filings.toolsItem 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
General
The following discussion and analysis of the financial condition and results of operations of Quanta Services, Inc. (together with its subsidiaries, Quanta, we, us or our) should be read in conjunction with our condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report and with our 2023 Annual Report, which was filed with the SEC on February 22, 2024 and is available on the SEC’s website at www.sec.gov and on our website at www.quantaservices.com. The discussion below contains forward-looking statements that are based upon our current expectations and are subject to uncertainty and changes in circumstances. Actual results may differ materially from these expectations due to inaccurate assumptions and known or unknown risks and uncertainties, including those identified in Cautionary Statement About Forward-Looking Statements and Information above, in Item 1A. Risk Factors of Part II of this Quarterly Report and in Item 1A. Risk Factors of Part I of our 2023 Annual Report.
Overview
Our third quarter 2024 results reflect increased demand for our services, as consolidated revenue and operating income increased as compared to the third quarter of 2023, primarily due to increased revenues and operating income for our Renewable Energy Infrastructure Solutions (Renewable Energy) segment.
With respect to our Electric Power Infrastructure Solutions (Electric Power) segment, utilities are continuing to invest significant capital in their electric power delivery systems through multi-year grid modernization and reliability programs, as well as system upgrades and hardening programs in response to recurring severe weather events. We have also experienced high demand for new and expanded transmission, substation and distribution infrastructure needed to reliably transport power. In particular, we continue to experience strong demand from our utility customers, which we believe is driven by increasing demand for electricity associated with, among other things, data centers and other technology-related dynamics, domestic manufacturing reshoring initiatives and overall electrification trends. Our acquisition of Cupertino Electric Inc. (CEI) has also created additional demand for our critical path electrical design and installation solutions from the technology and data center industry.
With respect to our Renewable Energy segment, the transition to a reduced-carbon economy as well as a meaningful increase in current and forecasted electricity demand is continuing to drive demand for renewable generation and related infrastructure (e.g., high-voltage electric transmission and substation infrastructure), as well as interconnection services necessary to connect and transmit renewable-generated electricity to existing electric power delivery systems. Despite these positive longer-term trends, during 2022 and into 2023, the timing of certain projects within this segment were negatively impacted by supply chain challenges that resulted in delays and shortages of, and increased costs for, materials necessary for certain projects, particularly sourcing restrictions related to solar panels necessary for the utility-scale solar industry and delays in availability of power transformers impacting the electric power and renewable energy industries. While certain challenges associated with solar panel sourcing improved during 2023, we could experience and continue to monitor other potential supply chain challenges that could impact the availability and/or cost of renewable infrastructure project components, including solar generation components, in future periods.
With respect to our Underground Utility and Infrastructure Solutions (Underground and Infrastructure) segment, during the third quarter of 2024, operating income margin was negatively impacted by cost absorption pressures across our gas operations in the United States and project delays for our industrial operations along the U.S. Gulf Coast due to Hurricanes Beryl and Francine. We continue to believe the market for our industrial solutions and gas utility and pipeline integrity services remains solid given the recurring critical-path maintenance requirements and regulated spend dedicated to modernizing systems, reducing methane emissions, ensuring environmental compliance and improving safety and reliability. Additionally, revenues associated with large pipeline projects have decreased in 2024 as compared to 2022 and 2023, and we anticipate that revenues associated with these projects will continue to fluctuate.
During the nine months ended September 30, 2024, increased revenues and operating income contributed to $1.37 billion of net cash provided by operating activities, a 139% increase compared to the nine months ended September 30, 2023, which allowed us to execute our business plan, including the strategic acquisition of certain businesses, for which we utilized $1.72 billion of cash, net of cash acquired, and the payment of $40.8 million in dividends associated with our common stock. Additionally, as of September 30, 2024, available commitments under our senior credit facility, combined with our cash and cash equivalents, totaled $3.28 billion.
Additionally, we entered into certain debt financing arrangements in connection with our acquisition of CEI. In July 2024, we entered into, and borrowed the full amount available under a $400.0 million 90-day term loan facility outside of the senior credit facility and utilized these borrowings, together with $1.20 billion of borrowings under our commercial paper program
and cash on hand, primarily to finance the cash portion of the acquisition of CEI and pay certain related costs and expenses and working capital requirements. In August 2024, we received net proceeds from the issuance of senior notes of $1.24 billion, net of the original issue discount, underwriting discounts and deferred financing costs, which were used to repay certain borrowings that were utilized to acquire CEI. Additionally, on October 1, 2024, we repaid the $500.0 million aggregate principal amount of our 0.950% senior notes. These debt financing arrangements are more fully described in Note 8 of the Notes to Condensed Consolidated Financial Statements in Item 1. Financial Statements of Part I of this Quarterly Report.
We expect the strong demand for our services will continue. Our remaining performance obligations and backlog were $15.61 billion and $33.96 billion as of September 30, 2024, representing increases of 12.3% and 12.8% relative to December 31, 2023. For a reconciliation of backlog to remaining performance obligations, the most comparable financial measure prepared in conformity with generally accepted accounting principles in the United States (GAAP), see Non-GAAP Financial Measures below.
Significant Factors Impacting Results
Our revenues, profit, margins and other results of operations can be influenced by a variety of factors in any given period, including those described in Item 1. Business and Item 1A. Risk Factors of Part I in our 2023 Annual Report, and those factors have caused fluctuations in our results in the past and are expected to cause fluctuations in our results in the future. Additional information with respect to certain of those factors is provided below.
Seasonality. Typically, our revenues are lowest in the first quarter of the year because cold, snowy or wet conditions can create challenging working environments that are more costly for our customers or cause delays on projects. In addition, infrastructure projects often do not begin in a meaningful way until our customers finalize their capital budgets, which typically occurs during the first quarter. Second quarter revenues are typically higher than those in the first quarter, as some projects begin, but continued cold and wet weather can often impact productivity. Third quarter revenues are typically the highest of the year, as a greater number of projects are underway and operating conditions, including weather, are normally more accommodating. Generally, revenues during the fourth quarter are lower than the third quarter but higher than the second quarter, as many projects are completed and customers often seek to spend their capital budgets before year end. However, the holiday season and inclement weather can sometimes cause delays during the fourth quarter, reducing revenues and increasing costs. These seasonal impacts are typical for our U.S. operations, but seasonality for our international operations may differ. For example, revenues for certain projects in Canada are typically higher in the first quarter because projects are often accelerated in order to complete work while the ground is frozen and prior to the break up, or seasonal thaw, as productivity is adversely affected by wet ground conditions during warmer months.
Weather, natural disasters and emergencies. The results of our business in a given period can be impacted by adverse weather conditions, severe weather events, natural disasters or other emergencies, which include, among other things, heavy or prolonged snowfall or rainfall, hurricanes, tropical storms, tornadoes, floods, blizzards, extreme temperatures, wildfires, post-wildfire floods and debris flows, pandemics and earthquakes. Climate change has the potential to increase the frequency and extremity of severe weather events. These conditions and events can negatively impact our financial results due to, among other things, the termination, deferral or delay of projects, reduced productivity and exposure to significant liabilities due to failure of electrical power or other infrastructure on which we have performed services. However, severe weather events can also increase our emergency restoration services, which typically yield higher margins due in part to higher equipment utilization and absorption of fixed costs.
Demand for services. We perform the majority of our services under existing contracts, including MSAs and similar agreements pursuant to which our customers are not committed to specific volumes of our services. Therefore our volume of business can be positively or negatively affected by fluctuations in the amount of work our customers assign us in a given period, which may vary by geographic region. Examples of items that may cause demand for our services to fluctuate materially from quarter to quarter include: the financial condition of our customers, their capital spending and their access to and cost of capital; acceleration of any projects or programs by customers (e.g., modernization or hardening programs); economic and political conditions on a regional, national or global scale, including availability of renewable energy tax credits; interest rates; governmental regulations affecting the sourcing and costs of materials and equipment; other changes in U.S. and global trade relationships; and project deferrals and cancellations.
Revenue mix and impact on margins. The mix of revenues based on the types of services we provide in a given period will impact margins, as certain industries and services provide higher-margin opportunities. Our larger or more complex projects typically include, among others, transmission projects with higher voltage capacities; pipeline projects with larger-diameter throughput capacities; large-scale renewable generation projects; and projects with increased engineering, design or construction complexities, more difficult terrain or geographical requirements, or longer distance requirements. These projects typically yield opportunities for higher margins than our recurring services under MSAs described above, as we assume a
greater degree of performance risk and there is greater utilization of our resources for longer construction timeframes. However, larger projects are subject to additional risk of regulatory delay and cyclicality. Project schedules also fluctuate, particularly in connection with larger, more complex or longer-term projects, which can affect the amount of work performed in a given period. Furthermore, smaller or less complex projects typically have a greater number of companies competing for them, and competitors at times may more aggressively pursue available work. A greater percentage of smaller scale or less complex work also could negatively impact margins due to the inefficiency of transitioning between a greater number of smaller projects versus continuous production on fewer larger projects. As a result, at times we may choose to maintain a portion of our workforce and equipment in an underutilized capacity to ensure we are strategically positioned to deliver on larger projects when they move forward.
Project variability and performance. Margins for a single project may fluctuate period to period due to changes in the volume or type of work performed, the pricing structure under the project contract or job productivity. Additionally, our productivity and performance on a project can vary period to period based on a number of factors, including unexpected project difficulties or site conditions (including in connection with difficult geographic characteristics); project location, including locations with challenging operating conditions; whether the work is on an open or encumbered right of way; inclement weather or severe weather events; environmental restrictions or regulatory delays; protests, public activism, other political activity or legal challenges related to a project; and the performance of third parties. Moreover, we currently generate a significant portion of our revenues under fixed price contracts, and fixed price contracts are more common in connection with our larger and more complex projects that typically involve greater performance risk. Under these contracts, we assume risks related to project estimates and execution, and project revenues can vary, sometimes substantially, from our original projections due to a variety of factors, including the additional complexity, timing uncertainty or extended bidding, regulatory and permitting processes associated with these projects. These variations can result in a reduction in expected profit, the incurrence of losses on a project or the issuance of change orders and/or assertion of contract claims against customers. See Contract Estimates and Changes in Estimates in Note 3 of the Notes to Condensed Consolidated Financial Statements in Item 1. Financial Statements of Part I of this Quarterly Report.
Subcontract work and provision of materials. Work that is subcontracted to other service providers generally yields lower margins, and therefore an increase in subcontract work in a given period can decrease operating margins. In recent years, we have subcontracted approximately 20% of our work to other service providers. Additionally, under certain contracts, including contracts for engineering, procurement and construction services, we agree to procure all or part of the required materials. While we attempt to structure our agreements with customers and suppliers to account for the impact of increased materials procurement requirements or fluctuations in the cost of materials we procure, our margins may be lower on projects where we furnish a significant amount of materials, as our markup on materials is generally lower than our markup on labor costs, and in a given period an increase in the percentage of work with greater materials procurement requirements may decrease our overall margins, including in some cases our assuming price risk. Furthermore, fluctuations in the price or availability of materials, equipment and consumables that we or our customers utilize could impact costs to complete projects.
Results of Operations
Consolidated Results
Three months ended September 30, 2024 compared to the three months ended September 30, 2023
The following table sets forth selected statements of operations data, such data as a percentage of revenues for the periods indicated, as well as the dollar and percentage change from the prior period (dollars in thousands).
| Three Months Ended September 30, | Change | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2024 | 2023 | $ | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Revenues | $ | 6,493,167 | 100.0 | % | $ | 5,620,822 | 100.0 | % | $ | 872,345 | 15.5 | % | |||||||||||||||||||||||||||||||||||||||||||||||
| Cost of services | 5,480,597 | 84.4 | 4,773,498 | 84.9 | 707,099 | 14.8 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Gross profit | 1,012,570 | 15.6 | 847,324 | 15.1 | 165,246 | 19.5 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Equity in earnings of integral unconsolidated affiliates | 14,015 | 0.2 | 11,707 | 0.2 | 2,308 | 19.7 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Selling, general and administrative expenses | (483,878) | (7.5) | (386,538) | (6.9) | (97,340) | 25.2 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Amortization of intangible assets | (110,422) | (1.7) | (71,361) | (1.3) | (39,061) | 54.7 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Change in fair value of contingent consideration liabilities | (1,124) | — | (803) | — | (321) | 40.0 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Operating income | 431,161 | 6.6 | 400,329 | 7.1 | 30,832 | 7.7 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Interest and other financing expenses | (59,950) | (0.9) | (47,531) | (0.8) | (12,419) | 26.1 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Interest income | 7,237 | 0.1 | 1,993 | — | 5,244 | 263.1 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other income (expense), net | 2,994 | 0.1 | (3,744) | (0.1) | 6,738 | * | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Income before income taxes | 381,442 | 5.9 | 351,047 | 6.2 | 30,395 | 8.7 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Provision for income taxes | 82,421 | 1.3 | 77,522 | 1.3 | 4,899 | 6.3 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income | 299,021 | 4.6 | 273,525 | 4.9 | 25,496 | 9.3 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Less: Net income attributable to non-controlling interests | 5,836 | 0.1 | 689 | — | 5,147 | 747.0 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income attributable to common stock | $ | 293,185 | 4.5 | % | $ | 272,836 | 4.9 | % | $ | 20,349 | 7.5 | % |
- The percentage change is not meaningful.
Revenues. Revenues increased due to a $505.2 million increase in revenues from our Renewable Energy segment and a $492.5 million increase in revenues from our Electric Power segment, partially offset by a $125.4 million decrease in revenues from our Underground and Infrastructure segment. See Segment Results below for additional information and discussion related to segment revenues.
Cost of services. Costs of services primarily includes wages, benefits, subcontractor costs, materials, equipment, and other direct and indirect costs, including related depreciation. The increase in cost of services generally correlates to the increase in revenues.
Selling, general and administrative expenses. The increase was primarily attributable to a $55.7 million increase related to recently acquired businesses and a $29.6 million increase in compensation expense, largely associated with increased salaries due primarily to an increase in number of employees to support business growth and increased incentive compensation due primarily to increased levels of profitability. Also contributing to the increase was a $7.8 million increase in expense related to deferred compensation liabilities. The fair market value changes in deferred compensation liabilities were largely offset by changes in the fair value of corporate-owned life insurance (COLI) assets associated with the deferred compensation plan, which are included in “Other income (expense), net” as discussed below.
Amortization of intangible assets. The increase was related to incremental amortization expense associated with recent acquisitions, including CEI.
Operating income. Operating income was positively impacted by a $70.1 million increase in operating income for our Renewable Energy segment and a $58.3 million increase in operating income for our Electric Power segment, partially offset by a $29.8 million decrease in operating income for our Underground and Infrastructure segment and a $67.8 million increase in corporate and non-allocated costs, which includes amortization expense. Results for each of our business segments and our corporate and non-allocated costs are discussed in Segment Results below.
Interest and other financing expenses. Approximately half of the increase resulted from higher levels of debt as compared to the three months ended September 30, 2023.
Other income (expense), net. The increase was primarily attributable to an $8.3 million increase in the mark-to-market valuation adjustment of the COLI assets associated with our deferred compensation plan. The fair market value changes of the COLI assets were largely offset by changes in the fair value of the deferred compensation liabilities, which are included in “Selling, general and administrative expenses” as discussed above.
Provision for income taxes. The effective tax rates for the three months ended September 30, 2024 and 2023 were 21.6% and 22.1%. The effective tax rate for the three months ended September 30, 2024 was favorably impacted by the recognition of a $25.3 million tax benefit that resulted from equity incentive awards vesting at a higher fair market value than their grant date fair value as compared to the recognition of $1.6 million associated with this tax benefit for the three months ended September 30, 2023. Additionally, the tax rate for the three months ended September 30, 2023 was favorably impacted by the realization of a loss attributable to our investment in Starry Group Holdings, Inc. (Starry), and the corresponding release of the $22.7 million valuation allowance initially recorded during the year ended December 31, 2022.
Comprehensive income. See Statements of Comprehensive Income in Item 1. Financial Statements of Part I of this Quarterly Report. Comprehensive income increased by $75.2 million in the three months ended September 30, 2024 as compared to the three months ended September 30, 2023 due to a $49.7 million increase related to foreign currency translation adjustments and a $25.5 million increase in net income. The predominant functional currencies for our operations outside the U.S. are Canadian and Australian dollars. Foreign currency translation gains for the three months ended September 30, 2024 primarily resulted from the weakening of the U.S. dollar against the Canadian and Australian dollars.
Nine months ended September 30, 2024 compared to the nine months ended September 30, 2023
The following table sets forth selected statements of operations data, such data as a percentage of revenues for the periods indicated, as well as the dollar and percentage change from the prior period (dollars in thousands):
| Nine Months Ended September 30, | Change | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2024 | 2023 | $ | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Revenues | $ | 17,119,373 | 100.0 | % | $ | 15,098,258 | 100.0 | % | $ | 2,021,115 | 13.4 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Cost of services (including related depreciation) | 14,671,978 | 85.7 | 12,953,640 | 85.8 | 1,718,338 | 13.3 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Gross profit | 2,447,395 | 14.3 | 2,144,618 | 14.2 | 302,777 | 14.1 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Equity in earnings of integral unconsolidated affiliates | 34,935 | 0.2 | 30,697 | 0.2 | 4,238 | 13.8 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Selling, general and administrative expenses | (1,318,574) | (7.7) | (1,155,261) | (7.7) | (163,313) | 14.1 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Amortization of intangible assets | (267,147) | (1.6) | (213,789) | (1.4) | (53,358) | 25.0 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Change in fair value of contingent consideration liabilities | (2,864) | — | (803) | — | (2,061) | 256.7 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Operating income | 893,745 | 5.2 | 805,462 | 5.3 | 88,283 | 11.0 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Interest and other financing expenses | (146,343) | (0.9) | (137,413) | (0.9) | (8,930) | 6.5 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Interest income | 18,817 | 0.1 | 4,957 | — | 13,860 | 279.6 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other income, net | 29,493 | 0.2 | 7,541 | 0.1 | 21,952 | 291.1 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Income before income taxes | 795,712 | 4.6 | 680,547 | 4.5 | 115,165 | 16.9 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Provision for income taxes | 178,716 | 1.0 | 143,468 | 0.9 | 35,248 | 24.6 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income | 616,996 | 3.6 | 537,079 | 3.6 | 79,917 | 14.9 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Less: Net income attributable to non-controlling interests | 17,292 | 0.1 | 3,298 | 0.1 | 13,994 | 424.3 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income attributable to common stock | $ | 599,704 | 3.5 | % | $ | 533,781 | 3.5 | % | $ | 65,923 | 12.4 | % |
- The percentage change is not meaningful.
Revenues. Revenues increased due to a $1.73 billion increase in revenues from our Renewable Energy segment and a $520.6 million increase in revenues from our Electric Power segment, partially offset by a $225.6 million decrease in revenues from our Underground and Infrastructure segment. See Segment Results below for additional information and discussion related to segment revenues.
Cost of services. Costs of services primarily includes wages, benefits, subcontractor costs, materials, equipment, and other direct and indirect costs, including related depreciation. The increase in cost of services generally correlates to the increase in revenues.
Selling, general and administrative expenses. The increase was primarily attributable to a $93.6 million increase related to recently acquired businesses; a $31.7 million increase in compensation expense, largely associated with increased salaries, incentive compensation and non-cash stock compensation expense due primarily to an increase in number of employees to support business growth and increased incentive compensation due primarily to increased levels of profitability; a $17.9 million increase in travel and related expenses to support business growth; and an $11.9 million loss on the disposal of a non-core business. Also contributing to the increase was an $8.4 million increase in expense related to deferred compensation liabilities. The fair market value changes in deferred compensation liabilities were largely offset by changes in the fair value of COLI assets associated with the deferred compensation plan, which are included in “Other income (expense), net” as discussed below.
Amortization of intangible assets. The increase was related to incremental amortization expense associated with recent acquisitions, including CEI.
Operating income. Operating income was positively impacted by a $161.5 million increase in operating income for our Renewable Energy segment and a $91.0 million increase in operating income for our Electric Power segment, partially offset by a $70.1 million decrease in operating income for our Underground and Infrastructure segment and a $94.2 million increase in corporate and non-allocated costs, which includes amortization expense. Results for each of our business segments and corporate and non-allocated costs are discussed in Segment Results below.
Interest and other financing expenses. Approximately half of the increase resulted from higher interest rates as compared to the nine months ended September 30, 2023.
Interest income. Interest income increased in the nine months ended September 30, 2024 primarily due to an increase in interest-bearing cash and cash equivalent accounts and interest earned on certain receivable balances with customers.
Other income (expense), net. The increase was primarily attributable to a gain of $12.6 million resulting from the sale of an investment in a non-integral unconsolidated affiliate, $5.0 million of which was attributable to a non-controlling interest, as further described in Note 6 of the Notes to Condensed Consolidated Financial Statements in Item 1. Financial Statements of Part I of this Quarterly Report. The increase was also attributable to a $9.3 million increase in the mark-to-market valuation adjustment of the COLI assets associated with our deferred compensation plan. The fair market value changes of the COLI assets were largely offset by changes in the fair value of the deferred compensation liabilities, which are included in “Selling, general and administrative expenses” as discussed above.
Provision for income taxes. The effective tax rates for the nine months ended September 30, 2024 and 2023 were 22.5% and 21.1%. The tax rate for the nine months ended September 30, 2024 was favorably impacted by the recognition of a $47.8 million benefit that resulted from equity incentive awards vesting at a higher fair market value than their grant date fair market value, as compared to the recognition of $34.0 million associated with this tax benefit for the nine months ended September 30, 2023. Additionally, the tax rate for the nine months ended September 30, 2023 was favorably impacted by the realization of the loss on the Starry investment for tax purposes, and the corresponding release of the valuation allowance initially recorded during the year ended December 31, 2022.
Net income attributable to non-controlling interests. The increase in net income attributable to non-controlling interests is primarily related to increased activity on certain joint ventures and the $5.0 million gain on the sale of the investment in a non-integral equity unconsolidated affiliate recorded during the nine months ended September 30, 2024, as described above.
Comprehensive income. See Statements of Comprehensive Income in Item 1. Financial Statements of Part I of this Quarterly Report. Comprehensive income increased by $64.8 million in the nine months ended September 30, 2024 as compared to the nine months ended September 30, 2023, primarily due to a $79.9 million increase in net income, partially offset by a $14.3 million decrease in foreign currency translation adjustments. The predominant functional currencies for our operations outside the U.S. are Canadian and Australian dollars. Foreign currency translation losses for the nine months ended September 30, 2024 primarily resulted from the strengthening of the U.S. dollar against the Canadian dollar.
Segment Results
We report our results under three reportable segments: Electric Power, Renewable Energy and Underground and Infrastructure. Reportable segment information, including revenues and operating income by type of work, is gathered from each of our operating companies. Classification of our operating company revenues by type of work for segment reporting purposes can at times require judgment on the part of management. Integrated operations and common administrative support for operating companies require that certain allocations be made to determine segment profitability, including allocations of corporate shared and indirect operating costs, as well as general and administrative costs. Certain corporate costs are not allocated, including corporate facility costs; non-allocated corporate salaries, benefits and incentive compensation; acquisition
and integration costs; non-cash stock-based compensation; amortization related to intangible assets; asset impairments related to goodwill and intangible assets; and change in fair value of contingent consideration liabilities.
Three months ended September 30, 2024 compared to the three months ended September 30, 2023
The following table sets forth segment revenues, segment operating income (loss) and operating margins for the periods indicated, as well as the dollar and percentage change from the prior period (dollars in thousands):
| Three Months Ended September 30, | Change | |||||||||||||||||||||||||||||||||||||
| 2024 | 2023 | $ | % | |||||||||||||||||||||||||||||||||||
| Revenues: | ||||||||||||||||||||||||||||||||||||||
| Electric Power | $ | 2,982,032 | 45.9 | % | $ | 2,489,547 | 44.3 | % | $ | 492,485 | 19.8 | % | ||||||||||||||||||||||||||
| Renewable Energy | 2,251,855 | 34.7 | 1,746,636 | 31.1 | 505,219 | 28.9 | % | |||||||||||||||||||||||||||||||
| Underground and Infrastructure | 1,259,280 | 19.4 | 1,384,639 | 24.6 | (125,359) | (9.1) | % | |||||||||||||||||||||||||||||||
| Consolidated revenues | $ | 6,493,167 | 100.0 | % | $ | 5,620,822 | 100.0 | % | $ | 872,345 | 15.5 | % | ||||||||||||||||||||||||||
| Operating income (loss): | ||||||||||||||||||||||||||||||||||||||
| Electric Power | $ | 354,505 | 11.9 | % | $ | 296,176 | 11.9 | % | $ | 58,329 | 19.7 | % | ||||||||||||||||||||||||||
| Renewable Energy | 221,509 | 9.8 | % | 151,389 | 8.7 | % | 70,120 | 46.3 | % | |||||||||||||||||||||||||||||
| Underground and Infrastructure | 93,956 | 7.5 | % | 123,764 | 8.9 | % | (29,808) | (24.1) | % | |||||||||||||||||||||||||||||
| Corporate and Non-Allocated Costs | (238,809) | (3.7) | % | (171,000) | (3.0) | % | (67,809) | 39.7 | % | |||||||||||||||||||||||||||||
| Consolidated operating income | $ | 431,161 | 6.6 | % | $ | 400,329 | 7.1 | % | $ | 30,832 | 7.7 | % |
Electric Power Segment Results
Revenues. The increase in revenues for the three months ended September 30, 2024 was primarily due to approximately $450 million in revenues attributable to acquired businesses and the overall mix of work performed during the period, which included higher emergency restoration services revenues as compared to the three months ended September 30, 2023.
Operating Income. The increase in operating income for the three months ended September 30, 2024 was primarily due to the increase in revenues. Operating margin for the three months ended September 30, 2024 was favorably impacted by higher margin emergency restoration services revenues offset by lower operating margins associated with telecommunication projects.
Renewable Energy Segment Results
Revenues. The increase in revenues for the three months ended September 30, 2024 was primarily due to increased demand for generation and transmission services for renewable generation projects, as well as approximately $150 million in revenues attributable to acquired businesses.
Operating Income. The increase in operating income and operating margin was partially due to the increase in revenues during the three months ended September 30, 2024 and the negative impact during the three months ended September 30, 2023 due to variability in overall project timing and increased unabsorbed costs related to higher levels of fixed costs for resources required to support the future increase in project activity.
Underground and Infrastructure Segment Results
Revenues. The decrease in revenues for the three months ended September 30, 2024 was primarily due to lower revenues from large pipeline projects, partially offset by approximately $55 million in revenues attributable to an acquired business.
Operating Income. The decrease in operating income and operating margin for the three months ended September 30, 2024 was primarily due to decreased revenues, which contributed to lower levels of fixed cost absorption, as well as the overall mix of work performed in the period.
Corporate and Non-Allocated Costs
The increase in corporate and non-allocated costs during the three months ended September 30, 2024 was primarily due to a $39.1 million increase in amortization of intangible assets and a $11.6 million increase in compensation expense, which was attributable to increased salaries and incentive compensation expense in support of business growth.
Nine months ended September 30, 2024 compared to the nine months ended September 30, 2023
The following table sets forth segment revenues, segment operating income (loss) and operating margins for the periods indicated, as well as the dollar and percentage change from the prior period (dollars in thousands):
| Nine Months Ended September 30, | Change | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2024 | 2023 | $ | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Revenues: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Electric Power | $ | 7,761,480 | 45.3 | % | $ | 7,240,838 | 48.0 | % | $ | 520,642 | 7.2 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Renewable Energy | 5,870,411 | 34.3 | 4,144,304 | 27.4 | 1,726,107 | 41.7 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Underground and Infrastructure | 3,487,482 | 20.4 | 3,713,116 | 24.6 | (225,634) | (6.1) | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Consolidated revenues | $ | 17,119,373 | 100.0 | % | $ | 15,098,258 | 100.0 | % | $ | 2,021,115 | 13.4 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Operating income (loss): | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Electric Power | $ | 846,390 | 10.9 | % | $ | 755,342 | 10.4 | % | $ | 91,048 | 12.1 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Renewable Energy | 459,076 | 7.8 | % | 297,532 | 7.2 | % | 161,544 | 54.3 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Underground and Infrastructure | 222,437 | 6.4 | % | 292,544 | 7.9 | % | (70,107) | (24.0) | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Corporate and Non-Allocated Costs | (634,158) | (3.7) | % | (539,956) | (3.6) | % | (94,202) | 17.4 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Consolidated operating income | $ | 893,745 | 5.2 | % | $ | 805,462 | 5.3 | % | $ | 88,283 | 11.0 | % |
Electric Power Infrastructure Solutions Segment Results
Revenues. The increase in revenues for the nine months ended September 30, 2024 was primarily due to approximately $570 million in revenues attributable to acquired businesses and higher emergency restoration services revenues as compared to the nine months ended September 30, 2023. These increases are partially offset by the timing of work and a shift of resources to meet the demand in the Renewable Energy segment.
Operating Income. The increase in operating income and operating margin for the nine months ended September 30, 2024 was primarily due to the increase in revenues, change in the overall mix of work, including an increase in higher margin emergency restoration services, partially offset by lower operating margins associated with telecommunication projects.
Renewable Energy Infrastructure Solutions Segment Results
Revenues. The increase in revenues for the nine months ended September 30, 2024 was primarily due to increased demand for generation and transmission services for renewable generation projects, as well as approximately $155 million in revenues attributable to acquired businesses.
Operating Income. The increase in operating income and operating margin was primarily due to the increase in revenues during the nine months ended September 30, 2024, partially offset by decreased productivity and increased costs on various solar projects in the United States. Additionally, operating income and operating margin during the nine months ended September 30, 2023 were negatively impacted by delays, logistical challenges and other issues outside of our control that increased costs associated with a large renewable energy project in Canada.
Underground Utility and Infrastructure Solutions Segment Results
Revenues. The decrease in revenues for the nine months ended September 30, 2024 was primarily due to lower revenues from large pipeline projects, partially offset by approximately $170 million in revenues attributable to an acquired business.
Operating Income. The decrease in operating income and operating margin for the nine months ended September 30, 2024 was primarily due to decreased revenues and overall mix of work performed during the period, which contributed to lower levels of fixed cost absorption, and an $11.9 million loss recorded during the nine months ended September 30, 2024 related to the disposition of a non-core business.
Corporate and Non-Allocated Costs
The increase in corporate and non-allocated costs during the nine months ended September 30, 2024 was primarily due to a $53.4 million increase in intangible asset amortization and a $23.5 million increase in compensation expense, which was attributable to increased salaries, incentive compensation and non-cash stock compensation expense in support of business growth.
Non-GAAP Financial Measures
EBITDA and Adjusted EBITDA
EBITDA and adjusted EBITDA, financial measures not recognized under GAAP, when used in connection with net income attributable to common stock, are intended to provide useful information to investors and analysts as they evaluate our performance. EBITDA is defined as earnings before interest and other financing expenses, taxes, depreciation and amortization, and adjusted EBITDA is defined as EBITDA adjusted for certain other items as described below. These measures should not be considered as an alternative to net income attributable to common stock or other financial measures of performance that are derived in accordance with GAAP. Management believes that the exclusion of these items from net income attributable to common stock enables us and our investors to more effectively evaluate our operations period over period and to identify operating trends that might not be apparent due to, among other reasons, the variable nature of these items period over period. In addition, management believes these measures may be useful for investors in comparing our operating results with other companies that may be viewed as our peers.
As to certain of the items below, (i) non-cash stock-based compensation expense varies from period to period due to acquisition activity, changes in the estimated fair value of performance-based awards, forfeiture rates, accelerated vesting and amounts granted; (ii) acquisition and integration costs vary from period to period depending on the level and complexity of our acquisition activity; (iii) equity in (earnings) losses of non-integral unconsolidated affiliates varies from period to period depending on the activity and financial performance of such affiliates, the operations of which are not operationally integral to us; (iv) gains and losses on the sale of investments and businesses vary from period to period depending on activity; and (v) change in fair value of contingent consideration liabilities varies from period to period depending on the performance in post-acquisition periods of certain acquired businesses and the effect of present value accretion on fair value calculations. Because EBITDA and adjusted EBITDA, as defined, exclude some, but not all, items that affect net income attributable to common stock, such measures may not be comparable to similarly titled measures of other companies. The most comparable GAAP financial measure, net income attributable to common stock, and information reconciling the GAAP and non-GAAP financial measures, are included below. The following table shows dollars in thousands:
| Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||
| September 30, | September 30, | |||||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||||||||||||
| Net income attributable to common stock (GAAP as reported) | $ | 293,185 | $ | 272,836 | $ | 599,704 | $ | 533,781 | ||||||||||||||||||
| Interest and other financing expenses | 59,950 | 47,531 | 146,343 | 137,413 | ||||||||||||||||||||||
| Interest income | (7,237) | (1,993) | (18,817) | (4,957) | ||||||||||||||||||||||
| Provision for income taxes | 82,421 | 77,522 | 178,716 | 143,468 | ||||||||||||||||||||||
| Depreciation expense | 89,979 | 81,488 | 262,525 | 239,746 | ||||||||||||||||||||||
| Amortization of intangible assets | 110,422 | 71,361 | 267,147 | 213,789 | ||||||||||||||||||||||
| Interest, income taxes, depreciation and amortization included in equity in earnings of integral unconsolidated affiliates | 5,384 | 5,256 | 15,608 | 14,538 | ||||||||||||||||||||||
| EBITDA | 634,104 | 554,001 | 1,451,226 | 1,277,778 | ||||||||||||||||||||||
| Non-cash stock-based compensation | 38,234 | 32,600 | 110,815 | 94,658 | ||||||||||||||||||||||
| Acquisition and integration costs | 7,053 | 4,166 | 25,461 | 26,338 | ||||||||||||||||||||||
| Equity in losses (earnings) of non-integral unconsolidated affiliates | 1,662 | 966 | (1,413) | (1,119) | ||||||||||||||||||||||
| Loss on disposition of business (gain on sale of investment), net (1) | 662 | — | 4,370 | (1,496) | ||||||||||||||||||||||
| Change in fair value of contingent consideration liabilities | 1,124 | 803 | 2,864 | 803 | ||||||||||||||||||||||
| Adjusted EBITDA | $ | 682,839 | $ | 592,536 | $ | 1,593,323 | $ | 1,396,962 |
(1) The amount for the nine months ended September 30, 2024 is a loss of $11.9 million on the disposition of a non-core business, partially offset by a gain of $7.5 million as a result of the sale of a non-integral equity method investment.
Remaining Performance Obligations and Backlog
A performance obligation is a promise in a contract with a customer to transfer a distinct good or service. Our remaining performance obligations represent management’s estimate of consolidated revenues that are expected to be realized from the remaining portion of firm orders under fixed price contracts not yet completed or for which work has not yet begun, which includes estimated revenues attributable to consolidated joint ventures and variable interest entities, revenues from funded and unfunded portions of government contracts to the extent they are reasonably expected to be realized, and revenues from change orders and claims to the extent management believes they will be earned and are probable of collection.
We have also historically disclosed our backlog, a measure commonly used in our industry but not recognized under GAAP. We believe this measure enables management to more effectively forecast our future capital needs and results and better identify future operating trends that may not otherwise be apparent. We believe this measure is also useful for investors in forecasting our future results and comparing us to our competitors. Our remaining performance obligations are a component of backlog, which also includes estimated orders under MSAs, including estimated renewals, and certain non-fixed price contracts. Our methodology for determining backlog may not be comparable to the methodologies used by other companies.
As of September 30, 2024 and December 31, 2023, MSAs accounted for 38% and 45% of our estimated 12-month backlog and 49% and 55% of our total backlog. Generally, our customers are not contractually committed to specific volumes of services under our MSAs, and most of our contracts can be terminated on short notice even if we are not in default. We determine the estimated backlog for these MSAs using recurring historical trends, factoring in seasonal demand and projected customer needs based upon ongoing communications. In addition, many of our MSAs are subject to renewal, and these potential renewals are considered in determining estimated backlog. As a result, estimates for remaining performance obligations and backlog are subject to change based on, among other things, project accelerations; project cancellations or delays, including but not limited to those caused by commercial issues, regulatory requirements, natural disasters, emergencies and adverse weather conditions; and final acceptance of change orders by customers. These factors can cause revenues to be realized in periods and at levels that are different than originally projected.
The following table reconciles total remaining performance obligations to our backlog (a non-GAAP financial measure) by reportable segment along with estimates of amounts expected to be realized within 12 months (in thousands):
| September 30, 2024 | December 31, 2023 | |||||||||||||||||||||||||||||||||||||
| 12 Month | Total | 12 Month | Total | |||||||||||||||||||||||||||||||||||
| Electric Power | ||||||||||||||||||||||||||||||||||||||
| Remaining performance obligations | $ | 4,276,630 | $ | 7,081,450 | $ | 2,762,608 | $ | 4,505,830 | ||||||||||||||||||||||||||||||
| Estimated orders under MSAs and short-term, non-fixed price contracts | 5,935,083 | 12,868,759 | 5,597,732 | 10,995,198 | ||||||||||||||||||||||||||||||||||
| Backlog | $ | 10,211,713 | $ | 19,950,209 | $ | 8,360,340 | $ | 15,501,028 | ||||||||||||||||||||||||||||||
| Renewable Energy | ||||||||||||||||||||||||||||||||||||||
| Remaining performance obligations | $ | 5,230,590 | $ | 7,138,365 | $ | 5,512,159 | $ | 8,005,368 | ||||||||||||||||||||||||||||||
| Estimated orders under MSAs and short-term, non-fixed price contracts | 301,359 | 432,580 | 118,770 | 119,634 | ||||||||||||||||||||||||||||||||||
| Backlog | $ | 5,531,949 | $ | 7,570,945 | $ | 5,630,929 | $ | 8,125,002 | ||||||||||||||||||||||||||||||
| Underground and Infrastructure | ||||||||||||||||||||||||||||||||||||||
| Remaining performance obligations | $ | 1,161,919 | $ | 1,389,715 | $ | 1,017,227 | $ | 1,383,057 | ||||||||||||||||||||||||||||||
| Estimated orders under MSAs and short-term, non-fixed price contracts | 2,220,595 | 5,053,421 | 2,222,451 | 5,099,332 | ||||||||||||||||||||||||||||||||||
| Backlog | $ | 3,382,514 | $ | 6,443,136 | $ | 3,239,678 | $ | 6,482,389 | ||||||||||||||||||||||||||||||
| Total | ||||||||||||||||||||||||||||||||||||||
| Remaining performance obligations | $ | 10,669,139 | $ | 15,609,530 | $ | 9,291,994 | $ | 13,894,255 | ||||||||||||||||||||||||||||||
| Estimated orders under MSAs and short-term, non-fixed price contracts | 8,457,037 | 18,354,760 | 7,938,953 | 16,214,164 | ||||||||||||||||||||||||||||||||||
| Backlog | $ | 19,126,176 | $ | 33,964,290 | $ | 17,230,947 | $ | 30,108,419 |
The increases in both remaining performance obligations and backlog from December 31, 2023 to September 30, 2024 were partially due to the impact of acquisitions that occurred in the nine months ended September 30, 2024 as well as increased new project awards with existing customers, and the increase in backlog was also attributable to new project awards included in the Electric Power segment.
Liquidity and Capital Resources
Overview
We plan to fund our working capital, capital expenditures, debt service, dividends and other cash requirements with our current available liquidity and cash from operations, which could be affected by general economic, financial, competitive, legislative, regulatory, business and other factors, many of which are beyond our control. Management monitors financial markets and national and global economic conditions for factors that may affect our liquidity and capital resources.
Our capital deployment priorities that require the use of cash include: (i) working capital to fund ongoing operating needs, (ii) capital expenditures to meet anticipated demand for our services, (iii) acquisitions and investments to facilitate the long-term growth and sustainability of our business, and (iv) return of capital to stockholders, including through the payment of dividends and repurchases of our outstanding common stock. We intend to fund these requirements primarily with cash flow from operating activities, as well as debt financing as needed.
Cash Requirements and Capital Allocation
In July 2024, and as described below, we entered into, and borrowed the full amount available under, a new $400 million 90-day term loan facility, borrowed approximately $1.2 billion under our commercial paper program and amended our credit facility. In August 2024, we issued $1.25 billion aggregate principal amount of senior notes and received net proceeds of $1.24 billion and used the proceeds to repay certain borrowings that were utilized to acquire CEI. These debt financing arrangements and interest related to such arrangements are more fully described in Note 8 of the Notes to Condensed Consolidated Financial Statements in Item 1. Financial Statements of Part I of this Quarterly Report. Additionally, on October 1, 2024, we repaid the $500.0 million aggregate principal amount of our 0.950% senior notes due October 2024. During the nine months ended September 30, 2024, there were no other material changes outside the ordinary course of business in the specified contractual obligations or changes to our capital allocation priorities as set forth in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations in Part II of the 2023 Annual Report.
We anticipate that our future cash flows from operating activities, cash and cash equivalents on hand, existing borrowing capacity under our senior credit facility and commercial paper program and ability to access capital markets for additional capital will provide sufficient funds to enable us to meet our cash requirements for the next twelve months and over the longer term.
Significant Sources of Cash
Cash flow from operating activities is primarily influenced by demand for our services and operating margins but is also influenced by the timing of working capital needs associated with the various types of services that we provide. Our working capital needs may increase when we commence large volumes of work under circumstances where project costs are required to be paid before the associated receivables are billed and collected. Additionally, operating cash flows can be negatively impacted as a result of unpaid and delayed change orders and claims. Changes in project timing due to delays or accelerations and other economic, regulatory, market and political factors that may affect customer spending could also impact cash flow from operating activities. Further information with respect to our cash flow from operating activities is set forth below and in Note 16 of the Notes to Condensed Consolidated Financial Statements in Item 1. Financial Statements of Part I of this Quarterly Report*.*
Our available commitments under our senior credit facility and cash and cash equivalents as of September 30, 2024 were as follows (in thousands):
| September 30, 2024 | ||||||||
| Total capacity available for revolving loans, credit support for commercial paper program and letters of credit | $ | 2,800,000 | ||||||
| Less: | ||||||||
| Borrowings of revolving loans | 58,987 | |||||||
| Letters of credit outstanding | 226,100 | |||||||
| Available commitments for revolving loans, credit support for commercial paper program and letters of credit | 2,514,913 | |||||||
| Plus: | ||||||||
| Cash and cash equivalents (1) | 764,067 | |||||||
| Total available commitments under senior credit facility and cash and cash equivalents | $ | 3,278,980 |
(1) Further information with respect to our cash and cash equivalents is set forth below and in Note 15 of the Notes to Condensed Consolidated Financial Statements in Item 1. Financial Statements of Part I of this Quarterly Report. This amount includes $303.0 million in jurisdictions outside of the U.S., principally in Australia. There are currently no legal or economic restrictions that would materially impede our ability to repatriate such cash.
On July 31, 2024, we amended our senior credit facility to, among other things, (i) increase the aggregate commitments for revolving loans from $2.64 billion to $2.80 billion and (ii) extend the maturity date for revolving loans under the senior credit facility from October 8, 2026 to July 31, 2029. In August 2024, we issued $1.25 billion aggregate principal amount of senior notes and received net proceeds of $1.24 billion and used the proceeds to repay certain borrowings that were utilized to acquire CEI. For additional information regarding the amendment to our senior credit facility and the issuance of the senior notes, see Note 8 of the Notes to Condensed Consolidated Financial Statements in Item 1. Financial Statements of Part I of this Quarterly Report.
We consider our investment policies related to cash and cash equivalents to be conservative, as we maintain a diverse portfolio of what we believe to be high-quality cash and cash equivalent investments with short-term maturities. Additionally, subject to the conditions specified in the credit agreement for our senior credit facility, we have the option to increase the capacity of our senior credit facility, in the form of an increase in the revolving commitments, term loans or a combination thereof, from time to time, upon receipt of additional commitments from new or existing lenders by up to an additional (i) $400.0 million plus (ii) additional amounts so long as the Incremental Leverage Ratio Requirement (as defined in the credit agreement) is satisfied at the time of such increase. The Incremental Leverage Ratio Requirement requires, among other things, after giving pro forma effect to such increase and the use of proceeds therefrom, compliance with the credit agreement’s financial covenants as of the most recent fiscal quarter end for which financial statements were required to be delivered. Further information with respect to our debt obligations is set forth in Note 8 of the Notes to Condensed Consolidated Financial Statements in Item 1. Financial Statements of Part I of this Quarterly Report*.*
We may seek to access the capital markets from time to time to raise additional capital, increase liquidity as we deem necessary, refinance or extend the term of our existing indebtedness, fund acquisitions or otherwise fund our capital needs. While our financial strategy and consistent performance have allowed us to maintain investment grade ratings, our ability to access capital markets in the future depends on a number of factors, including our financial performance and financial position, our credit ratings, industry conditions, general economic conditions, our backlog, capital expenditure commitments, market conditions and market perceptions of us and our industry.
Sources and Uses of Cash, Cash Equivalents and Restricted Cash During the Nine Months Ended September 30, 2024 and 2023
In summary, our cash flows for each period were as follows (in thousands):
| Nine Months Ended | ||||||||||||||||||||||||||
| September 30, | ||||||||||||||||||||||||||
| 2024 | 2023 | |||||||||||||||||||||||||
| Net cash provided by operating activities | $ | 1,369,181 | $ | 572,414 | ||||||||||||||||||||||
| Net cash used in investing activities | $ | (2,127,148) | $ | (722,324) | ||||||||||||||||||||||
| Net cash provided by financing activities | $ | 227,427 | $ | 31,051 |
Operating Activities
Net cash provided by operating activities of $1.37 billion and $572.4 million in the nine months ended September 30, 2024 and 2023 primarily reflected earnings adjusted for non-cash items and cash provided and used by the main components of working capital: “Accounts and notes receivable,” “Contract assets,” “Accounts payable and accrued expenses,” and “Contract liabilities.” Net cash provided by operating activities during the nine months ended September 30, 2023 was negatively impacted by incremental working capital requirements and the timing of billings related to the large renewable transmission project in Canada as discussed further in Note 3 of the Notes to Condensed Consolidated Financial Statements in Item 1. Financial Statements of Part I of this Quarterly Report.
As discussed above, cash flow provided by operating activities is primarily influenced by demand for our services and operating margins but is also influenced by working capital needs. Our working capital needs may increase when we commence large volumes of work under circumstances where project costs, primarily labor, equipment and subcontractors, are required to be paid before the associated receivables are billed and collected and when we incur costs for work that is the subject of unpaid change orders and claims. Accordingly, changes within working capital in accounts receivable, contract assets and contract liabilities are normally related and are typically affected on a collective basis by changes in revenue due to the timing and volume of work performed and variability in the timing of customer billings and payments, as well as change orders and claims. Additionally, working capital needs are generally higher during the summer and fall due to increased demand for our services when favorable weather conditions exist in many of our operating regions. Conversely, working capital assets are typically converted to cash during the winter. These seasonal trends can be offset by changes in project timing due to delays or accelerations and other economic factors that may affect customer spending, including market conditions or the impact of certain unforeseen events (e.g., regulatory and other actions that impact the supply chain for certain materials).
Days sales outstanding (DSO) represents the average number of days it takes revenues to be converted into cash, which management believes is an important metric for assessing liquidity. A decrease in DSO has a favorable impact on cash flow from operating activities, while an increase in DSO has a negative impact on cash flow from operating activities. DSO is calculated by using the sum of current accounts receivable, net of allowance (which includes retainage and unbilled balances), plus contract assets, less contract liabilities, and divided by average revenues per day during the quarter. DSO as of September 30, 2024 was 65 days, which was lower than DSO of 79 days as of September 30, 2023 and lower than our five-year historical average DSO of 80 days. This decrease in DSO as compared to September 30, 2023 was partially due to an increase in contract liabilities related to favorable billing terms on certain large projects and increased revenues in the nine months ended September 30, 2024 as well as improved collection of customer receivables. Although the decrease in DSO had a positive impact on cash flow from operating activities, unapproved change orders and claims included in contract assets from the aforementioned large renewable transmission project in Canada continued to negatively impact DSO and cash flow from operating activities as of and during the nine months ended September 30, 2024.
Investing Activities
Net cash used in investing activities in the nine months ended September 30, 2024 included $1.72 billion related to acquisitions, $457.1 million of capital expenditures and $72.6 million cash paid primarily for non-integral equity method investments. Partially offsetting these items were $67.2 million of proceeds from the sale of, and insurance settlements related to, property and equipment; $31.2 million of proceeds from the disposition of a non-core business and $29.2 million of proceeds from the sale of a non-integral equity investment.
Net cash used in investing activities in the nine months ended September 30, 2023 included $472.6 million related to acquisitions and $325.4 million of capital expenditures. Partially offsetting these items were $48.0 million of proceeds from the sale of, and insurance settlements related to, property and equipment and $42.3 million of proceeds from the sale of non-integral equity investments.
Our industry is capital intensive, and we expect substantial capital expenditures and commitments for equipment purchases and equipment lease and rental arrangements to be needed for the foreseeable future in order to meet anticipated demand for our services. In addition, we expect to continue to pursue strategic acquisitions and investments, although we cannot predict the timing or amount of the cash needed for these initiatives. We also have various other capital commitments that are detailed primarily in Note 14 of the Notes to Condensed Consolidated Financial Statements in Item 1. Financial Statements of Part I of this Quarterly Report.
Financing Activities
In July 2024, we entered into, and borrowed the full amount available under, a $400.0 million 90-day term loan facility outside of our senior credit facility and utilized these borrowings, together with $1.2 billion of borrowings under our commercial paper program and cash on hand, to finance the acquisition of CEI, as well as pay certain related costs and expenses and fund certain working capital requirements. On August 9, 2024, we received net proceeds from the issuance of senior notes of $1.24 billion, including $2.8 million of deferred financing costs paid of accrued by us, but net of the original issue discount and underwriting discounts and used the proceeds to repay certain borrowings utilized to acquire CEI, including the full amount of the short-term term loan. Net cash provided by financing activities in the nine months ended September 30, 2024 included $791.0 million of net repayments under our senior credit facility and commercial paper program. Financing costs paid directly by us during the nine months ended September 30, 2024 were $7.6 million, which related to the August 2024 issuance of senior notes, the short-term term loan and the amendment of our senior credit facility. Net cash provided by financing activities in the nine months ended September 30, 2024 was also partially offset by $140.6 million of payments to satisfy tax withholding obligations associated with stock-based compensation and the payment of $40.8 million of dividends.
Net cash provided by financing activities in the nine months ended September 30, 2023 included $203.6 million of net borrowings under our senior credit facility and commercial paper program, partially offset by $113.4 million of payments to satisfy tax withholding obligations associated with stock-based compensation and the payment of $36.1 million of dividends.
Subsequent to September 30, 2024, on October 1, 2024, we repaid the $500.0 million aggregate principal amount of 0.950% senior notes due October 2024.
We expect to continue to utilize cash for similar financing activities in the future, including repayments of our outstanding debt, payment of cash dividends and repurchases of our common stock and/or debt securities.
Critical Accounting Estimates
The discussion and analysis of our financial condition and results of operations are based on our condensed consolidated financial statements, which have been prepared in accordance with GAAP. Certain information and footnote disclosures, normally included in annual financial statements prepared in accordance with GAAP, have been condensed or omitted pursuant to those rules and regulations. The preparation of these condensed 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 as of the date the condensed consolidated financial statements are published and the reported amounts of revenues and expenses recognized during the periods presented. We review all significant estimates affecting our condensed consolidated financial statements on a recurring basis and record the effect of any necessary adjustments prior to their publication. Judgments and estimates are based on our beliefs and assumptions derived from information available at the time such judgments and estimates are made. Uncertainties with respect to such estimates and assumptions are inherent in the preparation of financial statements. There can be no assurance that actual results will not differ from those estimates. Management has reviewed its development and selection of critical accounting estimates with the audit committee of our Board of Directors. Our accounting policies are primarily described in Notes 2 and 4 of the Notes to Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data in Part II of the 2023 Annual Report and should be read in conjunction with the accounting policies identified in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations of Part II of our 2023 Annual Report, which we believe affect our more significant estimates.
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