##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 Form 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 2007
 OR
 o
    
    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)
 Delaware
    
    03-0523754(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)
 100 West Sixth Street, Suite 300, Media, PA  (Address of principal executive offices)  19063  (Zip Code)  (610) 480-8000  (Registrants telephone number, including area code)
 þ o
  o þ o
 o þ




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##### 



For the Quarter Ended March 31, 2007
FORM 10-Q
INFRASOURCE SERVICES, INC. AND SUBSIDIARIES
Table of Contents
  
 Page #Part IFINANCIAL INFORMATIONItem 1.
    
    Financial Statements (Unaudited)Condensed Consolidated Balance Sheets at December 31, 2006 and March 31, 2007
    
    
    3Condensed Consolidated Statements of Operations for the three months ended
March 31, 2006 and 2007
    
    
    4Condensed Consolidated Statement of Shareholders Equity for the three months ended
March 31, 2007
    
    
    5Condensed Consolidated Statements of Cash Flows for the three months ended March 31,
2006 and 2007
    
    
    6Notes to Condensed Consolidated Financial Statements
    
    
    7Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    19Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    26Item 4.
    
    Controls and Procedures
    
    
    27PART IIOTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    27Item 1A.
    
    Risk Factors
    
    
    28Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    31Item 3.
    
    Defaults Upon Senior Securities
    
    
    31Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    31Item 5.
    
    Other Information
    
    
    31Item 6.
    
    Exhibits
    
    
    31SIGNATURES
    
    
    32
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##### Table of Contents



PART I  FINANCIAL INFORMATION
 
 ITEM 1. FINANCIAL STATEMENTS
 INFRASOURCE SERVICES, INC. AND SUBSIDIARIES
 
  December 31,
    
    
    March 31,2006
    
    
    2007(Unaudited)(In thousands, except share data)Current assets:Cash and cash equivalents
    
    $
    26,209
    
    
    $
    23,620Contract receivables (less allowances for doubtful accounts
of $3,770 and $3,843, respectively)
    
    
    166,780
    
    
    
    131,916Costs and estimated earnings in excess of billings
    
    
    59,012
    
    
    
    57,883Inventories
    
    
    5,443
    
    
    
    4,807Deferred income taxes
    
    
    8,201
    
    
    
    7,820Other current assets
    
    
    6,384
    
    
    
    8,756Current assets  discontinued operations
    
    
    746
    
    
    
    424Total current assets
    
    
    272,775
    
    
    
    235,226Property and equipment (less accumulated depreciation
of $73,302 and $77,265, respectively)
    
    
    154,578
    
    
    
    161,877Goodwill
    
    
    146,933
    
    
    
    147,015Intangible assets, net
    
    
    900
    
    
    
    839Deferred charges and other assets, net
    
    
    5,529
    
    
    
    4,647Assets held for sale
    
    
    517
    
    
    
    513Total assets
    
    $
    581,232
    
    
    $
    550,117Current liabilities:Current portion of long-term debt
    
    $
    42
    
    
    $
    38Current portion of capital lease obligations
    
    
    35
    
    
    
    36Short-term credit facility borrowings
    
    
    1,077
    
    
    
    Other liabilities  related parties
    
    
    766
    
    
    
    420Accounts payable
    
    
    47,846
    
    
    
    27,580Accrued compensation and benefits
    
    
    27,951
    
    
    
    19,887Other current and accrued liabilities
    
    
    22,096
    
    
    
    28,033Accrued insurance reserves
    
    
    36,166
    
    
    
    34,276Billings in excess of costs and estimated earnings
    
    
    23,245
    
    
    
    18,354Deferred revenues
    
    
    6,188
    
    
    
    6,540Total current liabilities
    
    
    165,412
    
    
    
    135,164Long-term debt, net of current portion
    
    
    50,014
    
    
    
    50,009Capital lease obligations, net of current portion
    
    
    56
    
    
    
    46Deferred revenues
    
    
    16,347
    
    
    
    16,097Other long-term liabilities  related party
    
    
    900
    
    
    
    922Deferred income taxes
    
    
    3,750
    
    
    
    1,833Other long-term liabilities
    
    
    5,568
    
    
    
    5,747Total liabilities
    
    
    242,047
    
    
    
    209,818Commitments and contingenciesShareholders equity:Preferred stock, $.001 par value (authorized - 12,000,000 shares;
0 shares issued and outstanding)
    
    
    
    
    
    
    Common stock, $.001 par value (authorized - 120,000,000 shares;
issued 40,263,739 and 40,339,623 shares, respectively, and
outstanding - 40,233,869 and 40,309,753, respectively)
    
    
    40
    
    
    
    40Treasury stock, at cost (29,870 shares)
    
    
    (137
    )
    
    
    (137
    )Additional paid-in capital
    
    
    288,517
    
    
    
    290,752Retained earnings
    
    
    50,785
    
    
    
    49,609Accumulated other comprehensive income (loss)
    
    
    (20
    )
    
    
    35Total shareholders equity
    
    
    339,185
    
    
    
    340,299Total liabilities and shareholders equity
    
    $
    581,232
    
    
    $
    550,117
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INFRASOURCE SERVICES, INC. AND SUBSIDIARIES
 
  Three Months Ended
    
    
    Three Months EndedMarch 31, 2006
    
    
    March 31, 2007(Unaudited)(In thousands, except per share data)Revenues
    
    $
    214,275
    
    
    $
    203,804Cost of revenues
    
    
    185,424
    
    
    
    175,409Gross profit
    
    
    28,851
    
    
    
    28,395Selling, general and administrative expenses
    
    
    22,693
    
    
    
    25,608Merger related costs
    
    
    
    
    
    
    3,574Provision (recoveries) of uncollectible accounts
    
    
    (10
    )
    
    
    163Amortization of intangible assets
    
    
    257
    
    
    
    60Income (loss) from operations
    
    
    5,911
    
    
    
    (1,010
    )Interest income
    
    
    236
    
    
    
    328Interest expense
    
    
    (2,111
    )
    
    
    (1,043
    )Other income, net
    
    
    97
    
    
    
    113Income (loss) from continuing operations before income taxes
    
    
    4,133
    
    
    
    (1,612
    )Income tax expense (benefit)
    
    
    1,666
    
    
    
    (623
    )Income (loss) from continuing operations
    
    
    2,467
    
    
    
    (989
    )Discontinued operations:Loss from discontinued operations (net of income
tax benefit of $(1) and $(11), respectively)
    
    
    (1
    )
    
    
    (17
    )Net income (loss)
    
    $
    2,466
    
    
    $
    (1,006
    )Basic income (loss) per share:Income (loss) from continuing operations
    
    $
    0.06
    
    
    $
    (0.02
    )Loss from discontinued operations
    
    
    
    
    
    
    Net income (loss)
    
    $
    0.06
    
    
    $
    (0.02
    )Weighted average basic common shares outstanding
    
    
    39,515
    
    
    
    40,279Diluted income (loss) per share:Income (loss) from continuing operations
    
    $
    0.06
    
    
    $
    (0.02
    )Loss from discontinued operations
    
    
    
    
    
    
    Net income (loss)
    
    $
    0.06
    
    
    $
    (0.02
    )Weighted average diluted common shares outstanding
    
    
    40,116
    
    
    
    40,279
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INFRASOURCE SERVICES, INC. AND SUBSIDIARIES
 
  AccumulatedOtherCommon Stock
    
    
    Treasury Stock
    
    
    Additional Paid-In
    
    
    Comprehensive
    
    
    RetainedShares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Capital
    
    
    Income (Loss)
    
    
    Earnings
    
    
    Total(Unaudited)(in thousands, except share amounts)Balance as of December 31, 2006
    
    
    40,263,739
    
    
    $
    40
    
    
    
    (29,870
    )
    
    $
    (137
    )
    
    $
    288,517
    
    
    $
    (20
    )
    
    $
    50,785
    
    
    $
    339,185Cumulative effect of adopting
new accounting pronouncement
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (170
    )
    
    
    (170
    )Stock options exercised
    
    
    75,976
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    591
    
    
    
    
    
    
    
    
    
    
    
    591Income tax benefit from options
exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    441
    
    
    
    
    
    
    
    
    
    
    
    441Adjustment of shares issued
under employee stock purchase
plan
    
    
    (92
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Share-based compensation expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,203
    
    
    
    
    
    
    
    
    
    
    
    1,203Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,006
    )
    
    
    (1,006
    )Other comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    55
    
    
    
    
    
    
    
    55Balance as of March 31, 2007
    
    
    40,339,623
    
    
    $
    40
    
    
    
    (29,870
    )
    
    $
    (137
    )
    
    $
    290,752
    
    
    $
    35
    
    
    $
    49,609
    
    
    $
    340,299
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INFRASOURCE SERVICES, INC. AND SUBSIDIARIES
 
  Three Months Ended
    
    
    Three Months EndedMarch 31, 2006
    
    
    March 31, 2007(Unaudited)(In thousands)Cash flows from operating activities:Net income (loss)
    
    $
    2,466
    
    
    $
    (1,006
    )Adjustments to reconcile net income (loss) to cash
provided by operating activities:Loss from discontinued operations  net of taxes
    
    
    1
    
    
    
    17Depreciation
    
    
    6,880
    
    
    
    5,163Amortization of intangibles
    
    
    257
    
    
    
    60(Gain) / loss on sale of assets
    
    
    71
    
    
    
    (122
    )Deferred income taxes
    
    
    (778
    )
    
    
    (1,536
    )Share-based compensation
    
    
    870
    
    
    
    1,203Other
    
    
    122
    
    
    
    74Changes in operating assets and liabilities:Contract receivables, net
    
    
    (3,948
    )
    
    
    34,701Costs and estimated earnings in excess of billings, net
    
    
    (683
    )
    
    
    (3,762
    )Inventories and other current assets
    
    
    (1,357
    )
    
    
    (314
    )Deferred charges and other assets
    
    
    243
    
    
    
    189Accounts payable
    
    
    (12,248
    )
    
    
    (21,125
    )Other current liabilities
    
    
    11,334
    
    
    
    (5,344
    )Other liabilities  related parties
    
    
    36
    
    
    
    Other liabilities
    
    
    163
    
    
    
    873Net cash flows provided by operating
activities from continuing operations
    
    
    3,429
    
    
    
    9,071Net cash flows provided by (used in) operating
activities from discontinued operations
    
    
    13
    
    
    
    (28
    )Net cash flows provided by operating activities
    
    
    3,442
    
    
    
    9,043Cash flows from investing activities:Acquisitions of businesses, net of cash acquired
    
    
    (3,476
    )
    
    
    (386
    )Proceeds from sales of equipment
    
    
    186
    
    
    
    403Additions to property and equipment
    
    
    (9,544
    )
    
    
    (11,544
    )Net cash flows used in investing
activities from continuing operations
    
    
    (12,834
    )
    
    
    (11,527
    )Net cash flows used in investing
activities from discontinued operations
    
    
    (13
    )
    
    
    Net cash flows used in investing activities
    
    
    (12,847
    )
    
    
    (11,527
    )Cash flows from financing activities:Repayments of long-term debt and capital lease obligations
    
    
    (223
    )
    
    
    (1,095
    )Excess tax
benefits from share-based compensation
    
    
    356
    
    
    
    402Proceeds from exercise of stock options
    
    
    755
    
    
    
    591Net cash
flows provided by (used in) financing activities
    
    
    888
    
    
    
    (102
    )Cash and cash equivalents:Net decrease in cash and cash equivalents
    
    
    (8,517
    )
    
    
    (2,586
    )Cash and cash equivalents  beginning of period
    
    
    31,639
    
    
    
    26,209Effect of exchange rates on cash
    
    
    (1
    )
    
    
    (3
    )Cash and cash equivalents  end of period
    
    $
    23,121
    
    
    $
    23,620Supplemental cash flow information:Accounts payable balance related to purchases of property and equipment
    
    $
    954
    
    
    $
    3,118
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INFRASOURCE SERVICES, INC. AND SUBSIDIARIES
 
 Notes to Condensed Consolidated Financial Statements
 (Unaudited)
 1. Organization and Basis of Presentation
    Recent Development:
   7




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Basis of Presentation:
   2. Recent Accounting Pronouncements
    8




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3. Discontinued Operations
   December 31,
    
    
    March 31,2006
    
    
    2007(in thousands)Inventory
    
    $
    687
    
    
    $
    370Deferred income taxes
    
    
    59
    
    
    
    54Total current assets
    
    
    746
    
    
    
    424Total assets
    
    $
    746
    
    
    $
    424Net assets
    
    $
    746
    
    
    $
    424
  For The Three
    
    For The ThreeMonths Ended
    
    Months EndedMarch 31, 2006
    
    March 31, 2007(in thousands)Revenues
    
    $
    2,965
    
    
    $
    281Loss from discontinued operations before income taxes
    
    
    (2
    )
    
    
    (28
    )
 4. Costs And Estimated Earnings In Excess Of Billings
   9




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5. Goodwill and Intangible Assets
  December 31, 2006
    
    
    March 31, 2007(in thousands)Goodwill
    
    $
    146,933
    
    
    $
    147,015Intangible assets:Volume agreements
    
    
    4,561
    
    
    
    4,561Non-compete agreements
    
    
    20
    
    
    
    20Total intangible assets
    
    
    4,581
    
    
    
    4,581Accumulated amortization:Volume agreements
    
    
    (3,681
    )
    
    
    (3,741
    )Non-compete agreements
    
    
    
    
    
    
    (1
    )Total accumulated amortization
    
    
    (3,681
    )
    
    
    (3,742
    )Intangible assets, net
    
    $
    900
    
    
    $
    839
  December 31, 2006
    
    
    March 31, 2007Infrastructure Construction Services
    
    $
    136,540
    
    
    $
    136,622Telecommunciations Services
    
    
    10,393
    
    
    
    10,393Total
    
    $
    146,933
    
    
    $
    147,015
  For the year ended December, 31,
    
    (in thousands)2007 (excludes the three months ended March 31, 2007)
    
    $
    3652008
    
    
    3012009
    
    
    1622010
    
    
    3Thereafter
    
    
    8Total
    
    $
    839
 6. Computation of Per Share Earnings
  10




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Three Months
    
    
    Three MonthsEnded March
    
    
    Ended March31, 2006
    
    
    31, 2007(in thousands)Income (loss) from continuing operations
    
    $
    2,467
    
    
    $
    (989
    )Income (loss) from discontinued operations, net of tax
provision (benefit) of $(1) and $(11), respectively
    
    
    (1
    )
    
    
    (17
    )Net income (loss)
    
    $
    2,466
    
    
    $
    (1,006
    )Weighted average basic common shares outstanding
    
    
    39,515
    
    
    
    40,279Effect of dilutive stock options and restricted stock
    
    
    601
    
    
    
    Weighted average diluted common shares outstanding
    
    
    40,116
    
    
    
    40,279Basic income (loss) per share
    
    $
    0.06
    
    
    $
    (0.02
    )Diluted income (loss) per share
    
    $
    0.06
    
    
    $
    (0.02
    )
  7. Share-based Compensation Plans
  Three Months
    
    
    Three MonthsEnded March 31,
    
    
    Ended March 31,2006
    
    
    2007(in thousands)Stock option expense
    
    $
    662
    
    
    $
    704Restricted stock expense
    
    
    103
    
    
    
    381Employee stock purchase plan expense
    
    
    105
    
    
    
    118Total share-based compensation expense
    
    $
    870
    
    
    $
    1,203Share-based compensation expense included in:Cost of revenues
    
    $
    117
    
    
    $
    96Selling, general and administrative expenses
    
    
    753
    
    
    
    1,107Total share-based compensation expense
    
    $
    870
    
    
    $
    1,203Total tax benefit related to share-based compensation expense
    
    $
    351
    
    
    $
    464
 11




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Stock Options
    12




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Three months
    
    Three monthsended March 31,
    
    ended March 31,2006
    
    2007Weighted Average Assumptions:Expected volatility
    
    
    45
    %
    
    
    40
    %Dividend yield
    
    
    0
    %
    
    
    0
    %Risk-free interest rate
    
    
    4.57
    %
    
    
    4.49
    %Expected holding period (in years)
    
    
    6.25
    
    
    
    6.25
   Weighted
    
    
    WeightedAverage
    
    
    AverageExercise
    
    
    RemainingNumber of
    
    
    Price per
    
    
    Contractual
    
    
    AggregateOptions
    
    
    share
    
    
    Life
    
    
    Intrinsic ValueOutstanding as of December 31,
2006
    
    
    2,230,989
    
    
    $
    11.79Granted
    
    
    7,000
    
    
    
    24.81Exercised
    
    
    (75,976
    )
    
    
    7.78Cancelled
    
    
    (33,250
    )
    
    
    17.69Outstanding as of March 31, 2007
    
    
    2,128,763
    
    
    $
    11.88
    
    
    7.9 years
    
    $
    39,696Exercisable as of March 31, 2007
    
    
    585,091
    
    
    $
    8.30
    
    
    7.0 years
    
    $
    12,763
  Restricted Stock
 Time-based
 Weighted-Number of
    
    
    Average Grant-Shares
    
    
    Date Fair ValueNon-vested shares at December 31, 2006
    
    
    77,331
    
    
    $
    17.15Shares issued
    
    
    12,100
    
    
    
    24.81Non-vested shares at March 31, 2007
    
    
    89,431
    
    
    $
    18.18
  13




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Performance-based:
  Weighted-Number of
    
    Average Grant-Shares
    
    Date Fair ValueNon-vested shares at December 31, 2006
    
    
    87,200
    
    
    $
    20.55Shares forfeited
    
    
    (1,500
    )
    
    
    20.55Non-vested shares at March 31, 2007
    
    
    85,700
    
    
    $
    20.55
 Employee Stock Purchase Plan
  8. Concentration of Credit Risk
   9. Comprehensive Income (Loss)
  14




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##### Table of Contents



Three Months Ended
    
    
    Three Months EndedMarch 31, 2006
    
    
    March 31, 2007(in thousands)Net income (loss)
    
    $
    2,466
    
    
    $
    (1,006
    )Foreign currency translation adjustment
    
    
    (15
    )
    
    
    55Comprehensive income (loss)
    
    $
    2,451
    
    
    $
    (951
    )
  10. Segment Information
   15




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##### Table of Contents



InfrastructureFor the Three Months
    
    Construction
    
    
    Telecommunication
    
    
    Corporate andEnded March 31, 2006
    
    Services
    
    
    Services
    
    
    Eliminations
    
    
    Total(in thousands)Revenues
    
    $
    206,685
    
    
    $
    10,073
    
    
    $
    (2,483
    )
    
    $
    214,275Income (loss) from
operations as
adjusted
    
    
    8,417
    
    
    
    4,479
    
    
    
    (5,858
    )
    
    
    7,038Depreciation
    
    
    5,839
    
    
    
    986
    
    
    
    55
    
    
    
    6,880Share-based compensation
    
    
    533
    
    
    
    21
    
    
    
    316
    
    
    
    870Amortization
    
    
    257
    
    
    
    
    
    
    
    
    
    
    
    257Total assets
    
    
    381,231
    
    
    
    95,344
    
    
    
    94,684
    
    
    
    571,259Capital expenditures
    
    
    5,341
    
    
    
    4,170
    
    
    
    33
    
    
    
    9,544Reconciliation:Income (loss) from
operations as adjusted
    
    $
    8,417
    
    
    $
    4,479
    
    
    $
    (5,858
    )
    
    $
    7,038Less: Amortization and
shared-based
compensation
    
    
    790
    
    
    
    21
    
    
    
    316
    
    
    
    1,127Income (loss) from
operations
    
    
    7,627
    
    
    
    4,458
    
    
    
    (6,174
    )
    
    
    5,911Interest income
    
    
    1
    
    
    
    
    
    
    
    235
    
    
    
    236Interest expense
    
    
    (1,274
    )
    
    
    155
    
    
    
    (992
    )
    
    
    (2,111
    )Other income (expense),
net
    
    
    (26
    )
    
    
    (3
    )
    
    
    126
    
    
    
    97Income (loss) before
income taxes
    
    $
    6,328
    
    
    $
    4,610
    
    
    $
    (6,805
    )
    
    $
    4,133
 16




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##### Table of Contents



InfrastructureFor the Three Months
    
    Construction
    
    
    Telecommunication
    
    
    Corporate andEnded March 31, 2007
    
    Services
    
    
    Services
    
    
    Eliminations
    
    
    Total(in thousands)Revenues
    
    $
    192,230
    
    
    $
    11,457
    
    
    $
    117
    
    
    $
    203,804Income (loss) from
operations as
adjusted
    
    
    3,540
    
    
    
    5,481
    
    
    
    (5,194
    )
    
    
    3,827Depreciation
    
    
    3,791
    
    
    
    1,210
    
    
    
    162
    
    
    
    5,163Share-based compensation
    
    
    505
    
    
    
    91
    
    
    
    607
    
    
    
    1,203Merger related costs
    
    
    
    
    
    
    
    
    
    
    3,574
    
    
    
    3,574Amortization
    
    
    60
    
    
    
    
    
    
    
    
    
    
    
    60Total assets
    
    
    395,748
    
    
    
    95,869
    
    
    
    58,500
    
    
    
    550,117Capital expenditures
    
    
    1,917
    
    
    
    6,406
    
    
    
    3,221
    
    
    
    11,544Reconciliation:Income (loss) from
operations as adjusted
    
    $
    3,540
    
    
    $
    5,481
    
    
    $
    (5,194
    )
    
    $
    3,827Merger related costs
    
    
    
    
    
    
    
    
    
    
    3,574
    
    
    
    3,574Less: Amortization and
share-based
compensation
    
    
    565
    
    
    
    91
    
    
    
    607
    
    
    
    1,263Income (loss) from
operations
    
    
    2,975
    
    
    
    5,390
    
    
    
    (9,375
    )
    
    
    (1,010
    )Interest income
    
    
    3,118
    
    
    
    345
    
    
    
    (3,135
    )
    
    
    328Interest expense
    
    
    (875
    )
    
    
    (166
    )
    
    
    (2
    )
    
    
    (1,043
    )Other income, net
    
    
    109
    
    
    
    4
    
    
    
    
    
    
    
    113Income (loss) before
income taxes
    
    $
    5,327
    
    
    $
    5,573
    
    
    $
    (12,512
    )
    
    $
    (1,612
    )
  Three Months Ended
    
    
    Three Months EndedMarch 31, 2006
    
    
    March 31, 2007Electric Transmission
    
    $
    57,760
    
    
    $
    58,348Electric Substation
    
    
    38,749
    
    
    
    46,301Utility Distribution and Industrial Electric
    
    
    37,343
    
    
    
    30,018Total Electric
    
    
    133,852
    
    
    
    134,667Natural Gas
    
    
    53,926
    
    
    
    37,817Telecommunications
    
    
    24,312
    
    
    
    25,156Other
    
    
    2,185
    
    
    
    6,164$
    214,275
    
    
    $
    203,804
  11. Related Party Transactions
  17




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##### Table of Contents



12. Commitments and Contingencies
    18




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##### Table of Contents

\

Item 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
 Forward-Looking and Cautionary Statements
    Introduction
  Overview
  19




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##### Table of Contents



.
  
    
    We executed a merger agreement with Quanta Services, Inc. on March 18 and, as a result,
incurred transaction related costs of $3.6 million. We anticipate that the merger will
close during the third quarter of 2007.
    
    Gross profit decreased $0.5 million, as compared to the first quarter of 2006, while
gross profit margin increased from 13.5% in 2006 to 13.9% in 2007. The decrease in gross
profit was a result of lower revenue in our natural gas business caused primarily by the
effects of a decline in housing starts, the
planned exit of certain low margin contracts and more severe weather than we experienced
in the first quarter of 2006, partially offset by the gross profits generated by RUE
following its acquisition
 in December 2006. The increase in gross margin percentage was due to lower
insurance costs, the contribution of higher gross margins from the service revenues of RUE
and an increase in the volume of dark fiber lease revenue, offset by the effects of
adverse weather conditions and lower profitability on electric transmission work.
    
    Backlog increased by 16.1% from $902 million at December 31, 2006 to
$1,048 million at March 31, 2007 due primarily to the award of two large electric
contracts with strategic customers.
  Three Months Ended
    
    Three Months EndedEnd Market
    
    March 31, 2006
    
    March 31, 2007Electric Transmission
    
    
    27.0
    %
    
    
    28.7
    %Electric Substation
    
    
    18.1
    %
    
    
    22.7
    %Utility Distribution and Industrial Electric
    
    
    17.4
    %
    
    
    14.7
    %Total Electric
    
    
    62.5
    %
    
    
    66.1
    %Natural Gas
    
    
    25.2
    %
    
    
    18.5
    %Telecommunications
    
    
    11.3
    %
    
    
    12.3
    %Other
    
    
    1.0
    %
    
    
    3.1
    %
  20




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##### Table of Contents



Backlog as of
    
    
    Increase/
    
    
    Increase/March
    
    
    March
    
    
    (Decrease)
    
    
    (Decrease)End Market
    
    31, 2006
    
    
    31, 2007
    
    
    ($)
    
    
    (%)(in millions)Electric Transmission
    
    $
    176.1
    
    
    $
    171.8
    
    
    $
    (4.3
    )
    
    
    -2.4
    %Electric Substation
    
    
    136.4
    
    
    
    181.1
    
    
    
    44.7
    
    
    
    32.8
    %Utility Distribution and Industrial Electric
    
    
    72.7
    
    
    
    203.0
    
    
    
    130.3
    
    
    
    179.2
    %Total Electric
    
    
    385.2
    
    
    
    555.9
    
    
    
    170.7
    
    
    
    44.3
    %Natural Gas
    
    
    293.7
    
    
    
    231.5
    
    
    
    (62.2
    )
    
    
    -21.2
    %Telecommunications
    
    
    233.6
    
    
    
    237.7
    
    
    
    4.1
    
    
    
    1.8
    %Other
    
    
    10.6
    
    
    
    22.4
    
    
    
    11.8
    
    
    
    111.3
    %Total
    
    $
    923.1
    
    
    $
    1,047.5
    
    
    $
    124.4
    
    
    
    13.5
    %
 Backlog as of
    
    
    Increase/
    
    
    Increase/December
    
    
    March
    
    
    (Decrease)
    
    
    (Decrease)End Market
    
    31, 2006
    
    
    31, 2007
    
    
    ($)
    
    
    (%)(in millions)Electric Transmission
    
    $
    138.8
    
    
    $
    171.8
    
    
    $
    33.0
    
    
    
    23.8
    %Electric Substation
    
    
    132.0
    
    
    
    181.1
    
    
    
    49.1
    
    
    
    37.2
    %Utility Distribution and Industrial Electric
    
    
    102.4
    
    
    
    203.0
    
    
    
    100.6
    
    
    
    98.2
    %Total Electric
    
    
    373.2
    
    
    
    555.9
    
    
    
    182.7
    
    
    
    49.0
    %Natural Gas
    
    
    245.6
    
    
    
    231.5
    
    
    
    (14.1
    )
    
    
    -5.7
    %Telecommunications
    
    
    254.0
    
    
    
    237.7
    
    
    
    (16.3
    )
    
    
    -6.4
    %Other
    
    
    29.3
    
    
    
    22.4
    
    
    
    (6.9
    )
    
    
    -23.5
    %Total
    
    $
    902.1
    
    
    $
    1,047.5
    
    
    $
    145.4
    
    
    
    16.1
    %
  Backlog as of
    
    
    Increase/
    
    
    Increase/March 31,
    
    
    March 31,
    
    
    (Decrease)
    
    
    (Decrease)2006
    
    
    2007
    
    
    ($)
    
    
    (%)(in millions)ICS
    
    $
    788.2
    
    
    $
    923.1
    
    
    $
    134.9
    
    
    
    17.1
    %TS
    
    
    134.9
    
    
    
    124.4
    
    
    
    (10.5
    )
    
    
    -7.8
    %Total
    
    $
    923.1
    
    
    $
    1,047.5
    
    
    $
    124.4
    
    
    
    13.5
    %
 Backlog as of
    
    
    Increase/
    
    
    Increase/December 31,
    
    
    March 31,
    
    
    (Decrease)
    
    
    (Decrease)2006
    
    
    2007
    
    
    ($)
    
    
    (%)(in millions)ICS
    
    $
    768.7
    
    
    $
    923.1
    
    
    $
    154.4
    
    
    
    20.1
    %TS
    
    
    133.4
    
    
    
    124.4
    
    
    
    (9.0
    )
    
    
    -6.8
    %Total
    
    $
    902.1
    
    
    $
    1,047.5
    
    
    $
    145.4
    
    
    
    16.1
    %
 21




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##### Table of Contents



Results of Operations
 Seasonality and Cyclicality
   Consolidated Results
 Three months ended March 31, 2007 compared to the three months ended March 31, 2006
 Three Months
    
    
    
    
    
    
    Three MonthsEnded March
    
    
    % of
    
    
    Ended March
    
    
    % of31, 2006
    
    
    Revenue
    
    
    31, 2007
    
    
    RevenueRevenues
    
    $
    214,275
    
    
    
    100.0
    %
    
    $
    203,804
    
    
    
    100.0
    %Gross profit
    
    
    28,851
    
    
    
    13.5
    %
    
    
    28,395
    
    
    
    13.9
    %Selling, general and administrative expenses
    
    
    22,693
    
    
    
    10.6
    %
    
    
    25,608
    
    
    
    12.6
    %Merger related costs
    
    
    
    
    
    
    0.0
    %
    
    
    3,574
    
    
    
    1.7
    %Provision (recoveries) of uncollectible
accounts
    
    
    (10
    )
    
    
    0.0
    %
    
    
    163
    
    
    
    0.1
    %Amortization of intangible assets
    
    
    257
    
    
    
    0.1
    %
    
    
    60
    
    
    
    0.0
    %Income (loss) from operations
    
    
    5,911
    
    
    
    2.8
    %
    
    
    (1,010
    )
    
    
    -0.5
    %Interest income
    
    
    236
    
    
    
    0.1
    %
    
    
    328
    
    
    
    0.2
    %Interest expense
    
    
    (2,111
    )
    
    
    -1.0
    %
    
    
    (1,043
    )
    
    
    -0.5
    %Other
income, net
    
    
    97
    
    
    
    0.0
    %
    
    
    113
    
    
    
    0.0
    %Income (loss) from continuing operations
before income taxes
    
    
    4,133
    
    
    
    1.9
    %
    
    
    (1,612
    )
    
    
    -0.8
    %Income tax expense (benefit)
    
    
    1,666
    
    
    
    0.8
    %
    
    
    (623
    )
    
    
    -0.3
    %Income (loss) from continuing operations
    
    $
    2,467
    
    
    
    1.1
    %
    
    $
    (989
    )
    
    
    -0.5
    %
 Revenues:
 Gross profit:
 22




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##### Table of Contents



Selling, general and administrative expenses:
 Interest expense:
 Provision for income taxes:
 Discontinued operations, net of tax:
 Segment Results
   Three months ended March 31, 2007 compared to the three months ended March 31, 2006
 Three Months
    
    
    Three MonthsEnded March 31,
    
    
    Ended March 31,
    
    
    Change2006
    
    
    2007
    
    
    $
    
    
    %(in thousands)Revenue:Infrastructure Construction Services
    
    $
    206,685
    
    
    $
    192,230
    
    
    $
    (14,455
    )
    
    
    -7.0
    %Telecommunications Services
    
    
    10,073
    
    
    
    11,457
    
    
    
    1,384
    
    
    
    13.7
    %Total segment revenues
    
    
    216,758
    
    
    
    203,687
    
    
    
    (13,071
    )
    
    
    -6.0
    %Corporate and eliminations
    
    
    (2,483
    )
    
    
    117
    
    
    
    2,600
    
    
    
    104.7
    %Total revenue
    
    $
    214,275
    
    
    $
    203,804
    
    
    $
    (10,471
    )
    
    
    -4.9
    %
 23




---



##### Table of Contents



Three Months
    
    
    Three MonthsEnded March 31,
    
    
    Ended March 31,
    
    
    Change2006
    
    
    2007
    
    
    $
    
    
    %(in thousands)Income from operations as adjusted:Infrastructure Construction Services
    
    $
    8,417
    
    
    $
    3,540
    
    
    $
    (4,877
    )
    
    
    -57.9
    %Telecommunications Services
    
    
    4,479
    
    
    
    5,481
    
    
    
    1,002
    
    
    
    22.4
    %Total segment income from operations as adjusted
    
    
    12,896
    
    
    
    9,021
    
    
    
    (3,875
    )
    
    
    -30.0
    %Corporate and eliminations
    
    
    (5,859
    )
    
    
    (5,194
    )
    
    
    665
    
    
    
    11.3
    %Total income from operations as adjusted
    
    $
    7,037
    
    
    $
    3,827
    
    
    $
    (3,210
    )
    
    
    -45.6
    %
 ICS
 Revenues:
 Income from operations as adjusted:
 TS
 Revenues:
 Income from operations as adjusted:
 Corporate
  Liquidity and Capital Resources
 Cash, Working Capital Requirements and Capital Expenditures
  24




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##### Table of Contents



Sources and Uses of Cash
  Cash from operating activities from continuing operations.
 Cash from investing activities from continuing operations.
 Cash from financing activities from continuing operations.
 Related Party Transactions
  25




---



##### Table of Contents



Critical Accounting Policies and Estimates
  New Accounting Pronouncements
    
 Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
   Interest Rates.
 26




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##### Table of Contents



Currency Risk.
 Gasoline and Diesel Fuel.
 
 Item 4. CONTROLS AND PROCEDURES
 Disclosure Controls and Procedures
  Internal Control Over Financial Reporting
  
 PART II  OTHER INFORMATION
 
 Item 1. LEGAL PROCEEDINGS.
   27




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##### Table of Contents



Item 1A. RISK FACTORS.
  Because the exchange ratio is fixed and the market price of shares of Quanta common stock will
fluctuate, InfraSource stockholders cannot be sure of the value of the merger consideration they
will receive.
 InfraSources stockholders will receive a fixed number of shares of Quanta common stock, rather
than a number of shares with a particular fixed value. The market values of Quanta common
stock and InfraSource common stock at the time of the merger may vary significantly from their
prices on the date the merger agreement was executed or the date on which Quanta or InfraSource
stockholders vote on the merger. Because the exchange ratio will not be adjusted to reflect
any changes in the market value of Quanta common stock or InfraSource common stock, the market
value of the Quanta common stock issued in the merger and the InfraSource common stock
surrendered in the merger may be higher or lower than the values of those shares on those
earlier dates. Stock price changes may result from a variety of factors that are beyond the
control of Quanta and InfraSource, including changes in the Companys business, operations and
prospects, regulatory considerations, market assessments of the likelihood that the merger will
be completed, the timing of the completion of the merger, and general market and economic
conditions. Neither party is permitted to walk away from the merger, terminate the merger
agreement or resolicit the vote of its stockholders solely because of changes in the market
price of either partys common stock.Changes in the price of shares of Quanta common stock and InfraSource common stock may result
from a variety of factors, including:
 
    
    market assessment of the likelihood of the merger being consummated;
    
    changes in the respective businesses, operations and prospects of Quanta
and InfraSource, including Quanta and InfraSources ability to meet earnings
estimates;
    
    governmental or litigation developments or regulatory considerations
affecting Quanta or InfraSource or the utility industry; and
    
    general business, market, industry or economic conditions.
 Many of these factors are beyond the control of Quanta and InfraSource.
 28




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##### Table of Contents



Any delay in completing the merger may substantially reduce the benefits expected to be obtained
from the merger.
 In addition to obtaining the required regulatory clearances and approvals, the merger is
subject to a number of other conditions beyond the control of InfraSource and Quanta that may
prevent, delay or otherwise materially adversely affect its completion. Quanta and InfraSource
cannot predict whether and when these other conditions will be satisfied. Further, the
requirements for obtaining the required clearances and approvals could delay the effective time
of the merger for a significant period of time or prevent it from occurring. Any delay in
completing the merger may materially adversely affect the synergies and other benefits that
Quanta and InfraSource expect to achieve if the merger and the integration of their respective
businesses is completed within the expected timeframe.
 Failure to complete the merger could negatively impact the stock prices and the future business and
financial results of InfraSource.
 If the merger is not completed, the ongoing business of InfraSource may be adversely affected
and InfraSource will be subject to several risks, including the following:
 
    
    having to pay certain costs relating to the merger;
    
    the attention of management of will have been diverted to the merger
instead of on the Companys operations and pursuit of other opportunities that could
have been beneficial to it; and
    
    customer perception may be negatively impacted which could affect the
ability of InfraSource to compete for, or to win, new and renewal business in the
marketplace.
 InfraSource will incur substantial transaction and merger-related costs in connection with the
merger.
 InfraSource expects to incur a number of non-recurring transaction fees and other costs
associated with completing the merger, and combining the operations of the two companies.
These fees and costs will be substantial. Additional unanticipated costs may be incurred in
the integration of the businesses of Quanta and InfraSource. Although Quanta and InfraSource
expect that the elimination of duplicative costs, as well as the realization of other
efficiencies related to the integration of their businesses will offset the incremental
transaction and merger-related costs over time, this net benefit may not be achieved in the
near term, or at all.
 The fairness opinions obtained by Quanta and InfraSource from their respective financial advisors
will not reflect changes in circumstances between signing the merger agreement and the completion
of the merger.
 Neither Quanta nor InfraSource has obtained updated fairness opinions from Credit Suisse or
Citigroup, respectively. Changes in the operations and prospects of Quanta or InfraSource,
general market and economic conditions and other factors which may be beyond the control of
Quanta or InfraSource, and on which the fairness opinions were based, may alter the value of
Quanta or InfraSource or the prices of their common stock by the time the merger is completed.
The fairness opinions are based on the information in existence on the date delivered and will
not be updated as of the time the merger will be completed. Because Quanta and InfraSource
currently do not anticipate asking their respective financial advisors to update their
opinions, the opinions given at the time the merger agreement was signed do not address the
fairness of the merger consideration, from a financial point of view, at any time other than
the time the merger agreement was signed.
 Directors and executive officers of InfraSource  have
interests that differ from those of
 InfraSource stockholders generally.
 Executive officers of InfraSource negotiated the terms of the merger agreement and the
InfraSource board of directors unanimously approved the merger agreement and unanimously
recommends that InfraSource stockholders vote in favor of the proposal to adopt the merger
agreement. The executive officers of InfraSource each have management agreements with
InfraSource that provide for the
 29




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##### Table of Contents



payment of severance payments and the acceleration of existing equity awards if the executive
officers employment with InfraSource is terminated following a change in control transaction.
The merger will constitute a change in control transaction. In addition, upon completion of
the merger, David R. Helwig, J. Michal Conaway and Frederick W. Buckman, each of whom is
currently a member of the InfraSource board of directors, will become members of the Quanta
board of directors. These severance arrangements and directorship
positions are different from or in addition to
the interests of InfraSource stockholders in the company. InfraSource stockholders should take
into account such interests when they consider the InfraSource board of directors
recommendation that they vote for adoption of the merger agreement.
 In certain circumstances, the merger agreement requires payment of a termination fee of $43 million
by Quanta or InfraSource to the other and, under certain circumstances, InfraSource must allow
Quanta five business days to match any alternative acquisition proposal prior to any change in the
InfraSource boards recommendation. These terms could affect the decisions of a third party
proposing an alternative transaction to the merger, or the likelihood that such a proposal would be
made at all.
 Under the merger agreement, Quanta or InfraSource may be required to pay to the other a
termination fee of $43 million if the merger agreement is terminated under certain
circumstances. Should the merger agreement be terminated in circumstances under which such a
termination fee is payable, the payment of this fee could have material and adverse
consequences to the financial condition and operations of the company making such payment.
Additionally, under the merger agreement, in the event of a potential change by the InfraSource
board of directors of its recommendation with respect to the merger, InfraSource must allow
Quanta a five business day period to make a revised proposal, prior to which the InfraSource
board of directors may not change its recommendation with respect to the merger agreement.
These terms could affect the structure, pricing and terms proposed by other parties seeking to
acquire or merge with InfraSource, and could make it more difficult for another party to make a
superior acquisition proposal for InfraSource.
 InfraSources stockholders will be diluted by the merger.
 The merger will dilute the ownership position of the current stockholders of Quanta and
InfraSource. Quantas stockholders and InfraSources stockholders are expected to hold
approximately 75% and 25%, respectively, of the combined companys common stock outstanding on
a fully diluted basis (including options and convertible notes) immediately following the
completion of the merger.
 If the merger is completed, the date that InfraSource stockholders will receive their merger
consideration is uncertain.
 The completion of the merger is subject to the stockholder and regulatory approvals described
in the joint proxy statement/prospectus filed by Quanta. While we currently expect to complete
the merger during the third quarter of 2007, such date could be later than expected due to
delays in receiving such approvals. We cannot provide InfraSource stockholders with a
definitive date on which they will receive the merger consideration.
 InfraSource stockholders will be subject to a stockholder rights plan that discourages corporate
takeovers and could prevent stockholders from realizing a premium on their investment.
 On March 8, 2000, Quantas board of directors adopted an amended and restated rights agreement,
which, as amended and restated as of October 24, 2002, we refer to as the Rights Agreement.
The Rights Agreement provides for the distribution of uncertificated stock purchase rights to
Quanta stockholders at a rate of one preferred share purchase right for each share of Quanta
common stock. The Rights Agreement may impede a takeover of Quanta not supported by Quantas
board of directors, including a takeover that may be desired by a majority of Quantas
stockholders or involving a premium over the prevailing stock price. InfraSource stockholders,
who are not currently subject to a rights plan, will become subject to the Rights Agreement
after the merger. In addition, the Rights Plan could be triggered by the actions of a third
party, which event would adversely affect Quantas and InfraSources ability to close the
merger.
 30




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##### Table of Contents



Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
  
 Item 3. Defaults Upon Senior Securities.
  
 Item 4. Submission of Matters to a Vote of Security Holders.
  
 Item 5. Other Information.
  
 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
    
    Agreement and Plan of Merger, dated as of March 18, 2007, by and among
InfraSource Services, Inc., Quanta Services, Inc. and Quanta MS
Acquisition, Inc.(2)10.1
    
    Amendment No. 1 to
Indemnification Agreement.*10.2
    
    InfraSource, Incorporated Deferred
Compensation Plan.*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 Registrants 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 Registrants Current Report on Form 8-K filed with the
Commission on March 20, 2007. 31




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##### Table of Contents



SIGNATURES
  INFRASOURCE SERVICES, INC.
(Registrant)Date: May 8, 2007
    By:
    /s/ TERENCE R. MONTGOMERYTerence R. MontgomerySenior Vice President and Chief Financial Officer 32