e10vq
c
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended March 31, 2006 |
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 001-32164
INFRASOURCE SERVICES, INC.
(Exact name of registrant as specified in its charter)
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Delaware
(State or other jurisdiction of
incorporation or organization)
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03-0523754
(I.R.S. Employer
Identification No.) |
100 West Sixth Street, Suite 300, Media, PA
(Address of principal executive offices)
19063
(Zip Code)
(610) 480-8000
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past
90 days. Yes
þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated
filer in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer o
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Accelerated filer þ
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Non-accelerated filer o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act).
Yes o No þ
At April 26, 2006 there were 39,883,359 shares of InfraSource Services, Inc. Common Stock, par
value of $.001, outstanding.
For the Quarter Ended March 31, 2006
FORM 10-Q
INFRASOURCE SERVICES, INC. AND SUBSIDIARIES
Table of Contents
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Page # |
Part IFINANCIAL INFORMATION |
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3 |
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Item 1.
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Financial Statements (Unaudited)
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3 |
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Condensed Consolidated Balance Sheets at December 31, 2005 and March 31, 2006
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3 |
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Condensed Consolidated Statements of Income for the three months ended March
31, 2005 and 2006
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4 |
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Condensed Consolidated Statement of Shareholders Equity for the three months ended
March 31, 2006
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5 |
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Condensed Consolidated Statements of Cash Flows for the three months ended March 31,
2005 and 2006
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6 |
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Notes to Condensed Consolidated Financial Statements
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7 |
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Item 2.
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Managements Discussion and Analysis of Financial Condition and Results of Operations
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20 |
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Item 3.
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Quantitative and Qualitative Disclosures About Market Risk
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30 |
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Item 4.
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Controls and Procedures
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31 |
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PART IIOTHER INFORMATION |
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31 |
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Item 1.
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Legal Proceedings
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31 |
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Item 1A.
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Risk Factors
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32 |
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Item 6.
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Exhibits
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33 |
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SIGNATURES |
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34 |
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2
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INFRASOURCE SERVICES, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
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December 31, |
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March 31, |
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2005 |
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2006 |
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(Unaudited) |
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(In thousands, except share data) |
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Current assets: |
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Cash and cash equivalents |
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$ |
24,287 |
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$ |
11,891 |
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Contract receivables (less allowances for doubtful accounts
of $3,184 and $2,561, respectively) |
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137,762 |
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141,864 |
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Costs and estimated earnings in excess of billings |
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84,360 |
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86,175 |
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Inventories |
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9,183 |
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12,322 |
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Deferred income taxes |
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4,732 |
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5,193 |
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Other current assets |
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7,074 |
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6,121 |
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Receivables due from related party |
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268 |
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Total current assets |
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267,398 |
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263,834 |
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Property and equipment (less accumulated depreciation
of $55,919 and $62,741, respectively) |
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144,200 |
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146,290 |
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Goodwill |
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138,054 |
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138,610 |
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Intangible assets (less accumulated amortization of $19,861 and $20,118, respectively) |
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1,884 |
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1,627 |
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Deferred charges and other assets, net |
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10,501 |
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9,667 |
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Total assets |
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$ |
562,037 |
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$ |
560,028 |
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Current liabilities: |
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Current portion of long-term debt |
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$ |
889 |
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$ |
888 |
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Other liabilities related parties |
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11,299 |
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7,880 |
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Accounts payable |
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44,939 |
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40,057 |
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Accrued compensation and benefits |
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20,454 |
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19,049 |
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Other current and accrued liabilities |
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20,515 |
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19,068 |
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Accrued insurance reserves |
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30,550 |
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33,766 |
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Billings in excess of costs and estimated earnings |
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15,012 |
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16,143 |
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Deferred revenues |
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6,590 |
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6,573 |
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Total current liabilities |
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150,248 |
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143,424 |
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Long-term debt, net of current portion |
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83,019 |
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82,797 |
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Deferred revenues |
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17,826 |
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17,815 |
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Other long-term liabilities related party |
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420 |
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420 |
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Deferred income taxes |
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3,370 |
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3,805 |
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Other long-term liabilities |
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5,298 |
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4,837 |
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Total liabilities |
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260,181 |
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253,098 |
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Commitments and contingencies |
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Shareholders equity: |
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Preferred stock, $.001 par value (authorized - 12,000,000 shares;
0 shares issued and outstanding) |
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Common stock $.001 par value (authorized - 120,000,000 shares;
issued and outstanding - 39,396,694 and 39,673,004, respectively) |
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39 |
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40 |
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Treasury stock at cost (29,870 and 29,870, respectively) |
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(137 |
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(137 |
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Additional paid-in capital |
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276,746 |
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279,368 |
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Retained earnings |
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24,640 |
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27,106 |
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Accumulated other comprehensive income |
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568 |
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553 |
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Total shareholders equity |
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301,856 |
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306,930 |
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Total liabilities and shareholders equity |
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$ |
562,037 |
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$ |
560,028 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
3
INFRASOURCE SERVICES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Income
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Three Months Ended |
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Three Months Ended |
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March 31, 2005 |
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March 31, 2006 |
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(Unaudited) |
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(In thousands, except per share data) |
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Contract revenues |
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$ |
180,630 |
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$ |
217,240 |
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Cost of revenues |
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160,366 |
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188,044 |
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Gross profit |
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20,264 |
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29,196 |
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Selling, general and administrative expenses |
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16,508 |
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23,071 |
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Merger related costs |
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76 |
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Provision (recoveries) of uncollectible accounts |
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80 |
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(10 |
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Amortization of intangible assets |
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1,612 |
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257 |
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Income from operations |
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1,988 |
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5,878 |
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Interest income |
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194 |
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236 |
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Interest expense and amortization of debt discount |
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(1,456 |
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(2,111 |
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Other income, net |
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4,380 |
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128 |
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Income from continuing operations before income taxes |
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5,106 |
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4,131 |
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Income tax expense |
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2,042 |
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1,665 |
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Income from continuing operations |
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3,064 |
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2,466 |
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Discontinued operations: |
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Loss from discontinued operations (net of income
tax benefit of $215 and $0, respectively) |
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(322 |
) |
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Net income |
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$ |
2,742 |
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$ |
2,466 |
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Basic income per share: |
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Income from continuing operations |
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$ |
0.08 |
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$ |
0.06 |
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Loss from discontinued operations |
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(0.01 |
) |
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Net income |
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$ |
0.07 |
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$ |
0.06 |
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Weighted average basic common shares outstanding |
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38,981 |
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39,515 |
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Diluted income per share: |
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Income from continuing operations |
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$ |
0.08 |
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$ |
0.06 |
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Loss from discontinued operations |
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(0.01 |
) |
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Net income |
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$ |
0.07 |
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$ |
0.06 |
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Weighted average diluted common shares outstanding |
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39,794 |
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40,116 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
4
INFRASOURCE SERVICES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Shareholders Equity
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Accumulated Other Comprehensive |
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Income |
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Foreign |
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Fair Value |
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Currency |
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Common Stock |
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Treasury Stock |
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Additional Paid-In |
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Deferred |
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Adjustment on |
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Translation |
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Retained |
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Shares |
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Amount |
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Shares |
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Amount |
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Capital |
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Compensation |
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Derivatives |
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Adjustment |
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Earnings |
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Total |
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(Unaudited) |
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(in thousands, except share amounts) |
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Balance as of December 31, 2005 |
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39,396,694 |
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$ |
39 |
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(29,870 |
) |
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$ |
(137 |
) |
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$ |
278,387 |
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$ |
(1,641 |
) |
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$ |
480 |
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$ |
88 |
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$ |
24,640 |
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$ |
301,856 |
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Vesting of early exercised
options |
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119,476 |
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549 |
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549 |
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Reclass of deferred
compensation |
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(1,641 |
) |
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1,641 |
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Stock options exercised and
vested restricted stock |
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156,834 |
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1 |
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755 |
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756 |
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Income tax benefit from options
exercised |
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448 |
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448 |
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Share-based compensation expense |
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|
870 |
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|
870 |
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Net income |
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2,466 |
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|
2,466 |
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Other comprehensive loss |
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(15 |
) |
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(15 |
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Balance as of March 31, 2006 |
|
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39,673,004 |
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$ |
40 |
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(29,870 |
) |
|
$ |
(137 |
) |
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$ |
279,368 |
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|
$ |
|
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|
$ |
480 |
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|
$ |
73 |
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|
$ |
27,106 |
|
|
$ |
306,930 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
5
INFRASOURCE SERVICES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
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|
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Three Months Ended |
|
|
Three Months Ended |
|
|
|
March 31, 2005 |
|
|
March 31, 2006 |
|
|
|
(Unaudited) |
|
|
|
(In thousands) |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
2,742 |
|
|
$ |
2,466 |
|
Adjustments to reconcile net income to cash
used in operating activities: |
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Loss from discontinued operations - net of tax |
|
|
322 |
|
|
|
|
|
Depreciation |
|
|
6,793 |
|
|
|
6,911 |
|
Amortization of intangibles |
|
|
1,612 |
|
|
|
257 |
|
(Gain) loss on sale of assets |
|
|
(624 |
) |
|
|
71 |
|
Deferred income taxes |
|
|
1,512 |
|
|
|
(873 |
) |
Reversal of litigation judgment |
|
|
(4,279 |
) |
|
|
|
|
Other |
|
|
(121 |
) |
|
|
1,028 |
|
Changes in operating assets and liabilities, net of
effects of acquisitions: |
|
|
|
|
|
|
|
|
Contract receivables, net |
|
|
2,214 |
|
|
|
(4,092 |
) |
Costs and estimated earnings in excess of billings, net |
|
|
(25,546 |
) |
|
|
(683 |
) |
Inventories and other current assets |
|
|
2,893 |
|
|
|
(2,182 |
) |
Deferred charges and other assets |
|
|
(1,150 |
) |
|
|
156 |
|
Current liabilities |
|
|
(3,661 |
) |
|
|
(3,694 |
) |
Other liabilities related parties |
|
|
893 |
|
|
|
36 |
|
Other liabilities |
|
|
(29 |
) |
|
|
163 |
|
|
|
|
|
|
|
|
Net cash flows used in operating
activities from continuing operations |
|
|
(16,429 |
) |
|
|
(436 |
) |
Net cash flows used in operating
activities from discontinued operations |
|
|
(207 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net cash flows used in operating activities |
|
|
(16,636 |
) |
|
|
(436 |
) |
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Acquisitions of businesses, net of cash acquired |
|
|
(38 |
) |
|
|
(3,476 |
) |
Proceeds from restricted cash |
|
|
5,000 |
|
|
|
|
|
Proceeds from sales of equipment |
|
|
1,345 |
|
|
|
186 |
|
Additions to property and equipment |
|
|
(8,540 |
) |
|
|
(9,557 |
) |
|
|
|
|
|
|
|
Net cash flows used in investing
activities from continuing operations |
|
|
(2,233 |
) |
|
|
(12,847 |
) |
Net cash flows used in investing
activities from discontinued operations |
|
|
(138 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net cash flows used in investing activities |
|
|
(2,371 |
) |
|
|
(12,847 |
) |
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Increase in revolving credit facility borrowings |
|
|
6,000 |
|
|
|
|
|
Repayments of long-term debt and capital lease obligations |
|
|
(231 |
) |
|
|
(223 |
) |
Excess tax benefits from stock-based compensation |
|
|
|
|
|
|
356 |
|
Proceeds from exercise of stock options |
|
|
270 |
|
|
|
755 |
|
|
|
|
|
|
|
|
Net cash flows provided by financing activities |
|
|
6,039 |
|
|
|
888 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents: |
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents |
|
|
(12,968 |
) |
|
|
(12,395 |
) |
Cash and cash equivalents transferred to discontinued operations |
|
|
345 |
|
|
|
|
|
Cash and cash equivalents beginning of period |
|
|
21,222 |
|
|
|
24,287 |
|
Effect of exchange rates on cash |
|
|
|
|
|
|
(1 |
) |
|
|
|
|
|
|
|
Cash and cash equivalents end of period |
|
$ |
8,599 |
|
|
$ |
11,891 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable balance related to purchases of property and equipment |
|
$ |
2,217 |
|
|
$ |
954 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
6
INFRASOURCE SERVICES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Organization and Basis of Presentation
InfraSource Services, Inc. (InfraSource) was organized on May 30, 2003 as a Delaware
corporation. InfraSource and its wholly owned subsidiaries are referred to herein as the Company,
we, us, or our. We operate in two business segments. Our Infrastructure Construction
Services (ICS) segment provides design, engineering, procurement, construction, testing and
maintenance services for utility infrastructure. Our ICS customers include electric power
utilities, natural gas utilities, telecommunication customers, government entities and heavy
industrial companies, such as petrochemical, processing and refining businesses. Our
Telecommunication Services (TS) segment leases point-to-point telecommunications infrastructure
in select markets and provides design, procurement, construction and maintenance services for
telecommunications infrastructure. Our TS customers include communication service providers, large
industrial and financial services customers, school districts and other entities with high
bandwidth telecommunication needs. We operate in multiple service territories throughout the United
States. We do not have significant operations or assets outside the United States.
On September 24, 2003, we acquired all of the voting interests of InfraSource Incorporated and
certain of its wholly owned subsidiaries (collectively, the InfraSource Group), pursuant to a
merger transaction (the Merger). On May 12, 2004, we completed our initial public offering
(IPO) of 8,500,000 shares of common stock. Our principal stockholders are OCM/GFI Power
Opportunities Fund, L.P. and OCM Principal Opportunities Fund, L.P. (collectively, the Principal
Stockholders), both Delaware limited partnerships.
On March 24, 2006, the Principal Stockholders and other stockholders completed a secondary
underwritten public offering of 13,000,000 shares of our common stock at $17.50 per share. On April
12, 2006, an additional 1,950,000 shares of our common stock were sold following the exercise, in
full, of the underwriters over-allotment option to purchase additional shares for 30 days after the
prospectus date. We did not issue any primary shares; therefore, we did not receive any of the
proceeds of this offering. As of the date of this filing our Principal Stockholders own
approximately 27.3% of our common stock.
The accompanying unaudited condensed consolidated financial statements reflect our financial
position as of December 31, 2005 and March 31, 2006; our results of operations for the three months
ended March 31, 2005 and 2006; and our cash flows for the three months ended March 31, 2005 and
2006. The accompanying condensed consolidated financial statements are unaudited and have been
prepared in accordance with the rules and regulations of the U.S. Securities and Exchange
Commission (SEC). These financial statements include all adjustments that we consider necessary
for a fair presentation of financial position, results of operations and cash flows for the interim
periods presented. The December 31, 2005 condensed consolidated balance sheet data were derived
from audited financial statements, but do not include all disclosures required by accounting
principles generally accepted in the United States of America. The results for interim periods are
not necessarily indicative of results to be expected for a full year or future interim periods.
These financial statements should be read in conjunction with our financial statements and related
notes included in our Report on Form 10-K for the year ended December 31, 2005.
Certain amounts in the accompanying statements have been reclassified for comparative
purposes.
7
2. Summary of Significant Accounting Policies
Share-based compensation
On January 1, 2006, we adopted Statement of Financial Accounting Standards (SFAS) No.
123R Share-Based Payment, which requires the measurement and recognition of compensation expense
for all share-based payment awards made to employees and directors including employee stock
options, restricted stock and employee stock purchases related to the Employee Stock Purchase Plan
(employee stock purchases) based on estimated fair values. SFAS No. 123R supersedes our previous
accounting under Accounting Principles Board Opinion (APB) No. 25, Accounting for Stock Issued
to Employees. In March 2005, the SEC issued Staff Accounting Bulletin (SAB) No. 107 relating to
SFAS No. 123R. We have applied the provisions of SAB No. 107 in our adoption of SFAS No. 123R.
Prior to the adoption of SFAS No. 123R, we accounted for share-based awards to employees and
directors using the intrinsic value method in accordance with APB 25 as allowed under SFAS No. 123.
Under the intrinsic value method, no share-based compensation expense had been recognized in our
consolidated statements of operations, other than restricted stock awards and stock options granted
to employees and directors below the fair market value of the underlying stock at the grant-date.
We adopted SFAS No. 123R using the modified prospective transition method. Our condensed
consolidated financial statements as of and for the three months ended March 31, 2006 include the
impact of SFAS No. 123R. In accordance with the modified prospective transition method, our
condensed consolidated financial statements for prior periods have not been restated, and do not
include, the impact of SFAS No. 123R. Share-based compensation expense recognized under SFAS No.
123R for the three months ended March 31, 2006 was $0.9 million, of which $0.7 million related to
stock options, $0.1 million related to restricted stock and $0.1 million related to our employee
stock purchase plan (refer to note 8 for additional information). For the three months ended March
31, 2005, we recorded share-based compensation expense of $16,000 related to stock options which
were granted to employees and directors below the fair market value of the underlying stock at the
date of grant. Share-based compensation expense is included in selling, general and administrative
expenses in our condensed consolidated statements of income.
Our income from continuing operations before income taxes, income from continuing operations
and net income for the three months ended March 31, 2006 was $0.8 million, $0.5 million and $0.5
million lower, respectively, than if we had continued to account for share-based compensation under
APB No. 25. Basic and diluted earnings per share for the three months ended March 31, 2006 would
have been $0.07 and $0.07, respectively, if we had not adopted SFAS No. 123R, compared to reported
basic and diluted earnings per share of $0.06 and $0.06, respectively.
SFAS No. 123R requires companies to estimate the fair value of share-based payment awards on
the grant-date using an option-pricing model. We value share-based awards using the Black-Scholes
option pricing model and recognize compensation expense on a straight-line basis over the requisite
service periods. Share-based compensation expense recognized during the current period is based on
the value of the portion of share-based payment awards that is ultimately expected to vest. SFAS
No. 123R requires forfeitures to be estimated at the time of grant in order to estimate the amount
of share-based awards that will ultimately vest. The forfeiture rate is based on historical
activity. Share-based compensation expense recognized in our condensed consolidated statement of
income for the three months ended March 31, 2006 includes (i) compensation expense for share-based
payment awards granted prior to, but not yet vested as of December 31, 2005, based on the
grant-date fair value estimated in accordance with the pro forma provisions of SFAS No. 123 and
(ii) compensation expense for the share-based payment awards granted subsequent to December 31,
2005, based on the grant-date fair value estimated in accordance with the provisions of SFAS No.
123R. As share-based compensation expense recognized in our condensed consolidated statement of
income for the first quarter of fiscal 2006 is based on awards ultimately expected to vest, it has
been reduced for estimated forfeitures. Previously in our pro forma information required under SFAS
No. 123 for the periods prior to fiscal 2006, we accounted for forfeitures as they occurred.
8
The
following table illustrates the effect on net income and earnings per
share for the period prior to adoption of SFAS No. 123R, as if we had
applied the fair value recognition provisions of SFAS No. 123, as amended by SFAS No. 148,
Accounting for Stock-Based CompensationTransition and Disclosure.
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, 2005 |
|
|
|
(in thousands, except per share amounts) |
|
Net income as reported |
|
$ |
2,742 |
|
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all
awards, net of relative tax effects |
|
|
(157 |
) |
|
|
|
|
|
Add: Total stock-based employee compensation expense,
net of related tax effects included in the
determination of net income as reported |
|
|
16 |
|
|
|
|
|
|
|
|
|
|
Pro forma net income |
|
$ |
2,601 |
|
|
|
|
|
|
|
|
|
|
Basic and diluted income per share: |
|
|
|
|
Basic net income per share as reported |
|
$ |
0.07 |
|
Basic net income per share pro forma |
|
|
0.07 |
|
Diluted net income per share as reported |
|
|
0.07 |
|
Diluted net income per share pro forma |
|
|
0.07 |
|
Prior to the adoption of SFAS No. 123R, we presented all tax benefits of deductions resulting
from the exercise of stock options as operating cash flows in our consolidated statement of cash
flows. SFAS No. 123R requires the cash flow resulting from the tax deductions in excess of the
compensation cost recognized for those options (excess tax benefit) to be classified as financing
cash flows.
3. Discontinued Operations
In the third quarter of 2004, we committed to a plan to sell substantially all of the assets
of Utility Locate & Mapping Services, Inc. (ULMS). Additionally, in the second quarter of 2005,
we committed to a plan to sell substantially all of the assets of Electric Services, Inc. (ESI).
Both ULMS and ESI were part of our ICS segment. In accordance with SFAS No. 144, Accounting for
the Impairment or Disposal of Long-Lived Assets, the financial position, results of operations and
cash flows of ULMS and ESI were reflected as discontinued operations in our accompanying condensed
consolidated financial statements. On August 1, 2005 we sold certain assets of ULMS and the stock
of ESI.
9
Statement of operations information for discontinued operations:
|
|
|
|
|
|
|
For The Three |
|
|
Months Ended |
|
|
March 31, 2005 |
|
|
(in thousands) |
Contract revenues |
|
$ |
4,878 |
|
Pre-tax loss |
|
|
(536 |
) |
4. Costs And Estimated Earnings In Excess Of Billings
Included in costs and estimated earnings in excess of billings are costs related to claims and
unapproved change orders of approximately $12.4 million and $3.9 million at December 31, 2005 and
March 31, 2006, respectively. These remaining amounts are primarily related to permit delays,
changes in scope and environmental impacts on two underground utility construction projects.
During the three months ended March 31, 2006 we recovered claim amounts of $5.8 million existing at
December 31, 2005 related to a delay in the anticipated start date of one of our electric
transmission projects. Settlement of these claims in the first
quarter of 2006 generated a pre-tax
profit of $0.3 million.
Estimated revenue related to claims and in amounts up to but not exceeding costs incurred is
recognized when realization is probable and amounts are estimable. Profit from claims is recorded
in the period such amounts are agreed to with the customer.
5. Goodwill and Intangible Assets
Our goodwill and intangible assets are comprised of:
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005 |
|
|
March 31, 2006 |
|
|
|
(in thousands) |
|
Goodwill |
|
$ |
138,054 |
|
|
$ |
138,610 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets: |
|
|
|
|
|
|
|
|
Construction backlog |
|
$ |
17,184 |
|
|
$ |
17,184 |
|
Volume agreements |
|
|
4,561 |
|
|
|
4,561 |
|
|
|
|
|
|
|
|
Total intangible assets |
|
|
21,745 |
|
|
|
21,745 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated amortization: |
|
|
|
|
|
|
|
|
Construction backlog |
|
|
(16,690 |
) |
|
|
(16,814 |
) |
Volume agreements |
|
|
(3,171 |
) |
|
|
(3,304 |
) |
|
|
|
|
|
|
|
Total accumulated amortization |
|
|
(19,861 |
) |
|
|
(20,118 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets, net |
|
$ |
1,884 |
|
|
$ |
1,627 |
|
|
|
|
|
|
|
|
The goodwill balance as of March 31, 2006 was $128.2 million and $10.4 million for the ICS and
TS segments, respectively. The goodwill balance as of December 31, 2005 was $128.0 million and
$10.0 million for the ICS and TS segments, respectively. The increase in goodwill during the three
months ended March 31, 2006 relates to the resolution of preacquistion tax items. We are expecting
the working capital adjustment to the purchase price for our 2005 acquisition of EHV Power
Corporation (EHV) to be finalized in the second quarter of 2006.
10
As a result of the adoption of SFAS No. 142, Goodwill and Intangible Assets, goodwill is
subject to an assessment for impairment using a two-step fair value-based test with the first step
performed at least annually, or more frequently if events or circumstances exist that indicate that
goodwill may be impaired. We complete our annual analysis of our reporting units at each fiscal
year end. The first step compares the fair value of a reporting unit to its carrying amount,
including goodwill. If the carrying amount of the reporting unit exceeds its fair value, the second
step is then performed. The second step compares the carrying amount of the reporting units
goodwill to the fair value of the goodwill. If the fair value of the goodwill is less than the
carrying amount, an impairment loss would be recorded as a reduction to goodwill and a
corresponding charge to operating expense. No provisions for goodwill impairments were recorded
during the three ended March 31, 2005 and 2006.
Expense for the amortization of intangible assets was $1.6 million and $0.3 million for the
three months ended March 31, 2005 and 2006, respectively. When fully amortized, intangible assets
are removed from our balance sheet.
The estimated aggregate amortization expense of intangible assets for the next five succeeding
fiscal years is:
|
|
|
|
|
For the year ended December, 31, |
|
(in thousands) |
|
2006 (excludes the three months ended
March 31, 2006) |
|
$ |
805 |
|
2007 |
|
|
436 |
|
2008 |
|
|
227 |
|
2009 |
|
|
159 |
|
2010 |
|
|
|
|
|
|
|
|
Total |
|
$ |
1,627 |
|
|
|
|
|
6. Debt
On March 15, 2006, we entered into a Fourth Amendment to our credit facility. The Fourth
Amendment amends the events of default provisions of the credit facility to provide that an event
of default will occur if any person or group, other than the Principal Stockholders becomes or
obtains rights to become the beneficial owner, directly or indirectly, of more than 35% of our
outstanding common stock.
11
7. Computation of Per Share Earnings
The following table is a reconciliation of the numerators and denominators of the basic and
diluted income per share computation.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Three Months Ended |
|
|
|
March 31, 2005 |
|
|
March 31, 2006 |
|
|
|
(in thousands) |
|
Income from continuing
operations (numerator) |
|
$ |
3,064 |
|
|
$ |
2,466 |
|
Loss from discontinued
operations, net of tax
benefit of $(215) and $0,
respectively |
|
|
(322 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
2,742 |
|
|
$ |
2,466 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average basic common
shares outstanding
(denominator) |
|
|
38,981 |
|
|
|
39,515 |
|
Potential common stock arising
from stock options |
|
|
813 |
|
|
|
601 |
|
|
|
|
|
|
|
|
Weighted average diluted
common
shares outstanding
(denominator) |
|
|
39,794 |
|
|
|
40,116 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per share |
|
$ |
0.07 |
|
|
$ |
0.06 |
|
Diluted net income per share |
|
|
0.07 |
|
|
|
0.06 |
|
Included in potential common stock arising from stock options for the three months ended
March 31, 2005 and 2006 are early exercises of unvested stock option awards, which are excluded
from the weighted average basic common shares outstanding calculation. For the three months ended
March 31, 2005 and 2006 there were 637,620 shares and 680,701 shares, respectively, under option
grants excluded from the calculation of diluted earnings per share as the effect of these shares
would have been anti-dilutive.
8. Stock Compensation Plans
Stock Options
Our 2003 Omnibus Stock Incentive Plan as amended effective April 29, 2004 (the 2003 Stock
Plan), was originally adopted on September 23, 2003 to allow the grant of stock options and
restricted stock to designated key employees. The options currently issued under the 2003 Stock
Plan include time-based options that vest over four years. All options have a maximum term of ten
years. The 2003 Stock Plan was terminated upon completion of the IPO. Options previously issued
under the 2003 Stock Plan remain outstanding.
Our 2004 Omnibus Stock Incentive Plan (the 2004 Stock Plan) was adopted on April 29, 2004 to
allow the grant of stock options, stock appreciation rights, restricted stock, and deferred stock
or performance shares to employees and directors. The options currently issued under the 2004 Stock
Plan vest over a period of four years. All options have a maximum term of ten years. The aggregate
number of shares reserved for issuance under the 2004 Stock Plan is 800,000 plus an amount to be added
annually on the first
12
day of our fiscal year (beginning 2005) equal to the lesser of (i) 1,000,000 shares or (ii)
two percent of the number of our outstanding shares of common stock on the last day of the
immediately preceding fiscal year. As of March 31, 2006, 2.4 million shares have been reserved for
issuance under the 2004 Stock Plan.
For the three months ended March 31, 2006, approximately $0.7 million of compensation expense
related to stock options was recorded. Approximately $0.1 million of this expense related to
performance options issued under the 2003 Stock Plan that vested upon the achievement of certain
financial return targets achieved by the Principal Stockholders when we completed our secondary
offering on March 24, 2006.
For the purpose of calculating the fair value of our stock options, we estimate expected stock
price volatility based on our common stocks historical volatility. The risk-free interest rate
assumption included in the calculation is based upon observed interest rate appropriate for the
term of our employee stock options. The dividend yield assumption is based on our intent not to
issue a dividend. We are currently using the simplified method to calculate expected holding period
as provided for under SAB No. 107.
As stock-based compensation expense recognized in the condensed consolidated statement of
income for the three months ended March 31, 2006 is based on awards ultimately expected to vest, it
has been reduced for estimated forfeitures. SFAS No. 123R requires forfeitures to be estimated at
the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ
from those estimates. Forfeitures were estimated based on historical experience. In accordance with
SFAS No. 123, pro forma information for the periods prior to fiscal 2006 was based on recognizing the
effect of forfeitures as they occurred.
The weighted-average grant-date fair value of options granted during the three months ended
March 31, 2006 was $8.11. There were no stock options granted during the three months ended March
31, 2005. The total intrinsic value of options exercised during the three months ended March 31,
2005 and 2006, was $0.5 million and $1.1 million, respectively.
The fair value of each option grant was estimated on the grant-date using the Black-Scholes
option pricing model with the following weighted average assumptions:
|
|
|
|
|
|
|
Three months ended |
|
|
March 31, 2006 |
Weighted Average Assumptions: |
|
|
|
|
Expected volatility |
|
|
45 |
% |
Dividend yield |
|
|
0 |
% |
Risk-free interest rate |
|
|
4.57 |
% |
Annual forfeiture rate |
|
|
7 |
% |
Expected holding period (in years) |
|
|
6.25 |
|
13
The following table summarizes information for the options outstanding and exercisable
for the year ended December 31, 2005 and three months ended March 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Average |
|
|
|
|
|
|
|
|
|
|
Average |
|
|
Remaining |
|
|
Aggregate |
|
|
|
|
|
|
|
Exercise Price |
|
|
Contractual |
|
|
Intrinsic Value |
|
|
|
Options |
|
|
per share |
|
|
Life |
|
|
(in thousands) |
|
Balance, December 31,
2004 |
|
|
2,212,701 |
|
|
$ |
7.53 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
701,563 |
|
|
|
11.48 |
|
|
|
|
|
|
|
|
|
Exercised Vested |
|
|
(176,997 |
) |
|
|
5.02 |
|
|
|
|
|
|
|
|
|
Cancelled |
|
|
(331,526 |
) |
|
|
7.84 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31,
2005 |
|
|
2,405,741 |
|
|
$ |
8.81 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
19,913 |
|
|
|
16.01 |
|
|
|
|
|
|
|
|
|
Exercised Vested |
|
|
(114,947 |
) |
|
|
6.57 |
|
|
|
|
|
|
|
|
|
Cancelled |
|
|
(23,358 |
) |
|
|
7.48 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March 31, 2006 |
|
|
2,287,349 |
|
|
$ |
9.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
fully vested and expected to vest as of
March 31, 2006 |
|
|
2,064,455 |
|
|
$ |
8.63 |
|
|
|
8.2 |
|
|
$ |
17,706 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable as
of March 31, 2006 |
|
|
495,683 |
|
|
$ |
6.72 |
|
|
|
7.7 |
|
|
$ |
5,201 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value in the preceding table represents the total pre-tax
intrinsic value, based on our closing stock price of $17.21 on March 31, 2006, which would have
been received by the option holders had all option holders exercised their options as of that date.
The total number of in-the-money options exercisable on March 31, 2006 was 495,683.
As of March 31, 2006, there was approximately $6.8 million of total unrecognized compensation
cost related to nonvested stock options. That cost is expected to be recognized over a weighted
average period of 8.5 years.
14
Restricted Stock
On August 11, 2005 we granted the sellers of the Maslonka business (renamed InfraSource
Transmission Services), who are also our employees, 167,556 shares of restricted stock valued at
$2.2 million, of which 25% vested in January 2006 and the remainder vest four years from the date
of grant.
The following table presents a summary of the status of our nonvested restricted stock
as of March 31, 2006 and changes during the three months ended March 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average |
|
|
|
|
|
|
|
Grant-Date Fair |
|
|
|
Shares |
|
|
Value |
|
Nonvested shares at December 31, 2005 |
|
|
167,556 |
|
|
$ |
13.13 |
|
|
|
|
|
|
|
|
|
|
Vested |
|
|
(41,889 |
) |
|
|
13.13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested shares at March 31, 2006 |
|
|
125,667 |
|
|
$ |
13.13 |
|
|
|
|
|
|
|
|
|
As of March 31, 2006, there was approximately $1.4 million of total unrecognized
compensation cost related to nonvested restricted stock. That cost is expected to be recognized
over a weighted average period of 3.4 years. The total fair value of shares vested during the three
months ended March 31, 2006 was $0.6 million. Compensation expense related to restricted stock was
$0.1 million for the three months ended March 31, 2006.
Employee Stock Purchase Plan
In April 2004, our board of directors adopted the 2004 Employee Stock Purchase Plan for all
employees meeting its eligibility criteria. Under this plan, eligible employees may purchase shares
of our common stock, subject to certain limitations, at 85% of the market value. Purchases are
limited to 15% of an employees eligible compensation, up to a maximum of 2,000 shares per purchase
period. The maximum aggregate number of shares reserved for issuance under the plan is 2,000,000 plus an
amount to be added annually on the first day of our fiscal year (beginning 2005) equal to the
lesser of (i) 600,000 shares or (ii) one percent of the number of our outstanding shares of common
stock on the last day of the immediately preceding fiscal year. For the three months ended March
31, 2006, approximately $0.1 million of compensation expense related to the employee stock purchase
plan was recorded. As of March 31, 2006, 2.8 million shares have been reserved for issuance under
the 2004 Employee Stock Purchase Plan.
9. Concentration of Credit Risk
We derive a significant portion of our revenues from a small group of customers. Our top ten
customers accounted for 46% and 42%, of our consolidated revenues for the three months ended March
31, 2005 and 2006, respectively. Exelon Corporation (Exelon) accounted for approximately 21% and
17%, of our consolidated revenues for the three months ended March 31, 2005 and 2006, respectively.
At December 31, 2005 and March 31, 2006, accounts receivable due from Exelon, inclusive of
amounts due from a prime contractor for Exelon work, represented 9% and 15%, respectively, of our
total accounts receivable balance. Additionally, one other customer accounted for 10% of our
accounts receivable balance at March 31, 2006.
15
10. Other Income, Net
Other income, net for the three months ended March 31, 2005 includes a reversal of a $3.8
million charge for a litigation judgment recorded in 2003.
11. Comprehensive Income
The following table presents the components of comprehensive income for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Three Months Ended |
|
|
|
March 31, 2005 |
|
|
March 31, 2006 |
|
|
|
(In thousands) |
Net income |
|
$ |
2,742 |
|
|
$ |
2,466 |
|
Foreign currency translation adjustment |
|
|
|
|
|
|
(15 |
) |
Fair value adjustments on derivatives |
|
|
231 |
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
$ |
2,973 |
|
|
$ |
2,451 |
|
|
|
|
|
|
|
|
Other comprehensive income during the three months ended March 31, 2005 and 2006 was comprised
of changes in the fair value of interest rate cap and swap agreements designated and qualifying as
cash flow hedges under the provisions of SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities, as amended by SFAS Nos. 137, 138 and 149, net of reclassifications to net
income. Other comprehensive income during the three months ended March 31, 2006 includes a foreign
currency translation adjustment related to our Canadian operations.
12. Segment Information
We operate in two business segments. Our ICS segment provides design, engineering,
procurement, construction, testing and maintenance services for utility infrastructure. Our ICS
customers include electric power utilities, natural gas utilities, telecommunication customers,
government entities and heavy industrial companies, such as petrochemical, processing and refining
businesses. Our ICS services are provided by four of our operating units, all of which have been
aggregated into one reportable segment due to their similar economic characteristics, customer
bases, products and production and distribution methods. Our TS segment, consisting of a single
operating unit, leases point-to-point telecommunications infrastructure in select markets and
provides design, procurement, construction and maintenance services for telecommunications
infrastructure. Our TS customers include communication service providers, large industrial and
financial services customers, school districts and other entities with high bandwidth
telecommunication needs. Within our TS segment, we are regulated as a public telecommunication
utility in various states. We operate in multiple territories throughout the United States. We do
not have significant operations or assets outside the United States. We acquired a Canadian entity
in November 2005 which represents 1% of our revenue for the three months ended March 31, 2006 and
1% of total assets as of March 31, 2006.
Business segment performance measurements
are designed to facilitate evaluation of operating unit performance and assist in allocation of resources for the reportable segments. The
primary financial measures we use to evaluate our segment operations are contract revenues and
income (loss) from operations as adjusted, a non-GAAP financial measure. Income (loss) from
operations as adjusted excludes expenses for the amortization of intangibles related to our
acquisitions. These amortization expenses are excluded because we believe amortization expense does not reflect
the core performance of our business segments
16
operations. A reconciliation of income (loss) from operations as adjusted to the nearest GAAP
equivalent, income (loss) from operations is provided below.
We do not allocate corporate costs to our business segments for internal management reporting.
Corporate and eliminations includes unallocated corporate costs, revenue related to administrative
services we provide to one of our customers and elimination of revenues between reporting segments
which are not significant. The following tables present segment information by period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Infrastructure |
|
|
|
|
|
|
|
|
|
|
For the Three Months |
|
Construction |
|
|
Telecommunication |
|
|
Corporate and |
|
|
|
|
Ended March 31, 2005 |
|
Services |
|
|
Services |
|
|
Eliminations |
|
|
Total |
|
|
|
(in thousands) |
|
Revenues |
|
$ |
169,341 |
|
|
$ |
10,514 |
|
|
$ |
775 |
|
|
$ |
180,630 |
|
Income (loss) from
operations as
adjusted |
|
|
3,295 |
|
|
|
4,193 |
|
|
|
(3,888 |
) |
|
|
3,600 |
|
Depreciation |
|
|
5,911 |
|
|
|
836 |
|
|
|
46 |
|
|
|
6,793 |
|
Amortization |
|
|
1,612 |
|
|
|
|
|
|
|
|
|
|
|
1,612 |
|
Total assets |
|
|
376,291 |
|
|
|
78,790 |
|
|
|
68,533 |
|
|
|
523,614 |
|
Capital expenditures |
|
|
3,774 |
|
|
|
4,460 |
|
|
|
306 |
|
|
|
8,540 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
reconciliation: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from
operations as adjusted |
|
$ |
3,295 |
|
|
$ |
4,193 |
|
|
$ |
(3,888 |
) |
|
$ |
3,600 |
|
Less: Amortization |
|
|
1,612 |
|
|
|
|
|
|
|
|
|
|
|
1,612 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from
operations |
|
|
1,683 |
|
|
|
4,193 |
|
|
|
(3,888 |
) |
|
|
1,988 |
|
Interest income |
|
|
87 |
|
|
|
|
|
|
|
107 |
|
|
|
194 |
|
Interest expense and
amortization of debt
discount |
|
|
(1,353 |
) |
|
|
(24 |
) |
|
|
(79 |
) |
|
|
(1,456 |
) |
Other income, net |
|
|
594 |
|
|
|
1 |
|
|
|
3,785 |
|
|
|
4,380 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before
income taxes |
|
$ |
1,011 |
|
|
$ |
4,170 |
|
|
$ |
(75 |
) |
|
$ |
5,106 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Infrastructure |
|
|
|
|
|
|
|
|
|
|
For the Three Months |
|
Construction |
|
|
Telecommunication |
|
|
Corporate and |
|
|
|
|
Ended March 31, 2006 |
|
Services |
|
|
Services |
|
|
Eliminations |
|
|
Total |
|
|
|
(in thousands) |
|
Revenues |
|
$ |
209,601 |
|
|
$ |
10,073 |
|
|
$ |
(2,434 |
) |
|
$ |
217,240 |
|
Income (loss) from
operations as
adjusted |
|
|
7,853 |
|
|
|
4,458 |
|
|
|
(6,176 |
) |
|
|
6,135 |
|
Depreciation |
|
|
5,870 |
|
|
|
986 |
|
|
|
55 |
|
|
|
6,911 |
|
Amortization |
|
|
257 |
|
|
|
|
|
|
|
|
|
|
|
257 |
|
Total assets |
|
|
381,231 |
|
|
|
95,344 |
|
|
|
83,453 |
|
|
|
560,028 |
|
Capital expenditures |
|
|
5,354 |
|
|
|
4,170 |
|
|
|
33 |
|
|
|
9,557 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
reconciliation: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from
operations as adjusted |
|
$ |
7,853 |
|
|
$ |
4,458 |
|
|
$ |
(6,176 |
) |
|
$ |
6,135 |
|
Less: Amortization |
|
|
257 |
|
|
|
|
|
|
|
|
|
|
|
257 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from
operations |
|
|
7,596 |
|
|
|
4,458 |
|
|
|
(6,176 |
) |
|
|
5,878 |
|
Interest income |
|
|
1 |
|
|
|
|
|
|
|
235 |
|
|
|
236 |
|
Interest expense and
amortization of debt
discount |
|
|
(1,274 |
) |
|
|
155 |
|
|
|
(992 |
) |
|
|
(2,111 |
) |
Other income (expense),
net |
|
|
(47 |
) |
|
|
(3 |
) |
|
|
178 |
|
|
|
128 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before
income taxes |
|
$ |
6,276 |
|
|
$ |
4,610 |
|
|
$ |
(6,755 |
) |
|
$ |
4,131 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents information regarding revenues by end market:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Three Months Ended |
|
|
|
March 31, 2005 |
|
|
March 31, 2006 |
|
|
|
(in thousands) |
|
Electric Transmission |
|
$ |
39,485 |
|
|
$ |
57,760 |
|
Electric Substation |
|
|
32,636 |
|
|
|
38,749 |
|
Utility Distribution and Industrial Electric |
|
|
41,781 |
|
|
|
37,343 |
|
|
|
|
|
|
|
|
Total Electric |
|
|
113,902 |
|
|
|
133,852 |
|
|
|
|
|
|
|
|
|
|
Natural Gas |
|
|
43,141 |
|
|
|
53,926 |
|
Telecommunications |
|
|
19,381 |
|
|
|
24,312 |
|
Other |
|
|
4,206 |
|
|
|
5,150 |
|
|
|
|
|
|
|
|
|
|
$ |
180,630 |
|
|
$ |
217,240 |
|
|
|
|
|
|
|
|
Electric, gas and other end market revenues are entirely part of the ICS segment, while
telecommunications end market revenue is included in both the ICS and TS segments. Approximately
54% and 41%, of our telecommunications end market revenues for the three months ended March 31,
2005 and 2006, respectively, were from the TS segment.
13. Related Party Transactions
As of March 31, 2006, we had $0.3 million due from our Principal Stockholders included in receivables from related party on our condensed consolidated balance sheet. This amount relates to
reimbursements for certain secondary offering costs.
As of March 31, 2006, we had $7.1 million due to the former owners of Blair Park accrued in
other liabilitiesrelated parties on our condensed consolidated balance sheet for additional
contingent
18
purchase price consideration. Blair Park was acquired by InfraSource Incorporated in 2001.
The balance was paid in the second quarter of 2006.
As of March 31, 2006, we have $0.8 million due to the sellers of the Maslonka business, who are also employees, accrued in other
liabilitiesrelated parties on our condensed consolidated balance sheet. This balance relates to
amounts due upon collection from a third party. In January 2006, we paid the
sellers of the Maslonka business $3.3 million of holdback consideration.
We lease our InfraSource Transmission Services (ITS) headquarters in Mesa, Arizona and our
ITS Texas field office in San Angelo, Texas from EC Source, LLC, which is wholly owned by Martin
Maslonka. Our leases for these two properties will run through February 2009, subject to a
five-year renewal option. Pursuant to these leases, we expect to incur total annual lease payments
of $0.2 million.
We lease office and warehouse space from Coleman Properties of which three officers of Blair
Park are general partners. The lease for this space continues through October 2008.
Our annual payments under this agreement are approximately $0.1 million.
We also lease ducts in two river bores under the Delaware River from Coleman Properties. Our
lease commenced on May 1, 2005 and has a term of five years, with an option to extend. Our annual
lease payment is $0.02 million for each pair of fiber installed in the conduit up to a maximum of
$0.2 million per year if additional ducts are leased.
As of March 31, 2006 we have $0.4 million due to the EHV stockholders, who are currently our
employees, accrued in other long-term liabilitiesrelated party on our condensed consolidated
balance sheet. This amount is a portion of the holdback consideration from our acquisition of EHV,
which is payable in 2007 and not contingent on future events, with the exception of any
indemnification obligations owed to us.
We lease office and warehouse facilities in Michigan which are owned by an employee and his
family members. Our leases for these properties are expected to continue through March 2011 and May 2007. Pursuant
to these leases, we expect to incur total annual lease payments of $0.3 million.
14. Commitments and Contingencies
On September 21, 2005, a petition was filed against InfraSource, certain of its officers and
one of its directors and various other defendants in the Harris County, Texas District Court
seeking unspecified damages. The plaintiffs allege that the defendants violated their fiduciary
duties and committed constructive fraud by failing to maximize shareholder value in connection with
the Merger. At this time, it is too early to form a definitive opinion concerning the ultimate
outcome of this litigation. Management of InfraSource plans to vigorously defend against this
claim.
Pursuant to our service contracts, we generally indemnify our customers for the services we
provide under such contracts. Furthermore, because our services are integral to the operation and
performance of the electric power transmission and distribution infrastructure, we may become
subject to lawsuits or claims for any failure of the systems that we work on, even if our services
are not the cause for such failures, and we could be subject to civil and criminal liabilities to
the extent that our services contributed to any property damage or blackout. The outcome of these
proceedings could result in significant costs and diversion of managements attention to our business. Payments of significant
amounts, even if reserved, could adversely affect our reputation and liquidity position.
From time to time, we are a party to various other lawsuits, claims and other legal
proceedings. These actions may seek, among other things, compensation for alleged personal injury,
breach of contract, property damage, punitive damages, civil penalties or other losses, or
injunctive or declaratory relief. With
19
respect to such lawsuits, claims and proceedings, we accrue reserves when it is probable a
liability has been incurred and the amount of loss can be reasonably estimated. We do not believe
any of these proceedings currently pending, individually or in the aggregate, would be expected to
have a material adverse effect on our results of operations, cash flows or financial condition.
Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Forward-Looking and Cautionary Statements
In this Quarterly Report on Form 10-Q, we have made forward-looking statements. Generally,
these forward-looking statements can be identified by words like may, will, should, expect,
intend, anticipate, believe, estimate, predict, potential, or continue or the
negative of those words and other comparable words. These forward-looking statements generally
relate to our plans, objectives and expectations for future operations and are based upon our
current estimates and projections of future results or trends. Although we believe that our plans
and objectives reflected in or suggested by these forward-looking statements are reasonable, we may
not achieve these plans or objectives. These statements are subject to known and unknown risks,
uncertainties and other factors that could cause the actual results to differ materially from those
contemplated by the statements. These statements only reflect our predictions. Except as required
by law, we will not update forward-looking statements even though our situation may change in the
future. With respect to forward-looking statements, we claim the protection of the safe harbor for
forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.
The factors that could affect future results and could cause those results to differ
materially from those expressed in the forward-looking statements include, but are not limited to,
those described under Item 1, Business Risk Factors in our Annual Report on Form 10-K for the year ended
December 31, 2005 and other risks outlined in our filings with the Securities and Exchange
Commission (SEC).
Introduction
The following discussion should be read in conjunction with the unaudited condensed
consolidated financial statements and notes of InfraSource Services, Inc. and its wholly owned
subsidiaries included elsewhere in this Quarterly Report on Form 10-Q and with the Management
Discussion and Analysis of Financial Condition and Results of Operations Risk Factors, and
audited financial statements and notes included in our Annual Report on Form 10-K.
Overview
We are one of the largest specialty contractors servicing electric, natural gas and
telecommunications infrastructure in the United States based on market share. We operate in two
business segments. Our Infrastructure Construction Services (ICS) segment, provides design,
engineering, procurement, construction, testing and maintenance services for utility
infrastructure. Our ICS customers include electric power utilities, natural gas utilities,
telecommunication customers, government entities and heavy industrial companies, such as
petrochemical, processing and refining businesses. Our ICS services are provided by four of our
operating units, all of which have been aggregated into one reportable segment due to their similar
economic characteristics, customer bases, products and production and distribution methods. Our
Telecommunication Services (TS) segment, consisting of a single operating unit, leases
point-to-point telecommunications infrastructure in select markets and provides design,
procurement, construction and maintenance services for telecommunications infrastructure. Our TS
customers include communication service providers, large industrial and financial services
customers, school districts and other entities with high bandwidth telecommunication needs. Within
our TS segment, we are regulated as a public telecommunication utility in various states. We
operate in multiple service territories throughout the United States. We do not have significant
operations or assets outside the United States. We acquired EHV Power Corporation (EHV), a
Canadian entity, in November of 2005, which represented less than 1% of
20
our revenue in 2006.
During the first quarter of 2006:
|
|
|
Our gross profit increased $8.9 million, as compared to the first quarter of 2005, and
our gross profit margin increased from 11.2% in 2005 to 13.4% in 2006. The increase was
due primarily to an increase in volume and productivity in
our natural gas and electric transmission work due to unusually mild weather during the first quarter of 2006, an increase in the volume of higher margin electric
substation and electric transmission work, an increase
in volume of dark fiber lease revenue and the exiting of certain unprofitable natural
gas contracts. This increase was partially offset by a decrease in the volume of utility distribution and industrial electric work. |
|
|
|
|
Claim amounts of $5.8 million, related to a delay in the anticipated start date of one
of our electric transmission projects, were fully recovered during the three months ended
March 31, 2006. These claim settlements also generated a pre-tax profit of $0.3 million. |
|
|
|
|
We recorded $0.9 million of share-based compensation
expense upon the adoption of Statement of Financial Accounting
Standards (SFAS) No. 123R Share-Based
Payment. |
For the three months ended March 31, 2006, we had revenues of $217.2 million, in comparison to
$180.6 million for the three months ended March 31, 2005. Our revenue mix by end market for the
three months ended March 31, 2005 and 2006 is presented in the table below:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Three Months Ended |
End Market |
|
March 31, 2005 |
|
March 31, 2006 |
Electric Transmission |
|
|
22 |
% |
|
|
27 |
% |
Electric Substation |
|
|
18 |
% |
|
|
18 |
% |
Utility Distribution and Industrial Electric |
|
|
23 |
% |
|
|
17 |
% |
|
|
|
|
|
|
|
|
|
Total Electric |
|
|
63 |
% |
|
|
62 |
% |
|
|
|
|
|
|
|
|
|
Natural Gas |
|
|
24 |
% |
|
|
25 |
% |
Telecommunications |
|
|
11 |
% |
|
|
11 |
% |
Other |
|
|
2 |
% |
|
|
2 |
% |
Our top ten customers accounted for approximately 46% and 42% of our consolidated
revenues for the three months ended March 31, 2005 and 2006, respectively. Exelon accounted for
approximately 21% and 17% of our consolidated revenues for the three months ended March 31, 2005
and 2006, respectively. Approximately 54% and 41% of our telecommunications end market revenues
were from the TS segment for the three months ended March 31, 2005 and 2006, respectively.
21
Below is a period-over-period (first quarter 2005 as to first quarter 2006) and sequential
(fourth quarter 2005 as to first quarter 2006) comparison of end market backlog:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Backlog as of |
|
|
Increase/ |
|
|
Increase/ |
|
|
|
March 31, |
|
|
March 31, |
|
|
(Decrease) |
|
|
(Decrease) |
|
|
|
2005 |
|
|
2006 |
|
|
($) |
|
|
(%) |
|
|
|
(in millions) |
|
Electric Transmission |
|
$ |
152 |
|
|
$ |
176 |
|
|
$ |
24 |
|
|
|
16 |
% |
Electric Substation |
|
|
102 |
|
|
|
136 |
|
|
|
34 |
|
|
|
33 |
% |
Utility Distribution and Industrial Electric |
|
|
69 |
|
|
|
73 |
|
|
|
4 |
|
|
|
6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Electric |
|
|
323 |
|
|
|
385 |
|
|
|
62 |
|
|
|
19 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Natural Gas |
|
|
388 |
|
|
|
294 |
|
|
|
(94 |
) |
|
|
(24 |
)% |
Telecommunications |
|
|
186 |
|
|
|
234 |
|
|
|
48 |
|
|
|
26 |
% |
Other |
|
|
25 |
|
|
|
19 |
|
|
|
(6 |
) |
|
|
(24 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
922 |
|
|
$ |
932 |
|
|
$ |
10 |
|
|
|
1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Backlog as of |
|
|
Increase/ |
|
|
Increase/ |
|
|
|
December |
|
|
March 31, |
|
|
(Decrease) |
|
|
(Decrease) |
|
|
|
31, 2005 |
|
|
2006 |
|
|
($) |
|
|
(%) |
|
|
|
(in millions) |
|
Electric Transmission |
|
$ |
184 |
|
|
$ |
176 |
|
|
$ |
(8 |
) |
|
|
(4 |
)% |
Electric Substation |
|
|
124 |
|
|
|
136 |
|
|
|
12 |
|
|
|
10 |
% |
Utility Distribution and Industrial Electric |
|
|
45 |
|
|
|
73 |
|
|
|
28 |
|
|
|
62 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Electric |
|
|
353 |
|
|
|
385 |
|
|
|
32 |
|
|
|
9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Natural Gas |
|
|
284 |
|
|
|
294 |
|
|
|
10 |
|
|
|
3 |
% |
Telecommunications |
|
|
233 |
|
|
|
234 |
|
|
|
1 |
|
|
|
0 |
% |
Other |
|
|
24 |
|
|
|
19 |
|
|
|
(5 |
) |
|
|
(21 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
894 |
|
|
$ |
932 |
|
|
$ |
38 |
|
|
|
4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Below is a period-over-period (first quarter 2005 as to first quarter 2006) and sequential
(fourth quarter 2005 as to first quarter 2006) comparison of backlog by business segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Backlog as of |
|
|
Increase/ |
|
|
Increase/ |
|
|
|
March 31, |
|
|
March 31, |
|
|
(Decrease) |
|
|
(Decrease) |
|
|
|
2005 |
|
|
2006 |
|
|
($) |
|
|
(%) |
|
|
|
(in millions) |
|
Infrastructure Construction Services |
|
$ |
816 |
|
|
$ |
797 |
|
|
$ |
(19 |
) |
|
|
(2 |
)% |
Telecommunication Services |
|
|
106 |
|
|
|
135 |
|
|
|
29 |
|
|
|
27 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
922 |
|
|
$ |
932 |
|
|
$ |
10 |
|
|
|
1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Backlog as of |
|
|
Increase/ |
|
|
Increase/ |
|
|
|
December 31, |
|
|
March 31, |
|
|
(Decrease) |
|
|
(Decrease) |
|
|
|
2005 |
|
|
2006 |
|
|
($) |
|
|
(%) |
|
|
|
(in millions) |
|
Infrastructure Construction Services |
|
$ |
773 |
|
|
$ |
797 |
|
|
$ |
24 |
|
|
|
3 |
% |
Telecommunication Services |
|
|
121 |
|
|
|
135 |
|
|
|
14 |
|
|
|
12 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
894 |
|
|
$ |
932 |
|
|
$ |
38 |
|
|
|
4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
22
Critical Accounting Policies and Estimates
The preparation of our 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 at the date of the condensed
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. Actual
results may differ from those estimates. Refer to our Annual Report on Form 10-K for our critical
accounting policies and estimates in addition to Share-Based Compensation presented below.
Share-Based
Compensation
Effective January 1, 2006, we adopted SFAS No. 123R which requires the measurement and
recognition of compensation expense for all share-based payment awards made to employees
and directors, including stock options, restricted stock and employee stock purchases related
to the employee stock purchase plan, based on estimated fair values. We have identified the
accounting of our share-based payments as critical to the accounting for our business operations
and the understanding of our results of operations because they involve more significant judgments
and estimates used in the preparation of our condensed consolidated financial statements. Prior to
the adoption of SFAS No. 123R, we accounted for share-based awards to employees and directors using
the intrinsic value method in accordance with Accounting Principles
Board Opinion (APB) No. 25,
Accounting for Stock Issued to Employees as allowed under SFAS No. 123.
SFAS No. 123R requires companies to estimate the fair value of share-based payment awards
on the grant-date using an option-pricing model. We value share-based awards using the
Black-Scholes option pricing model. The Black-Scholes model, by its design, is highly
complex, and dependent upon key data inputs estimated by management. The primary data
inputs with the greatest degree of subjective judgment are the estimated lives of the
stock-based awards and the estimated volatility of our stock price. Beginning in fiscal
year 2006, we calculated the estimated life of stock options granted
using a simplified
method, which is based on the average of the vesting term and the term of the option, as a
result of guidance from the SEC as contained in Staff Accounting Bulletin No. 107 permitting
the initial use of this method. We determined expected volatility for fiscal year 2006 using
the historical method. Management selected the historical method as we have not identified a more
reliable or appropriate method to predict future volatility.
As share-based compensation expense recognized during the current period is based on the
value of the portion of share-based payment awards that is ultimately expected to vest,
SFAS No. 123R requires forfeitures to be estimated at the time of grant in order to estimate
the amount of share-based awards that will ultimately vest. The forfeiture rate is based on
historical activity. The value of the portion of the award that is ultimately expected to
vest is expensed on a straight-line basis over the requisite service periods in our consolidated
statements of income. Stock-based compensation expense recognized under SFAS No. 123R for the
three months ended March 31, 2006 was $0.9 million related to stock options, restricted stock and
the discount on employee stock purchases. For the three months ended March 31, 2005, we recorded
share-based compensation expense of $16,000 related to stock options which were granted to employees
and directors below the fair market value of the underlying stock at the date of grant. See Notes 2
and 8 to our condensed consolidated financial statements for additional information regarding the
adoption of SFAS No. 123R.
If factors change and we employ different assumptions in the application of SFAS No. 123R
in future periods, the compensation expense that we record under SFAS No. 123R may differ
significantly.
Results of Operations
Seasonality and Cyclicality
The results of operations of our ICS segment are subject to seasonal variations. During the
winter months, demand for new projects and new maintenance service arrangements is normally lower
in some geographic areas due to reduced construction activity, especially for services to natural
gas distribution customers. Therefore, our ICS segment typically experiences lower gross and
operating margins in the first quarter. However, demand for repair and maintenance services
attributable to damage caused by inclement weather during the winter months may partially offset
the loss of revenues from lower demand for new projects and new MSAs. During the three months
ended March 31, 2006 we experienced unusually mild weather which contributed to increased volume
and financial performance in our natural gas, underground telecommunications and electric
transmission services.
Our working capital needs are influenced by the seasonality of our business. We generally
experience a need for additional working capital during the spring and summer when we increase our
level of outdoor construction in weather-affected regions of the country. Conversely, we typically
convert working capital assets to cash during the winter months.
Activity in our industry and the
available volume of work is affected by the highly cyclical spending patterns in the
telecommunications and independent power producers sectors. As a result, our volume of business
may be adversely affected by declines in new projects in various geographic regions or industries
in the United States. The financial condition of our customers and their access to capital,
variations in the mix and margins on projects performed during any particular quarter, the timing
and magnitude of acquisitions and assimilation costs and regional economic conditions may also
materially affect quarterly results. Accordingly, our operating results in any particular quarter
may not be indicative of the results that can be expected for subsequent quarters or for the entire
year.
Our TS segments leasing of point-to-point telecommunications infrastructure is not
significantly affected by seasonality.
23
Consolidated Results
Three months ended March 31, 2006 compared to the three months ended March 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
|
|
|
|
Three Months |
|
|
|
|
|
|
Ended March |
|
|
% of |
|
|
Ended March |
|
|
% of |
|
|
|
31, 2005 |
|
|
Revenue |
|
|
31, 2006 |
|
|
Revenue |
|
|
|
(in thousands) |
|
Contract revenues |
|
$ |
180,630 |
|
|
|
100.0 |
% |
|
$ |
217,240 |
|
|
|
100.0 |
% |
Gross profit |
|
|
20,264 |
|
|
|
11.2 |
% |
|
|
29,196 |
|
|
|
13.4 |
% |
Selling, general and administrative expenses |
|
|
16,508 |
|
|
|
9.1 |
% |
|
|
23,071 |
|
|
|
10.6 |
% |
Merger related costs |
|
|
76 |
|
|
|
0.0 |
% |
|
|
|
|
|
|
0.0 |
% |
Provision (recoveries) of uncollectible
accounts |
|
|
80 |
|
|
|
0.0 |
% |
|
|
(10 |
) |
|
|
0.0 |
% |
Amortization of intangible
assets |
|
|
1,612 |
|
|
|
0.9 |
% |
|
|
257 |
|
|
|
0.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
|
1,988 |
|
|
|
1.1 |
% |
|
|
5,878 |
|
|
|
2.7 |
% |
Interest income |
|
|
194 |
|
|
|
0.1 |
% |
|
|
236 |
|
|
|
0.1 |
% |
Interest expense and amortization of debt
discount |
|
|
(1,456 |
) |
|
|
-0.8 |
% |
|
|
(2,111 |
) |
|
|
-1.0 |
% |
Other income |
|
|
4,380 |
|
|
|
2.4 |
% |
|
|
128 |
|
|
|
0.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before
income taxes |
|
|
5,106 |
|
|
|
2.8 |
% |
|
|
4,131 |
|
|
|
1.9 |
% |
Income tax expense |
|
|
2,042 |
|
|
|
1.1 |
% |
|
|
1,665 |
|
|
|
0.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
3,064 |
|
|
|
1.7 |
% |
|
$ |
2,466 |
|
|
|
1.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues: Revenues increased $36.6 million, or 20%, to $217.2 million for the three months
ended March 31, 2006 compared to the three months ended March 31, 2005 due to higher
volumes of work in each of our primary end markets. Electric revenues increased by $20.0 million, or
18%, including $18.3 million from electric transmission services and $6.1 million from electric
substation services, offset in part by a $4.4 million decrease from utility distribution and
industrial electric services. Underground natural gas revenues increased by $10.8 million, or 25%,
due primarily to unusually mild weather in the first quarter of 2006 which enabled an increased
volume of work performed. Telecommunications revenues increased by $4.9 million, or 25%, due to an
increase in demand for underground telecommunications infrastructure work, including fiber to the
premises initiatives.
Gross profit: Gross profit increased $8.9 million, or 44%, to $29.2 million for the three
months ended March 31, 2006 compared to the three months ended March 31, 2005. Gross profit
margins for the same periods increased from 11.2% in 2005 to 13.4% in 2006. The increase in gross
profit margin was due primarily to an increase in volume and productivity in our natural gas and
electric transmission work due to unusually mild weather, an increase in the volume of higher
margin electric substation and electric transmission work, an increase in volume of dark fiber
lease revenue and the exiting of certain unprofitable natural gas contracts. This increase was
partially offset by a decrease in the volume of utility distribution and industrial electric work.
Selling, general and administrative expenses: First quarter 2006 selling, general and
administrative expenses were $23.1, an increase of $6.6 million, or 40%, compared to the three
months ended March 31, 2005. The increase was due primarily to an increase in salaries and benefits
of $3.2 million for additional personnel hired to manage business growth, a $0.9 million charge for
share-based compensation and $0.7 million incurred for the secondary offering. Selling, general
and administrative expenses increased as a percentage of revenue from 9.1% for the three months
ended March 31, 2005 to 10.6% for the three months ended March 31, 2006.
24
Amortization of intangible assets: Amortization of intangible assets decreased $1.3 million,
or 84%, to $0.3 million during the three months ended March 31, 2006 compared to $1.6 million for
three months ended March 31, 2005. The decrease was due primarily to a lesser amount of intangible
amortization related acquired construction backlog, due to the completion of most of the acquired
contracts during 2005.
Interest expense and amortization of debt discount: We incurred $2.1 million of interest
expense for the three months ended March 31, 2006, an increase of $0.7 million from the three
months ended March 31, 2005, principally due to the 2005 reversal of $0.5 million of interest
accrued related to a litigation judgment settled in our favor during the three months ended March
31, 2005.
Other income, net: Other income decreased by $4.3 million for the three months ended March
31, 2006 compared to the three months ended March 31, 2005. The decrease was due primarily to the
2005 reversal of a $3.8 million charge related to a litigation judgment settled in our favor during
the three months ended March 31, 2005 and first quarter 2006 losses on equipment sales of $0.1
million compared to prior period gains of $0.6 million.
Provision for income taxes: The provision for income taxes for the three months ended March
31, 2006 was $1.7 million, compared to $2.0 million for the three months ended March 31, 2005. The
decrease was due to lower taxable income in the three months ended March 31, 2006.
Discontinued operations, net of tax: The loss of $0.3 from discontinued operations for the
three months ended March 31, 2005 included the results of operations of ULMS and ESI.
Segment Results
We manage our operations in two segments, ICS and TS. The primary financial measures we use to
evaluate our segment operations are contract revenues and income from operations as adjusted, a
non-GAAP financial measure. Income from operations as adjusted, excludes expenses for the amortization of intangibles related to our acquisitions. These amortization expenses are excluded because we
believe amortization expense does not reflect the core performance of our business segments
operations. A reconciliation of income from operations as adjusted to the nearest GAAP equivalent,
income (loss) from operations, is provided in Note 12 to our condensed consolidated financial
statements, included elsewhere in this report on Form 10-Q.
Our corporate overhead expenses have not been allocated to our segments because we evaluate
segment performance prior to the allocation of corporate expenses.
Three months ended March 31, 2006 compared to the three months ended March 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
Three Months |
|
|
|
|
|
|
Ended March 31, |
|
|
Ended March |
|
|
|
|
|
|
2005 |
|
|
31, 2006 |
|
|
Change |
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
% |
|
|
|
(in thousands) |
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Infrastructure Construction Services |
|
$ |
169,341 |
|
|
$ |
209,601 |
|
|
$ |
40,260 |
|
|
|
24 |
% |
Telecommunication Services |
|
|
10,514 |
|
|
|
10,073 |
|
|
|
(441 |
) |
|
|
-4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment revenues |
|
|
179,855 |
|
|
|
219,674 |
|
|
|
39,819 |
|
|
|
22 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate and eliminations |
|
|
775 |
|
|
|
(2,434 |
) |
|
|
(3,209 |
) |
|
|
-414 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
180,630 |
|
|
$ |
217,240 |
|
|
$ |
36,610 |
|
|
|
20 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
Three Months |
|
|
|
|
|
|
Ended March 31, |
|
|
Ended March 31, |
|
|
|
|
|
|
2005 |
|
|
2006 |
|
|
Change |
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
% |
|
|
|
(in thousands) |
|
Income from operations as adjusted: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Infrastructure Construction Services |
|
$ |
3,295 |
|
|
$ |
7,853 |
|
|
$ |
4,558 |
|
|
|
138 |
% |
Telecommunication Services |
|
|
4,193 |
|
|
|
4,458 |
|
|
|
265 |
|
|
|
6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment income from operations as adjusted |
|
|
7,488 |
|
|
|
12,311 |
|
|
|
4,823 |
|
|
|
64 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate and eliminations |
|
|
(3,888 |
) |
|
|
(6,176 |
) |
|
|
(2,288 |
) |
|
|
59 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income from operations as adjusted |
|
$ |
3,600 |
|
|
$ |
6,135 |
|
|
$ |
2,535 |
|
|
|
70 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ICS
Revenues: ICS revenues for the three months ended March 31, 2006 were $209.6 million, an
increase of $40.3 million, or 24%, compared to the three months ended March 31, 2005. The increase
was due to higher volumes of work in each of our primary end markets. Electric revenues increased
by $20.0 million, or 18%, including, $18.3 million from electric transmission services and $6.1
million from electric substation services, offset in part by a $4.4 million decrease from utility
distribution and industrial electric services. Underground natural gas revenues increased by $10.8
million, or 25%, due primarily to unusually mild weather in the first quarter of 2006 which enabled
an increased volume of work performed. Telecommunications revenues increased by $5.4 million, or
61%, due to an increase in demand for underground telecommunications infrastructure work, including
fiber to the premises initiatives.
Income from operations as adjusted: Income from operations as adjusted for the three months
ended March 31, 2006 was $7.9 million, an increase of $4.6 million, or 138%, compared to the three
months ended March 31, 2005. The increase was due primarily to an $8.9 million increase in gross
profit, partially offset by a $4.4 million increase in selling, general and administrative
expenses. The increase in gross profit margin was due primarily to an increase in volume and
productivity in our natural gas and electric transmission work due to unusually mild weather, an
increase in the volume of higher margin electric substation and electric transmission work and the
exiting of certain unprofitable natural gas contracts. This increase was partially offset by a
decrease in the volume of utility distribution and industrial electric work. Selling, general and
administrative costs increased primarily as a result of a $2.6 million for additional personnel
hired to meet the business growth and a $0.5 million charge for share-based compensation.
TS
Revenues: TS revenues decreased $0.4 million, or 4%, to $10.1 million for the three months
ended March 31, 2006 compared to the three months ended March 31, 2005 due to a decrease in outside
plant construction, offset in part by an increase in dark fiber leases.
Income from operations as adjusted: Income from operations as adjusted for the three months
ended March 31, 2006 was $4.5 million, an increase of $0.3 million, or 6%, compared to the three
months ended March 31, 2005. The increase was due primarily to an increase in dark fiber lease
revenues.
Corporate
The loss from operations as adjusted for corporate and eliminations increased by $2.3 million
for the three months ended March 31, 2006 compared to the three months ended March 31, 2005 due to
an increase in corporate expenses, offset in part by an increase of $0.9 million for revenue
related to administrative services we provide to one of our customers. Corporate expenses increased
as a result of $0.7 million incurred for secondary offering costs, an increase in salaries and
benefits of $0.4 million for additional personnel hired to manage business growth and a $0.3 million
charge for share-based compensation.
26
Liquidity and Capital Resources
Cash, Working Capital Requirements and Capital Expenditures
Our working capital needs are influenced by the seasonality of our business. We generally
experience a need for additional working capital during the spring season when we increase our
level of outdoor construction in weather-affected regions of the country. Conversely, we typically
convert working capital assets to cash during the winter months. We expect capital expenditures to
range from $24.0 million to $30.0 million during the remainder of 2006, which could vary depending
on the timing of awards of dark fiber and electric transmission contracts. More than 50% of the
expected capital expenditures are for dark fiber expansion. We intend to fund these expenditures
primarily with operating cash flows. We have reduced our capital expenditures as a percentage of
revenue over the past two years as a result of an increase in the use of leasing arrangements and
improved equipment utilization.
We anticipate that our cash on hand of $11.9 million as of March 31, 2006, our credit facility
and our future cash flow from operations will provide sufficient cash to enable us to meet our operating
needs based on expected levels of business, debt service requirements and planned capital
expenditures. However, we may find it necessary or desirable to seek additional financing to
support our capital needs, which may include additional financing to support our expected growth,
and to provide funds for strategic initiatives, such as acquisitions. Accordingly, this may
require us to increase our credit facility or complete equity-based financing, such as the issuance
of common stock or preferred stock, which would be dilutive to our existing shareholders. We
currently intend to refinance our credit facility in order to obtain more favorable debt terms and
increased debt capacity. A refinancing of our credit facility may cause all or a portion of our
capitalized debt issuance costs, which are $5.0 as of March 31, 2006, to be expensed. Our future
working capital needs may also be affected by any increases in demand for our services, including
any spending generated as a result of the Energy Policy Act of 2005.
Sources and Uses of Cash
As of March 31, 2006, we had cash and cash equivalents of $11.9 million, working capital of
$120.4 million and long-term debt of $83.7 million principally consisting of term loans under our
credit facility. As of March 31, 2006 we had no borrowings under the revolving portion of our
credit facility and $32.0 million in letters of credit outstanding thereunder, leaving $53.0
million available for additional borrowings. As of December 31, 2005, we had cash and cash
equivalents of $24.3 million, working capital of $117.2 million and long-term debt of $83.9
million. As of May 2, 2006, we have no borrowings under the revolving portion of our credit
facility. We are currently evaluating the expansion of our credit facility or other potential
financing alternatives to further accommodate internal growth and future acquisitions.
Included in costs and estimated earnings in excess of billings are costs related to claims and
unapproved change orders of approximately $12.4 million and $3.9 million at December 31, 2005 and
March 31, 2006, respectively. These remaining amounts are primarily related to permit delays,
changes in scope and environmental impacts on two underground utility construction projects.
During the three months ended March 31, 2006 we recovered claim amounts of $5.8 million existing at
December 31, 2005 related to a delay in the anticipated start date of one of our electric
transmission projects. Settlement of these claims in the first quarter of 2006 generated a pre-tax
profit of $0.3 million.
27
Cash from operating activities from continuing operations. During the three months ended
March 31, 2006 net cash used by operating activities from continuing operations was $0.4 million
compared to $16.4 million for the three ended March 31, 2005. The principal uses of operating cash
during the three months ended March 31, 2006 were payments for labor and materials related to
performance of services and selling, general, and administrative expenses. The principal source of
operating cash during the three months ended March 31, 2006 was payments received from customers
for contract services performed. Changes in operating assets and liabilities during the three
months ended March 31, 2006 used $10.3 million of operating cash flow from continuing operations
as compared with $24.4 million used during the first quarter of 2005. That decreased use of cash
included the effect of a first quarter 2006 $4.8 million increase in contracts receivable and costs
and estimated earnings in excess of billings, net, compared to a $23.3 million increase during the
first quarter of 2005. A first quarter 2006 increase in inventories and other current assets used
$2.2 million of operating cash flows compared to the $2.9 million source of cash due to a decrease
in inventories and other current assets during the first quarter of 2005.
Cash from investing activities from continuing operations. During the three months ended
March 31, 2006, net cash used by investing activities from continuing operations was $12.8 million
compared to $2.2 million used during the three months ended March 31, 2005. The primary use of cash
for the three months ended March 31, 2006 was $9.6 million for purchases of equipment, a $3.5
million payment of the remaining holdback plus interest to the sellers of the Maslonka business
(renamed InfraSource Transmission Services), offset in part by cash proceeds from the sale of
equipment of $0.2 million. The primary use of cash for the three months ended March 31, 2005 was
$8.5 million for purchases of equipment, offset in part by cash proceeds from the sale of equipment
of $1.3 million and the release of $5.0 million from restricted cash.
Cash from financing activities from continuing operations. During the three months ended
March 31, 2006, net cash provided by financing activities from continuing operations was $0.9
million compared to net cash provided of $6.0 million for the three months ended March 31, 2005.
The sources of cash from financing activities for the three months ended March 31, 2006 were
proceeds of $0.8 million from the exercise of stock options and $0.4 million from excess tax
benefits from share-based compensation, offset by $0.2 million long-term debt repayments. The
sources of cash from financing activities for the three months ended March 31, 2005 were a $6.0
million borrowing under our revolving credit facility and proceeds of $0.3 million from the
exercise of stock options, offset by $0.2 million long-term debt repayments.
During the three months ended March 31, 2005, net cash reclassified from discontinued
operations was $0.3 million. For the three months ended March 31, 2005, cash used by operating
activities from discontinued operations was $0.2 million and cash used in investing activities from
discontinued operations was $0.1 million. The investing activities related to purchases of
equipment.
28
Contractual Obligations and Other Commitments
As of March 31, 2006, our future contractual obligations were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due by period |
|
|
|
|
|
|
|
Less |
|
|
|
|
|
|
|
|
|
|
More |
|
|
|
|
|
|
|
than 1 |
|
|
1-3 |
|
|
4-5 |
|
|
than 5 |
|
Contractual Obligations (1) |
|
Total |
|
|
year |
|
|
years |
|
|
years |
|
|
years |
|
Long-term debt obligations |
|
|
83,685 |
|
|
|
674 |
|
|
|
2,606 |
|
|
|
80,405 |
|
|
|
|
|
Operating lease obligations |
|
|
38,908 |
|
|
|
14,486 |
|
|
|
23,917 |
|
|
|
424 |
|
|
|
81 |
|
Projected interest payments
on long term debt (2) |
|
|
29,637 |
|
|
|
5,688 |
|
|
|
19,248 |
|
|
|
4,701 |
|
|
|
|
|
Contingent earnout payments
(3) |
|
|
7,673 |
|
|
|
7,073 |
|
|
|
600 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other long-term liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested options exercised |
|
|
375 |
|
|
|
355 |
|
|
|
20 |
|
|
|
|
|
|
|
|
|
Other |
|
|
4,282 |
|
|
|
33 |
|
|
|
4,052 |
|
|
|
13 |
|
|
|
184 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
164,560 |
|
|
$ |
28,309 |
|
|
$ |
50,443 |
|
|
$ |
85,543 |
|
|
$ |
265 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Trade accounts payable are not included in Contractual Obligations. |
|
(2) |
|
The total projected interest payments on long-term debt are based upon borrowings and
interest rates as of March 31, 2006. The interest rate on variable rate debt is subject to
changes beyond our control and may result in actual interest expense and payments differing
from the amounts above. |
|
(3) |
|
See discussion below in Contingent Earnout Payments |
Contingent Earnout Payments
We have an obligation to pay an earnout pursuant to a Stock Purchase Agreement, dated as of
November 15, 2000, among InfraSource Incorporated, Blair Park Services, Inc., Sunesys, Inc. and the
shareholders named therein. As of March 31, 2006, a $7.1 million liability was included in other
liabilitiesrelated parties in our condensed consolidated financial statements. The earnout was
paid in the second quarter of 2006.
Pursuant to the terms of the EHV acquisition agreement, $0.6 million of the consideration was
subject to a holdback provision. The holdback is payable in 2007 and payment of the holdback is
not contingent on future events, with the exception of any indemnification obligations owed to us.
Related Party Transactions
As
of March 31, 2006, we had $0.3 million due from our Principal Stockholders included in receivables from related party on our condensed consolidated balance sheet. This amount related to
reimbursements for certain secondary offering costs.
As of March 31, 2006, we had $7.1 million due to the former owners of Blair Park accrued in
other liabilitiesrelated parties on our condensed consolidated balance sheet for additional
contingent purchase price consideration. Blair Park was acquired by InfraSource Incorporated in
2001. The balance was paid in the second quarter of 2006.
As of March 31, 2006, we have $0.8 million due to the sellers of the Maslonka business, who are also employees, accrued in other
liabilitiesrelated parties on our condensed consolidated balance sheet. This balance relates to
amounts due upon collection from a third party. In January 2006, we paid the sellers of the
Maslonka business $3.3 million of holdback consideration.
29
We lease our InfraSource Transmission Services (ITS) headquarters in Mesa, Arizona and our
ITS Texas field office in San Angelo, Texas from EC Source, LLC, which is wholly owned by Martin
Maslonka. Our leases for these two properties will run through February 2009, subject to a
five-year renewal option. Pursuant to these leases, we expect to incur total annual lease payments
of $0.2 million.
We lease office and warehouse space from Coleman Properties of which three officers of Blair
Park are general partners. The lease for this space continues through
October 2008. Our annual payments under this agreement are approximately $0.1 million.
We also lease ducts in two river bores under the Delaware River from Coleman Properties. Our
lease commenced on May 1, 2005 and has a term of five years, with an option to extend. Our annual
lease payment is $0.02 million for each pair of fiber installed in the conduit up to a maximum of
$0.2 million per year if additional ducts are leased.
As of March 31, 2006 we have $0.4 million due to the EHV stockholders, who are currently our
employees, accrued in other long-term liabilitiesrelated party on our condensed consolidated
balance sheet. This amount is a portion of the holdback consideration from our acquisition of EHV,
which is payable in 2007 and not contingent on future events, with the exception of any
indemnification obligations owed to us.
We lease office and warehouse facilities in Michigan which are owned by an employee and his
family members. Our leases for these properties are expected to continue through March 2011 and May 2007. Pursuant
to these leases, we expect to incur total annual lease payments of $0.3 million.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk primarily related to potential adverse changes in interest rates
as discussed below. We have not historically and do not intend to use derivative financial
instruments for trading or to speculate on changes in interest rates or commodity prices. On
October 10, 2003, we entered into an interest rate swap agreement and an interest rate cap
agreement with a term of three years, both of which qualify as cash flow hedges, to hedge the
variability of cash flows related to our variable rate term loan. We are not exposed to any
significant market risks, foreign currency exchange risk or interest rate risk from the use of
derivative financial instruments.
The sensitivity analysis below, which illustrates our hypothetical potential market risk
exposure, estimates the effects of hypothetical sudden and sustained changes in the applicable
market conditions on 2006 earnings. The sensitivity analysis presented does not consider any
additional actions we may take to mitigate our exposure to such changes. The hypothetical changes
and assumptions may be different from what actually occurs in the future.
Interest Rates. As of March 31, 2006, our $83.7 million term loan facility was subject to
floating interest rates. On October 10, 2003, we entered into an interest rate swap agreement and
an interest rate cap agreement. The interest rate swap initially covered a $70.0 million notional
amount and was reduced to $30.0 million effective October 11, 2005. Under the interest rate swap
agreement we pay a fixed rate of 2.395% in exchange for three month LIBOR until October 10, 2006.
The interest rate cap agreement, initially with a $20.0 million notional amount and was increased
to $40.0 million effective October 11, 2005, provides a 4.00% interest rate cap and matures October
10, 2006.
As of March 31, 2006, we had $13.7 million of our term loans subject to some floating rate
risk. As such, we are exposed to earnings and fair value risk due to changes in interest rates with
respect to our long-term obligations. The detrimental effect on our pre-tax earnings of a
hypothetical 50 basis point increase in interest rates would be approximately $0.2 million. As of
March 31, 2006, we had no
30
borrowings under the revolving portion of our credit facility.
Currency Risk. With our November 2005 acquisition of our Canadian subsidiary, we may be
subject to currency fluctuations in the future. We do not expect any such currency risk to be
material.
Gasoline and Diesel Fuel. We have market risk for changes in the price of gasoline and
diesel fuel. To the extent we cannot mitigate increases in fuel prices through surcharges and other
contract provisions with our customers, our operating income will be affected. As of March 31,
2006, we did not have any fuel hedges in place. However, on
April 11, 2006, we entered into fuel
hedges to mitigate a portion of our exposure to price fluctuations of gasoline and diesel fuel.
The fuel hedges cap our exposure to price fluctuations for approximately one-quarter of our expected
usage for the remainder of 2006.
Item 4.
CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
The company has designed and maintains a system of disclosure controls and procedures to give
reasonable assurance that information required to be disclosed in the companys reports submitted
under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within
the time periods specified in the rules and forms of the SEC. These controls and procedures also
give reasonable assurance that information required to be disclosed in such reports is accumulated
and communicated to management to allow timely decisions regarding required disclosures. The
companys management, with the participation of the companys Chief Executive Officer and Chief
Financial Officer, evaluated the effectiveness of the companys disclosure controls and procedures
(as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of
1934, as amended (the Exchange Act)) as of the end of the period covered by this report. Based
on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the
companys disclosure controls and procedures as of the end of the period covered by this report
were effective at a reasonable assurance level.
Internal Control Over Financial Reporting
No change in the Companys internal control over financial reporting (as such term is defined in
Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the Companys most recent
fiscal quarter that has materially affected, or is reasonably likely to materially affect, the
Companys internal control over financial reporting.
PART II OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS.
On September 21, 2005, a petition was filed against InfraSource, certain of its officers and
one of its directors and various other defendants in the Harris County, Texas District Court
seeking unspecified damages. The plaintiffs allege that the defendants violated their fiduciary
duties and committed constructive fraud by failing to maximize shareholder value in connection with
the Merger. At this time, it is too early to form a definitive opinion concerning the ultimate
outcome of this litigation. Management of InfraSource plans to vigorously defend against this
claim.
Pursuant to our service contracts, we generally indemnify our customers for the
services we provide under such contracts. Furthermore, because our services are integral to the
operation and performance of the electric power transmission and distribution infrastructure, we
may become subject to lawsuits or claims for any failure of the systems that we work on, even if
our services are not the cause for such failures, and we could be subject to civil and criminal
liabilities to the extent that our services
31
contributed to any property damage or blackout. The outcome of these proceedings could result
in significant costs and diversion of managements attention to our business. Payments of significant
amounts, even if reserved, could adversely affect our reputation and liquidity position.
From time to time, we are a party to various other lawsuits, claims and other legal
proceedings. These actions may seek, among other things, compensation for alleged personal injury,
breach of contract, property damage, punitive damages, civil penalties or other losses, or
injunctive or declaratory relief. With respect to such lawsuits, claims and proceedings, we accrue
reserves when it is probable a liability has been incurred and the amount of loss can be reasonably
estimated. We do not believe any of these proceedings currently pending, individually or in the
aggregate, would be expected to have a material adverse effect on our results of operations, cash
flows or financial condition.
Item 1A. RISK FACTORS.
No updates.
32
Item 6. EXHIBITS.
|
|
|
3.1
|
|
Restated Certificate of Incorporation of InfraSource Services, Inc.(1) |
|
|
|
3.1.1
|
|
Certificate of Amendment to the Restated Certificate of Incorporation
of InfraSource Services, Inc.(1) |
|
|
|
3.2
|
|
Amended and Restated Bylaws of InfraSource Services, Inc.(1) |
|
|
|
3.3
|
|
Specimen of Common Stock certificate of InfraSource Services Inc.(1) |
|
|
|
4.1
|
|
Stockholders Agreement, dated as of September 24, 2003, by and among
InfraSource Services, Inc. (f/k/a the Dearborn Holdings Corporation)
and its Security Holders party thereto.(2) |
|
|
|
4.2
|
|
Registration Rights Agreement, dated as of April 20, 2004, by and among
InfraSource Services, Inc. OCM Principal Opportunities Fund II, L.P.,
OCM/GFI Power Opportunities Funds, L.P., Martin Maslonka, Thomas B.
Tilford, Mark C. Maslonka, Justin Campbell, Joseph Gabbard, Sidney
Strauss, Jon Maslonka, David R. Helwig, Terence R. Montgomery and Paul
M. Daily.(1) |
|
|
|
4.2.1
|
|
Amendment to Registration Rights Agreement, dated as of December 7,
2005, by and among InfraSource Services, Inc. and OCM Principal
Opportunities Fund II, L.P., OCM/GFI Power Opportunities Funds, L.P.,
Tontine Capital Partners, L.P., Martin Maslonka, Thomas B. Tilford,
Mark C. Maslonka, Justin Campbell, Joseph Gabbard, Sidney Strauss, Jon
Maslonka, David R. Helwig, Terence R. Montgomery and Paul M. Daily.(3) |
|
|
|
10.1
|
|
Fourth Amendment, dated as of March 15, 2006, to the Amended and
Restated Credit Agreement, dated as of May 12, 2004, by and among
InfraSource Services, Inc., InfraSource Incorporated, LaSalle Bank
National Association, as syndication agent, Barclays Bank Plc, as
administrative agent, and the several banks and other financial
institutions or entities from time to time parties thereto.(4) |
|
|
|
31.1
|
|
Rule 13a-14(a)/Rule 15d-14(a) Certification of Chief Executive Officer.* |
|
|
|
31.2
|
|
Rule 13a-14(a)/Rule 15d-14(a) Certification of Chief Financial Officer.* |
|
|
|
32.1
|
|
Certification pursuant to Section 1350 of Chapter 63 of Title 18 of the
United States Code.* |
|
|
|
* |
|
Filed herewith |
|
(1) |
|
Filed as an exhibit to the Registrants Registration Statement on Form S-8
(Registration No. 333-115648) filed with the Commission on May 19, 2004. |
|
(2) |
|
Filed as an exhibit to the Registrants Registration Statement on Form S-1
(Registration No. 333-112375) filed with the Commission on January 30, 2004. |
|
(3) |
|
Filed as an exhibit to the Registrants Annual Report on Form 10-K for the year ended
December 31, 2005. |
|
(4) |
|
Filed as an exhibit to the Registrants Current Report on Form 8-K dated March 15,
2006. |
33
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
|
|
|
INFRASOURCE SERVICES, INC. |
|
|
|
|
(Registrant) |
|
|
|
Date: May 3, 2006
|
|
By:
|
|
/s/ TERENCE R. MONTGOMERY
Terence R. Montgomery
|
|
|
|
|
|
|
Senior Vice President and Chief Financial Officer |
|
|
34