibited under the Credit Agreement from engaging in certain activities, such as incurring additional indebtedness, making certain payments, and acquiring or disposing of assets. Based on the information above, management believes that the presentation of EBITDA as a liquidity measure is useful to investors and relevant to their assessment of our capacity to service or incur debt, fund capital expenditures, finance acquisitions and expand our operations.
The following table provides a reconciliation of net cash flows provided by operating activities to EBITDA:
Three months ended
September 30, Nine months ended
September 30,
(in thousands) 2022 2021 2022 2021
Provided by Operating Activities:
Net cash flows provided by operating activities $ 13,607 $ 19,653 $ 73,726 $ 108,215
Add/(subtract):
Changes in operating assets and liabilities 22,410 16,728 35,594 (3,867)
Adjustments to reconcile net income to net cash flows provided by operating activities (17,581) (13,210) (50,512) (40,030)
Depreciation & amortization 13,101 11,290 43,164 34,618
Income tax expense 7,672 7,568 19,622 22,493
Interest expense, net 1,090 282 2,177 1,407
EBITDA $ 40,299 $ 42,311 $ 123,771 $ 122,836
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Liquidity, Capital Resources and Material Cash Requirements
As of September 30, 2022, we had working capital of $249.8 million. We define working capital as current assets less current liabilities. During the nine months ended September 30, 2022, operating activities of our business provided net cash of $73.7 million, compared to $108.2 million of cash provided for the nine months ended September 30, 2021. Cash flow from operations is primarily influenced by operating margins, timing of contract performance and the type of services we provide to our customers. The $34.5 million year-over-year decrease in cash provided by operating activities was primarily due to unfavorable net changes in operating assets and liabilities of $39.5 million, partially offset by an increase in depreciation and amortization of $8.5 million. The unfavorable change in operating assets and liabilities was primarily due to the net unfavorable year-over-year changes in various working capital accounts that relate primarily to construction activities (accounts receivable, contract assets, accounts payable and contract liabilities) of $65.2 million, partially offset by the net favorable change of $29.1 million in other assets. The unfavorable changes in cash provided by working capital accounts, mainly related to construction activities, was primarily due to unfavorable changes in accounts receivable due to the timing of billings and payments under our contracts. The favorable change in other assets was primarily due to the timing of insurance payments partially offset by incremental prepayment of materials required for certain projects.
In the nine months ended September 30, 2022, we used net cash of $157.5 million in investing activities consisting of $110.7 million to acquire the Powerline Plus Companies and $48.5 million for capital expenditures, partially offset by $1.6 million of proceeds from the sale of equipment.
In the nine months ended September 30, 2022, financing activities provided net cash of $41.7 million, consisting primarily of $57.7 million of borrowing under our revolving line of credit and $24.2 million of borrowing under our equipment notes. The impact of these borrowing was partially offset by share repurchases of $31.7 million under our share repurchase program and $6.8 million of shares repurchased to satisfy tax obligations under our stock compensation programs.
We believe that our $303.9 million borrowing availability under our revolving line of credit at September 30, 2022, future cash flow from operations and our ability to utilize short- and long-term leases will provide sufficient liquidity for our short- and long-term needs. Our primary short-term liquidity needs include cash for operations, debt service requirements, capital expenditures, acquisition and joint venture opportunities, share repurchases and $9.8 million of remaining payroll tax deferrals provided under the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act"), which are expected to be paid by the end of 2022. We believe that we have adequate sources of liquidity to meet our long-term liquidity needs and foreseeable material cash requirements. We continue to invest in developing key management and craft personnel in both our T&D and C&I markets and in procuring the specific specialty equipment and tooling needed to win and execute projects of all sizes and complexity.
We have not historically paid dividends and currently do not expect to pay dividends.
Debt Instruments
Credit Agreement
On September 13, 2019, we entered into a five-year amended and restated credit agreement (the “Credit Agreement”) with a syndicate of banks led by JPMorgan Chase Bank, N.A. and Bank of America, N.A. The Credit Agreement provides for a facility of $375 million (the “Facility”), subject to certain financial covenants as defined in the Credit Agreement, that may be used for revolving loans of which $150 million may be used for letters of credit. The Facility also allows for revolving loans and letters of credit in Canadian dollars and other currencies, up to the U.S. dollar equivalent of $75 million. We have an expansion option to increase the commitments under the Facility or enter into incremental term loans, subject to certain conditions, by up to an additional $200 million upon receipt of additional commitments from new or existing lenders. Subject to certain exceptions, the Facility is secured by substantially all of our assets and the assets of our domestic subsidiaries and by a pledge of substantially all of the capital stock of our domestic subsidiaries and 65% of the capital stock of our direct foreign subsidiaries. Additionally, subject to certain exceptions, our domestic subsidiaries also guarantee the repayment of all amounts due under the Credit Agreement. If an event of default occurs and is continuing, on the terms and subject to the conditions set forth in the Credit Agreement, amounts outstanding under the Facility may be accelerated and may become or be declared immediately due and payable. Borrowings under the Facility are used for refinancing existing debt, working capital, capital expenditures, acquisitions and other general corporate purposes.
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Amounts borrowed under the Credit Agreement bear interest, at our option, at a rate equal to either (1) the Alternate Base Rate (as defined in the Credit Agreement), plus an applicable margin ranging from 0.00% to 0.75%; or (2) Adjusted LIBO Rate (as defined in the Credit Agreement) plus an applicable margin ranging from 1.00% to 1.75%. The applicable margin is determined based on our consolidated leverage ratio (“Leverage Ratio”) which is defined in the Credit Agreement as Consolidated Total Indebtedness (as defined in the Credit Agreement) divided by Consolidated EBITDA (as defined in the Credit Agreement). Letters of credit issued under the Facility are subject to a letter of credit fee of 1.00% to 1.75% for non-performance letters of credit or 0.50% to 0.875% for performance letters of credit, based on our consolidated Leverage Ratio. We are subject to a commitment fee of 0.15% to 0.25%, based on our consolidated Leverage Ratio, on any unused portion of the Facility. The Credit Agreement restricts certain types of payments when our consolidated Leverage Ratio exceeds 2.50 or our consolidated Liquidity (as defined in the Credit Agreement) is less than $50.0 million.
Under the Credit Agreement, we are subject to certain financial covenants and are limited to a maximum consolidated Leverage Ratio of 3.0 and a minimum interest coverage ratio of 3.0, which is defined in the Credit Agreement as Consolidated EBITDA (as defined in the Credit Agreement) divided by interest expense (as defined in the Credit Agreement). The Credit Agreement also contains a number of covenants, including limitations on asset sales, investments, indebtedness and liens. We were in compliance with all of the financial covenants under the Credit Agreement as of September 30, 2022.
We had $57.7 million of debt outstanding under the Facility as of September 30, 2022. We had no debt outstanding under the Facility as of December 31, 2021.
Letters of Credit
Some of our vendors require letters of credit to ensure reimbursement for amounts they are disbursing on our behalf, such as to beneficiaries under our insurance programs. In addition, from time-to-time certain customers require us to post letters of credit to ensure payment to our subcontractors and vendors under those contracts and to guarantee performance under our contracts. Such letters of credit are generally issued by a bank or similar financial institution. The letter of credit commits the issuer to pay specified amounts to the holder of the letter of credit if the holder claims that we have failed to perform specified actions in accordance with the terms of the letter of credit. If this were to occur, we would be required to reimburse the issuer of the letter of credit. Depending on the circumstances of such a reimbursement, we may also have to record a charge to earnings for the reimbursement. Currently, we do not believe that it is likely that any claims will be made under any letter of credit.
As of September 30, 2022 and December 31, 2021, we had $13.3 million and $12.3 million, respectively, in letters of credit outstanding under our Credit Agreement, which are almost entirely related to the Company's payment obligation under its insurance programs.
Equipment Notes
We have entered into multiple Master Loan Agreements with multiple finance companies. The Master Loan Agreements may be used for financing of equipment between us and the lenders pursuant to one or more equipment notes ("Equipment Notes"). Each Equipment Note constitutes a separate, distinct and independent financing of equipment and contractual obligation.
As of September 30, 2022, we had two outstanding Equipment Notes collateralized by equipment and vehicles owned by us. As of December 31, 2021, we had one outstanding Equipment Note collateralized by equipment and vehicles owned by us. As of September 30, 2022, we also had one other equipment note outstanding collateralized by a vehicle owned by us. The outstanding balance of all equipment notes was $28.2 million as of September 30, 2022 and $4.5 million as of December 31, 2021. As of September 30, 2022 we had outstanding short-term and long-term equipment notes of approximately $5.1 million and $23.1 million, respectively. As of December 31, 2021, we had an outstanding short-term and long-term Equipment Notes of approximately $1.0 million and $3.5 million, respectively.
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Lease Obligations
From time-to-time, the Company enters into non-cancelable leases for some of our facility, vehicle and equipment needs. These leases allow the Company to conserve cash by paying a monthly lease rental fee for the use of facilities, vehicles and equipment rather than purchasing them. The Company’s leases have remaining terms ranging from one to seven years, some of which may include options to extend the leases for up to five years, and some of which may include options to terminate the leases within one year. Typically, the Company has purchase options on the equipment underlying its long-term leases and many of its short-term rental arrangements. The Company may exercise some of these purchase options when the need for equipment is on-going and the purchase option price is attractive.
The outstanding balance of operating lease obligations was $31.4 million as of September 30, 2022, consisting of short-term and long-term operating lease obligations of approximately $9.8 million and $21.6 million, respectively. The outstanding balance of operating lease obligations was $21.0 million as of December 31, 2021, consisting of short-term and long-term operating lease obligations of approximately $7.8 million and $13.2 million, respectively.
The outstanding balance of finance lease obligations was $3.7 million as of September 30, 2022, consisting of short-term and long-term finance lease obligations of approximately $1.2 million and $2.6 million, respectively. As of December 31, 2021 we had no outstanding finance lease obligations.
Purchase Commitments for Construction Equipment
As of September 30, 2022, we had approximately $26.2 million in outstanding purchase obligations for certain construction equipment to be paid with cash outlays scheduled to occur over the next seven months.
Performance and Payment Bonds and Parent Guarantees
Many customers, particularly in connection with new construction, require us to post performance and payment bonds issued by a financial institution known as a surety. These bonds provide a guarantee to the customer that we will perform under the terms of a contract and that we will pay subcontractors and vendors. If we fail to perform under a contract or to pay subcontractors and vendors, the customer may demand that the surety make payments or provide services under the bond. We must reimburse our sureties for any expenses or outlays they incur. Under our continuing indemnity and security agreements with our sureties, with the consent of our lenders under the Credit Agreement, we have granted security interests in certain of our assets to collateralize our obligations to the surety. We may be required to post letters of credit or other collateral in favor of the surety or our customers. Posting letters of credit in favor of the surety or our customers reduces the borrowing availability under the Credit Agreement. To date, we have not been required to make any reimbursements to any of our sureties for bond-related costs. We believe that it is unlikely that we will have to fund significant claims under our surety arrangements. As of September 30, 2022, an aggregate of approximately $1.78 billion in original face amount of bonds issued by our sureties were outstanding. Our estimated remaining cost to complete these bonded projects was approximately $861.1 million as of September 30, 2022.
From time to time we guarantee the obligations of our wholly owned subsidiaries, including obligations under certain contracts with customers, certain lease agreements, and, in some states, obligations in connection with obtaining contractors’ licenses. Additionally, from time to time we are required to post letters of credit to guarantee the obligations of our wholly owned subsidiaries, which reduces the borrowing availability under our credit facility.
Concentration of Credit Risk
We grant trade credit under normal payment terms, generally without collateral, to our customers, which include high credit quality electric utilities, governmental entities, general contractors and builders, owners and managers of commercial and industrial properties located in the United States. Consequently, we are subject to potential credit risk related to changes in business and economic factors throughout the United States. However, we generally have certain statutory lien rights with respect to services provided. Under certain circumstances such as foreclosures or negotiated settlements, we may take title to the underlying assets in lieu of cash in settlement of receivables. As of September 30, 2022 and 2021, none of our customers individually exceeded 10% of consolidated accounts receivable. Management believes the terms and conditions in its contracts, billing and collection policies are adequate to minimize the potential credit risk.
New Accounting Pronouncements
For a discussion regarding new accounting pronouncements, please refer to Note 1–Organization, Business and Basis of Presentation—Recent Accounting Pronouncements in the accompanying notes to our Consolidated Financial Statements.
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Critical Accounting Policies
The discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities known to exist at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. We evaluate our estimates on an ongoing basis, based on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. There can be no assurance that actual results will not differ from those estimates. For further information regarding our critical accounting policies and estimates, please refer to Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies” included in our 2021 Annual Report.
Cautionary Statement Concerning Forward-Looking Statements and Information
We are including the following discussion to inform you of some of the risks and uncertainties that can affect our company and to take advantage of the protections for forward-looking statements that applicable federal securities law affords.
Statements in this Quarterly Report on Form 10-Q contain various forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”), which represent our management’s beliefs and assumptions concerning future events. When used in this document and in documents incorporated by reference, forward-looking statements include, without limitation, statements regarding financial forecasts or projections, and our expectations, beliefs, intentions or future strategies that are signified by the words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “likely,” “may,” “objective,” “outlook,” “plan,” “project,” “possible,” “potential,” “should”, "unlikely,” or other words that convey the uncertainty of future events or outcomes. The forward-looking statements in this Quarterly Report on Form 10-Q speak only as of the date of this Quarterly Report on Form 10-Q. We disclaim any obligation to update these statements (unless required by securities laws), and we caution you not to rely on them unduly. We have based these forward-looking statements on our current expectations and assumptions about future events. While our management considers these expectations and assumptions to be reasonable, they are inherently subject to significant business, economic, competitive, regulatory and other risks, contingencies and uncertainties, most of which are difficult to predict, and many of which are beyond our control. In addition, many of these risks, contingencies and uncertainties are currently amplified by, and may continue to be amplified by, the COVID-19 pandemic. These and other important factors, including those discussed under the caption “Forward-Looking Statements” and in Item 1A. “Risk Factors” in our 2021 Annual Report, and in any risk factors or cautionary statements contained in our other filings with the Securities and Exchange Commission, may cause our actual results, performance or achievements to differ materially from any future results, performance or achievements expressed or implied by these forward-looking statements.
These risks, contingencies and uncertainties include, but are not limited to, the following:
• Our operating results may vary significantly from period to period.
• Our industry is highly competitive.
• Negative economic and market conditions including tariffs on materials and recessionary conditions may adversely impact our customers’ future spending and, as a result, our operations and growth.
• We may be unsuccessful in generating internal growth, which could impact the projects available to the Company.
• Our inability to successfully execute or integrate acquisitions or joint ventures may have an adverse impact on our growth strategy and business.
• Project performance issues, including those caused by third parties, or certain contractual obligations may result in additional costs to us, reductions or delays in revenues or the payment of penalties, including liquidated damages.
• We may be unable to attract and retain qualified personnel.
• The timing of new contracts and termination of existing contracts may result in unpredictable fluctuations in our cash flows and financial results.
• During the ordinary course of our business, we may become subject to lawsuits or indemnity claims.
• Backlog may not be realized or may not result in profits and may not accurately represent future revenue.
• Our insurance has limits and exclusions that may not fully indemnify us against certain claims or losses, including claims resulting from wildfires or other natural disasters and an increase in cost, or the unavailability or cancellation of third party insurance coverages would increase our overall risk exposure and could disrupt our operations and reduce our profitability.
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• Risks associated with operating in the Canadian market could restrict our ability to expand and harm our business and prospects.
• Changes in tax laws or our interpretations of tax laws could materially impact our income tax liabilities.
• The nature of our business exposes us to potential liability for warranty claims and faulty engineering, which may reduce our profitability.
• Health outbreaks such as the COVID-19 pandemic may have an adverse impact on our business, employees, liquidity, financial condition, results of operations and cash flows.
• Our dependence on suppliers, subcontractors and equipment manufacturers could expose us to the risk of loss in our operations.
• Our participation in joint ventures and other projects with third parties may expose us to liability for failures of our partners.
• Legislative or regulatory actions relating to electricity transmission and renewable energy may impact demand for our services.
• We may incur liabilities and suffer negative financial or reputational impacts relating to occupational health and safety matters, including those related to environmental hazards such as wildfires and other natural disasters.
• Our failure to comply with environmental and other laws and regulations could result in significant liabilities.
• Our business may be affected by seasonal and other variations, including severe weather conditions and the nature of our work environment.
• Opportunities associated with government contracts could lead to increased governmental regulation applicable to us.
• We are subject to risks associated with climate change including financial risks and physical risks such as an increase in extreme weather events (such as floods, wildfires or hurricanes), rising sea levels and limitations on water availability and quality.
• Our use of percentage-of-completion accounting could result in a reduction or reversal of previously recognized revenues and profits.
• Our financial results are based upon estimates and assumptions that may differ from actual results.
• Our actual costs may be greater than expected in performing our fixed-price and unit-price contracts.
• An increase in the cost or availability for items such as materials, parts, commodities, equipment and tooling may also be impacted by trade regulations, tariffs, global relations, taxes, transportation costs and inflation which could adversely affect our business.
• We may not be able to compete for, or work on, certain projects if we are not able to obtain necessary bonds, letters of credit, bank guarantees or other financial assurances.
• Work stoppages or other labor issues with our unionized workforce could adversely affect our business, and we may be subject to unionization attempts.
• Multi-employer pension plan obligations related to our unionized workforce could adversely impact our earnings.
• We rely on information, communications and data systems in our operations and we or our business partners may be subject to failures, interruptions or breaches of such systems, which could affect our operations or our competitive position, expose sensitive information or damage our reputation.
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.