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                                          

INFRASOURCE SERVICES, INC.

Delaware		03-0523754
(State or other jurisdiction of		(I.R.S. Employer
incorporation 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)

     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):

Large accelerated filer o      Accelerated filer þ      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 30, 2007 there were 40,491,131 shares of InfraSource Services, Inc. Common Stock, par value of $.001, outstanding.

 

 

For the Quarter Ended March 31, 2007
FORM 10-Q
INFRASOURCE SERVICES, INC. AND SUBSIDIARIES
Table of Contents

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

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

INFRASOURCE SERVICES, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

		December 31,				March 31,
		2006				2007
		(Unaudited)
		(In thousands, except share data)
Current assets:
Cash and cash equivalents		$	26,209			$	23,620
Contract receivables (less allowances for doubtful accounts of $3,770 and $3,843, respectively)			166,780				131,916
Costs and estimated earnings in excess of billings			59,012				57,883
Inventories			5,443				4,807
Deferred income taxes			8,201				7,820
Other current assets			6,384				8,756
Current assets — discontinued operations			746				424
Total current assets			272,775				235,226
Property and equipment (less accumulated depreciation of $73,302 and $77,265, respectively)			154,578				161,877
Goodwill			146,933				147,015
Intangible assets, net			900				839
Deferred charges and other assets, net			5,529				4,647
Assets held for sale			517				513
Total assets		$	581,232			$	550,117
Current liabilities:
Current portion of long-term debt		$	42			$	38
Current portion of capital lease obligations			35				36
Short-term credit facility borrowings			1,077				—
Other liabilities — related parties			766				420
Accounts payable			47,846				27,580
Accrued compensation and benefits			27,951				19,887
Other current and accrued liabilities			22,096				28,033
Accrued insurance reserves			36,166				34,276
Billings in excess of costs and estimated earnings			23,245				18,354
Deferred revenues			6,188				6,540
Total current liabilities			165,412				135,164
Long-term debt, net of current portion			50,014				50,009
Capital lease obligations, net of current portion			56				46
Deferred revenues			16,347				16,097
Other long-term liabilities — related party			900				922
Deferred income taxes			3,750				1,833
Other long-term liabilities			5,568				5,747
Total liabilities			242,047				209,818
Commitments and contingencies
Shareholders’ 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				40
Treasury stock, at cost (29,870 shares)			(137	)			(137	)
Additional paid-in capital			288,517				290,752
Retained earnings			50,785				49,609
Accumulated other comprehensive income (loss)			(20	)			35
Total shareholders’ equity			339,185				340,299
Total liabilities and shareholders’ equity		$	581,232			$	550,117

The accompanying notes are an integral part of these condensed consolidated financial statements.

INFRASOURCE SERVICES, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

		Three Months Ended				Three Months Ended
		March 31, 2006				March 31, 2007
		(Unaudited)
		(In thousands, except per share data)
Revenues		$	214,275			$	203,804
Cost of revenues			185,424				175,409
Gross profit			28,851				28,395
Selling, general and administrative expenses			22,693				25,608
Merger related costs			—				3,574
Provision (recoveries) of uncollectible accounts			(10	)			163
Amortization of intangible assets			257				60
Income (loss) from operations			5,911				(1,010	)
Interest income			236				328
Interest expense			(2,111	)			(1,043	)
Other income, net			97				113
Income (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				40,279
Diluted 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

The accompanying notes are an integral part of these condensed consolidated financial statements.

INFRASOURCE SERVICES, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Shareholders’ Equity

																						Accumulated
																						Other
		Common Stock								Treasury Stock								Additional Paid-In				Comprehensive				Retained
		Shares				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			$	339,185
Cumulative effect of adopting new accounting pronouncement			—				—				—				—				—				—				(170	)			(170	)
Stock options exercised			75,976				—				—				—				591				—				—				591
Income tax benefit from options exercised			—				—				—				—				441				—				—				441
Adjustment of shares issued under employee stock purchase plan			(92	)			—				—				—				—				—				—				—
Share-based compensation expense			—				—				—				—				1,203				—				—				1,203
Net loss			—				—				—				—				—				—				(1,006	)			(1,006	)
Other comprehensive income			—				—				—				—				—				55				—				55
Balance as of March 31, 2007			40,339,623			$	40				(29,870	)		$	(137	)		$	290,752			$	35			$	49,609			$	340,299

The accompanying notes are an integral part of these condensed consolidated financial statements.

INFRASOURCE SERVICES, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

		Three Months Ended				Three Months Ended
		March 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				17
Depreciation			6,880				5,163
Amortization of intangibles			257				60
(Gain) / loss on sale of assets			71				(122	)
Deferred income taxes			(778	)			(1,536	)
Share-based compensation			870				1,203
Other			122				74
Changes in operating assets and liabilities:
Contract receivables, net			(3,948	)			34,701
Costs 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				189
Accounts payable			(12,248	)			(21,125	)
Other current liabilities			11,334				(5,344	)
Other liabilities — related parties			36				—
Other liabilities			163				873
Net cash flows provided by operating activities from continuing operations			3,429				9,071
Net cash flows provided by (used in) operating activities from discontinued operations			13				(28	)
Net cash flows provided by operating activities			3,442				9,043
Cash flows from investing activities:
Acquisitions of businesses, net of cash acquired			(3,476	)			(386	)
Proceeds from sales of equipment			186				403
Additions 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				402
Proceeds from exercise of stock options			755				591
Net 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				26,209
Effect of exchange rates on cash			(1	)			(3	)
Cash and cash equivalents — end of period		$	23,121			$	23,620
Supplemental cash flow information:
Accounts payable balance related to purchases of property and equipment		$	954			$	3,118

The accompanying notes are an integral part of these condensed consolidated financial statements.

INFRASOURCE SERVICES, INC. AND SUBSIDIARIES

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”. The Company operates in two business segments. Our Infrastructure Construction Services (“ICS”) segment provides design, engineering, procurement, construction, testing, maintenance, and repair services for utility infrastructure. 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. TS customers include communication service providers, large industrial and financial services customers, school districts and other entities with high bandwidth telecommunication needs. The Company operates in multiple service territories throughout the United States and does not have significant operations or assets outside the United States.

          On September 24, 2003, the Company acquired all of the voting interests of InfraSource Incorporated and certain of its wholly owned subsidiaries, pursuant to a merger transaction (the “Exelon Merger”). On May 12, 2004, the Company completed an IPO of 8,500,000 shares of common stock.

          At the time of the IPO, the Company’s principal stockholders were OCM/GFI Power Opportunities Fund, L.P. and OCM Principal Opportunities Fund, L.P. (collectively, the “former Principal Stockholders”), both Delaware limited partnerships. In 2006, the former Principal Stockholders and certain other stockholders completed two secondary underwritten public offerings of our common stock. The first occurred on March 24, 2006, in which they sold 13,000,000 shares of common stock at $17.50 per share (plus an additional 1,950,000 shares sold following exercise of the underwriters’ over-allotment option). The second occurred on August 9, 2006, in which they sold 10,394,520 shares of common stock at $17.25 per share (plus an additional 559,179 shares sold following exercise of the underwriters’ over-allotment option). The Company did not issue any primary shares and did not receive any of the proceeds from those offerings. The former Principal Stockholders no longer own any of the Company’s common stock.

          Recent Development:

          On March 18, 2007, InfraSource entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Quanta Services, Inc., a Delaware corporation (“Quanta”), and Quanta MS Acquisition, Inc., a wholly owned subsidiary of Quanta (“Merger Sub”) formed specifically for the purpose of the proposed merger. The Merger Agreement provides, upon the terms and subject to the conditions set forth in the Merger Agreement, for a strategic merger of InfraSource with Merger Sub, with InfraSource continuing as the surviving corporation and as a wholly owned subsidiary of Quanta (the “Merger”). As of the effective date of the Merger (the “Effective Date”), the stockholders of InfraSource (including holders of restricted stock) will receive shares of common stock of Quanta, par value $0.00001 per share, at a negotiated exchange rate (the “Exchange Ratio”) of 1.223 shares of Quanta common stock for each share of InfraSource common stock, and all outstanding stock options issued under the Company’s stock plans (see Note 7) will be converted, based on the Exchange Ratio, into stock options to receive shares of Quanta common stock. As of the Effective Date, three members of the Board of Directors of InfraSource will become members of the Board of Directors of Quanta.

          The Company has incurred and expects to incur substantial merger-related transaction costs related primarily to investment banking fees, legal fees and due diligence costs necessary to consummate the Merger. For the three months ended March 31, 2007, merger-related transaction costs totaled $3.6 million. The Company has agreed to pay additional investment banking fees of approximately $8.0 million, payable upon consummation of the Merger.

The Company must pay a fee of $43 million to Quanta if the Merger is terminated under certain circumstances specified in the Merger Agreement.

          Basis of Presentation:

          The accompanying unaudited condensed consolidated financial statements reflect the Company’s financial position as of December 31, 2006 and March 31, 2007; results of operations for the three months ended March 31, 2006 and 2007; and cash flows for the three months ended March 31, 2006 and 2007. 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 are considered necessary for fair presentation of financial position, results of operations and cash flows for the interim periods presented. The December 31, 2006 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 the financial statements and related notes included in the Company’s Report on Form 10-K for the year ended December 31, 2006.

          Certain amounts in the accompanying statements have been reclassified for comparative purposes. As of December 31, 2006, the Company revised the classification for book overdrafts in the condensed consolidated balance sheets and statements of cash flows. Such book overdrafts were related to outstanding checks on zero balance disbursement bank accounts that are funded upon presentation for payment from an investment account maintained by the Company at another financial institution. As originally reported, cash and cash equivalents as of March 31, 2006 included $11.2 million of book overdrafts that have been reclassified to accounts payable in the condensed consolidated balance sheets for comparative purposes. Prior to the reclassification, those amounts were reported as a reduction in cash and accounts payable. Additionally, this reclassification increased net cash flows provided by operating activities by $11.2 million for the three months ended March 31, 2006.

2. Recent Accounting Pronouncements

          In July 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation (“FIN”) No. 48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109,” which clarifies the accounting for uncertainty in tax positions. FIN No. 48 requires that the impact of a tax position be recognized if that position is more likely than not of being sustained on audit, based on the technical merits of the position. The tax position is measured at the largest amount of benefit that is greater than 50% likely of being realized upon the ultimate settlement. The provisions of FIN No. 48 are effective for fiscal years beginning after December 15, 2006, with any cumulative effect of the change in accounting principle recorded as an adjustment to opening retained earnings.

          The adoption of FIN No. 48 as of January 1, 2007 resulted in a reduction of opening retained earnings of $0.2 million. As of the adoption date, the Company had $0.6 million of unrecognized tax benefits, $0.2 million of which would reduce our effective tax rate if recognized. Tax years beginning in 2005 remain open and subject to examination by the Internal Revenue Service. Tax years beginning with the Company’s inception in 2003 remain open and subject to examination by state taxing jurisdictions. No significant increase or decrease in unrecognized tax benefits is currently anticipated during the next twelve months. As of date of adoption, interest and penalty assessment liabilities were less than $0.1 million. Interest assessments are recorded in interest expense and tax penalties are recognized in selling, general and administrative expenses.

          In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” This statement defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles and expands fair value measurement disclosures. SFAS No. 157 will be effective for

fiscal years beginning after November 15, 2007. The Company has not determined the effect, if any, the adoption of this statement will have on results of operations or financial position.

3. Discontinued Operations

          In the third and fourth quarters of 2006, the Company sold certain assets of Mechanical Specialties, Inc. (“MSI”) for a cash purchase price of approximately $2.6 million. The remaining inventory of MSI is eligible for sale to the buyer at cost for a period of one year from the date of sale. Any remaining inventory will be liquidated upon termination of the one-year agreement. MSI was part of the 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 MSI were reflected as discontinued operations in the accompanying unaudited condensed consolidated financial statements through the disposition dates. The tables below present balance sheet and statement of operations information for this discontinued operation.

          Balance sheet information:

		December 31,				March 31,
		2006				2007
		(in thousands)
Inventory		$	687			$	370
Deferred income taxes			59				54
Total current assets			746				424
Total assets		$	746			$	424
Net assets		$	746			$	424

          Statement of operations information:

		For The Three				For The Three
		Months Ended				Months Ended
		March 31, 2006				March 31, 2007
		(in thousands)
Revenues		$	2,965			$	281
Loss from discontinued operations before income taxes			(2	)			(28	)

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 $3.1 million and $8.9 million at December 31, 2006 and March 31, 2007, respectively. The increase was due primarily to a claim on an industrial electric project resulting from inefficiencies caused by scheduling changes.

          Estimated revenue related to claims, 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

          Goodwill and intangible assets are comprised of:

		December 31, 2006				March 31, 2007
		(in thousands)
Goodwill		$	146,933			$	147,015
Intangible assets:
Volume agreements			4,561				4,561
Non-compete agreements			20				20
Total intangible assets			4,581				4,581
Accumulated amortization:
Volume agreements			(3,681	)			(3,741	)
Non-compete agreements			—				(1	)
Total accumulated amortization			(3,681	)			(3,742	)
Intangible assets, net		$	900			$	839

          Goodwill by segments as of December 31, 2006 and March 31, 2007 are as follows:

		December 31, 2006				March 31, 2007
Infrastructure Construction Services		$	136,540			$	136,622
Telecommunciations Services			10,393				10,393
Total		$	146,933			$	147,015

          Expenses for the amortization of intangible assets were $0.3 million and $0.1 million for the three months ended March 31, 2006 and 2007, respectively. The estimated aggregate amortization expense of intangible assets for the next five fiscal years is:

For the year ended December, 31,		(in thousands)
2007 (excludes the three months ended March 31, 2007)		$	365
2008			301
2009			162
2010			3
Thereafter			8
Total		$	839

6. Computation of Per Share Earnings

          Income (loss) per share is computed in accordance with SFAS No. 128, “Earnings per Share” (“SFAS No. 128”). In accordance with SFAS No. 128, incremental potential common shares from stock options and restricted stock are included in the calculation of diluted income per share except when the effect would be antidilutive.

          The following table presents the calculations of basic and diluted income (loss) per share.

		Three Months				Three Months
		Ended March				Ended March
		31, 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				40,279
Effect of dilutive stock options and restricted stock			601				—
Weighted average diluted common shares outstanding			40,116				40,279
Basic income (loss) per share		$	0.06			$	(0.02	)
Diluted income (loss) per share		$	0.06			$	(0.02	)

          For the three months ended March 31, 2006 and 2007 there were 680,701 shares and 2,211,689 shares, respectively, under stock option and restricted stock grants excluded from the calculation of diluted income per share as the effect of these shares would have been anti-dilutive. Included in the effect of dilutive stock options for the three months ended March 31, 2006 are early exercises of unvested stock option awards, which are excluded from the weighted average basic common shares outstanding calculation.

7. Share-based Compensation Plans

          Share-based compensation expense included in results of operations is as follows:

		Three Months				Three Months
		Ended March 31,				Ended March 31,
		2006				2007
		(in thousands)
Stock option expense		$	662			$	704
Restricted stock expense			103				381
Employee stock purchase plan expense			105				118
Total share-based compensation expense		$	870			$	1,203
Share-based compensation expense included in:
Cost of revenues		$	117			$	96
Selling, general and administrative expenses			753				1,107
Total share-based compensation expense		$	870			$	1,203
Total tax benefit related to share-based compensation expense		$	351			$	464

          The provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123R “Share-Based Payment” and related interpretative guidance issued by the Financial Accounting Standards Board (“FASB”) and the Securities and Exchange Commission (“SEC”) are applied to all share-based payment awards made to employees and directors. SFAS 123R requires the measurement and recognition of compensation expense for all share-based payment awards including employee stock options, restricted stock and employee stock purchases related to the Employee Stock Purchase Plan based on the grant-date fair values of the awards. The value of the portion of a share-based payment award that is ultimately expected to vest is determined as of the award’s grant date and is expensed over its requisite service period in the Company’s condensed consolidated statements of operations. Estimates of expected share-based payment award forfeitures are made to determine the number of equity award instruments that are not expected to ultimately vest.

          As discussed in Note 1 – Organization and Basis of Presentation, all outstanding stock options issued under the Company’s stock plans will be converted as of the Effective Date of the Merger, based on the Exchange Ratio, into stock options to receive shares of Quanta common stock. Immediately prior to the Effective Date, the Employee Stock Purchase Plan will be terminated in its entirety. Upon completion of the Merger, Quanta will assume the obligations and succeed to the rights of InfraSource under the Company’s stock plans. The vesting of outstanding stock options and restricted stock issued to employees under the Company’s stock plans will not accelerate as a result of the Merger. Subsequent to the Merger, an employee’s options or restricted stock may fully vest upon the employee’s termination. Outstanding stock options and restricted stock issued to non-employee directors under the Company’s stock plans will vest upon completion of the Merger.

Stock Options

          The 2003 Omnibus Stock Incentive Plan, as amended effective April 29, 2004 (the “2003 Stock Plan”), was adopted to allow the grant of stock options and restricted stock to designated key employees and directors. Options currently outstanding under the 2003 Stock Plan consist of time-based options that vest over four years following the respective grant dates. 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.

          The 2004 Omnibus Stock Incentive Plan (the “2004 Stock Plan”) was adopted 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 outstanding 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 under the 2004 Stock Plan is 800,000 plus an amount added annually on the first day of each fiscal year (beginning 2005) equal to the lesser of (i) 1,000,000 shares or (ii) two percent of the number of shares of common stock outstanding on the last day of the immediately preceding fiscal year. As of March 31, 2007, 3.2 million shares have been reserved for issuance under the 2004 Stock Plan.

          The Black-Scholes model is used to determine the fair value of stock option grants and its results are based on various assumptions including expected volatility, expected holding period, risk-free interest rate and dividend yield. Expected stock price volatility is based on the historical volatility of the Company’s common stock. The risk-free interest rate assumption is based on observed interest rates appropriate for the term of the options. The dividend yield assumption is zero, as the Company does not currently intend to declare dividends. The Company currently uses the simplified method to calculate expected holding period, as provided for under SEC Staff Accounting Bulletin No. 107.

          Presented below are calculated weighted averages of the assumptions used in determining the fair values of grants made during the three months ended March 31, 2006 and 2007:

		Three months				Three months
		ended March 31,				ended March 31,
		2006				2007
Weighted 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

          The weighted-average grant-date fair values of options granted during the three months ended March 31, 2006 and 2007 were $8.11 and $11.57 per share, respectively. As of March 31, 2007, there was approximately $7.9 million of unrecognized compensation costs related to non-vested stock options. That cost is expected to be recognized over a weighted average period of 2.9 years.

          The following table summarizes information for the options outstanding and exercisable for the three months ended March 31, 2007:

						Weighted				Weighted
						Average				Average
						Exercise				Remaining
		Number of				Price per				Contractual				Aggregate
		Options				share				Life				Intrinsic Value
Outstanding as of December 31, 2006			2,230,989			$	11.79
Granted			7,000				24.81
Exercised			(75,976	)			7.78
Cancelled			(33,250	)			17.69
Outstanding as of March 31, 2007			2,128,763			$	11.88			7.9 years				$	39,696
Exercisable as of March 31, 2007			585,091			$	8.30			7.0 years				$	12,763

          The aggregate intrinsic value of options exercised during the three months ended March 31, 2006 and 2007 was $1.1 million and $1.2 million, respectively.

Restricted Stock

          Time-based: The following table presents a summary of the status of the number of time-based shares of non-vested restricted stock as of March 31, 2007 and changes during the three months ended March 31, 2007:

						Weighted-
		Number of				Average Grant-
		Shares				Date Fair Value
Non-vested shares at December 31, 2006			77,331			$	17.15
Shares issued			12,100				24.81
Non-vested shares at March 31, 2007			89,431			$	18.18

          As of March 31, 2007, there was approximately $0.6 million of unrecognized compensation costs related to time-based non-vested restricted stock. That cost is expected to be recognized over a weighted average period of 3.9 years. The total fair value of shares vested during the three months ended March 31, 2006 was $0.6 million. No time-based shares vested during the three months ended March 31, 2007.

          Performance-based: 87,200 shares of performance-based restricted stock granted in November 2006 will vest on the seventh anniversary of the grant date, unless vesting is accelerated due to the achievement of certain performance targets. Currently, the cost is recognized on a straight-line basis over seven years. The Company’s performance relative to targets is assessed each quarter and, if such targets are expected to be achieved, the remaining expense will be recognized on an accelerated basis.

          The following table presents a summary of the status of the number of performance-based shares of non-vested restricted stock as of March 31, 2007, and changes during the three months ended March 31, 2007:

						Weighted-
		Number of				Average Grant-
		Shares				Date Fair Value
Non-vested shares at December 31, 2006			87,200			$	20.55
Shares forfeited			(1,500	)			20.55
Non-vested shares at March 31, 2007			85,700			$	20.55

Employee Stock Purchase Plan

          In April 2004, the 2004 Employee Stock Purchase Plan was adopted for the benefit of all employees meeting its eligibility criteria. Under this plan, eligible employees may purchase shares of common stock, subject to certain limitations, at 85% of the market value. Purchases are limited to 15% of an employee’s 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 annual increase to be added on the first day of each fiscal year (beginning 2005) equal to the lesser of (i) 600,000 shares or (ii) one percent of the total shares of common stock outstanding on the last day of the immediately preceding fiscal year. As of March 31, 2007, 3.2 million shares have been reserved for issuance under the 2004 Employee Stock Purchase Plan.

8. Concentration of Credit Risk

          A significant portion of the Company’s revenues is derived from a small group of customers. Our top ten customers accounted for 42% and 47% of consolidated revenues for the three months ended March 31, 2006 and 2007, respectively. Exelon Corporation (“Exelon”) accounted for approximately 17% and 12% of consolidated revenues for the three months ended March 31, 2006 and 2007, respectively.

          At December 31, 2006 and March 31, 2007 accounts receivable due from Exelon, inclusive of amounts due from a prime contractor for Exelon work, represented 7% and 13%, respectively, of the total accounts receivable balance.

9. Comprehensive Income (Loss)

          The following table presents the components of comprehensive income (loss) for the periods presented:

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

          Other comprehensive income during the three months ended March 31, 2006 and 2007 includes foreign currency translation adjustment related to the Company’s Canadian operations.

10. Segment Information

          We operate in two business segments. Our ICS segment provides design, engineering, procurement, construction, testing, maintenance and repair services for utility infrastructure. ICS customers include electric power utilities, natural gas utilities, telecommunication customers, government entities and heavy industrial companies, such as petrochemical, processing and refining businesses. ICS services are provided by five 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. TS customers include communication service providers, large industrial and financial services customers, school districts and other entities with high bandwidth telecommunication needs. Within the 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.

          Business segment performance measurement and resource allocation for the reportable segments are designed to facilitate evaluation of operating unit performance and based on many factors. The primary financial measures used to evaluate segment operations are 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 acquisitions, share-based compensation and merger-related costs, because those expenses do not reflect the core performance of business segments’ operations. A reconciliation of income (loss) from operations as adjusted to the nearest GAAP equivalent, income (loss) from operations is provided below.

          Corporate costs are not allocated to business segments for internal management reporting. Corporate and eliminations includes corporate costs, revenue related to administrative services provided to one customer and the elimination of an insignificant amount of intra-company revenues. The following tables present segment information by period:

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

		Infrastructure
For the Three Months		Construction				Telecommunication				Corporate and
Ended March 31, 2007		Services				Services				Eliminations				Total
		(in thousands)
Revenues		$	192,230			$	11,457			$	117			$	203,804
Income (loss) from operations as adjusted			3,540				5,481				(5,194	)			3,827
Depreciation			3,791				1,210				162				5,163
Share-based compensation			505				91				607				1,203
Merger related costs			—				—				3,574				3,574
Amortization			60				—				—				60
Total assets			395,748				95,869				58,500				550,117
Capital expenditures			1,917				6,406				3,221				11,544
Reconciliation:
Income (loss) from operations as adjusted		$	3,540			$	5,481			$	(5,194	)		$	3,827
Merger related costs			—				—				3,574				3,574
Less: Amortization and share-based compensation			565				91				607				1,263
Income (loss) from operations			2,975				5,390				(9,375	)			(1,010	)
Interest income			3,118				345				(3,135	)			328
Interest expense			(875	)			(166	)			(2	)			(1,043	)
Other income, net			109				4				—				113
Income (loss) before income taxes		$	5,327			$	5,573			$	(12,512	)		$	(1,612	)

The following table presents information regarding revenues by end market:

		Three Months Ended				Three Months Ended
		March 31, 2006				March 31, 2007
Electric Transmission		$	57,760			$	58,348
Electric Substation			38,749				46,301
Utility Distribution and Industrial Electric			37,343				30,018
Total Electric			133,852				134,667
Natural Gas			53,926				37,817
Telecommunications			24,312				25,156
Other			2,185				6,164
		$	214,275			$	203,804

          All electric, gas and other end market revenues are included in the ICS segment, while telecommunications end market revenue is included in both the ICS and TS segments. Approximately 41% and 46% of telecommunications end market revenues for the three months ended March 31, 2006 and 2007, respectively, were from the TS segment.

11. Related Party Transactions

          The Company leases office and warehouse space from Coleman Properties, of which three officers of one of our subsidiaries are general partners. The lease for this space continues through October 2008. Annual lease payments under this agreement are approximately $0.1 million.

          The Company leases ducts in two river bores under the Delaware River from Coleman Properties. The lease commenced on May 1, 2005 and has a term of five years, with an option to extend. The 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, 2007, $0.4 million due to the EHV Power Corporation (“EHVPC”) stockholders, currently employees of the Company, was accrued in other liabilities—related party. This amount is a portion of the holdback consideration from the acquisition of EHVPC, which is payable in 2007 and not contingent on future events, with the exception of any indemnification obligations owed to the Company.

          The Company leases office and warehouse facilities in Michigan which are owned by an employee and his family members. Leases for these properties will run through March 2011 and May 2007, with annual lease payments of $0.3 million.

          As of March 31, 2007, $0.9 million due to former RUE stockholders, and currently employees of the Company, was accrued in other long-term liabilities—related party.

12. Commitments and Contingencies

          On September 21, 2005, a petition, as amended, was filed against InfraSource, certain of its officers and 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 certain acquisitions which closed in 1999 and 2000 and the Exelon Merger and committed other acts of misconduct following the filing of the petition. 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 service contracts, the Company generally indemnifies customers for the services provided under such contracts. Furthermore, because the Company’s 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 those proceedings could result in significant costs and diversion of management’s attention to ongoing business activities. Payments of significant amounts, even if reserved, could adversely affect the Company’s reputation and liquidity position.

          From time to time, we are a party to various other lawsuits, claims, other legal proceedings and are subject, due to the nature of our business, to governmental agency oversight, audits, investigations and review. Such 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. Under such governmental audits and investigations, we may become subject to fines and penalties or other monetary damages. With respect to such lawsuits, claims, proceedings and governmental investigations and audits, 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 the pending proceedings, individually or in the aggregate, will have a material adverse effect on results of operations, cash flows or financial condition.

Item 2.		MANAGEMENT’S 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 the Company’s plans, objectives and expectations for future operations and are based upon current estimates and projections of future results or trends. Although we believe that 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 circumstances 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 the Company’s Annual Report on Form 10-K for the year ended December 31, 2006 and other risks outlined in our filings with the Securities and Exchange Commission (“SEC”).

          Specific factors that might cause actual results to differ from expectations or may affect the value of the Company’s common stock include, but are not limited to: (i) the possibility that the pending merger with Quanta Services, Inc. will not be consummated; (ii) the award of new contracts and the timing of the award and performance of those contracts; (iii) exposure to fluctuations in profitability resulting from participation in fixed-price contracts; (iv) the determination that any of contracts are in a loss position; (v) cyclical changes that could reduce the demand for the services we provide; (vi) the nature of our contracts, particularly fixed-price contracts; (vii) the effect of percentage-of-completion accounting policies; (viii) loss of key customers; (ix) failure to attract and retain qualified personnel; (x) skilled labor shortages and increased labor costs; (xi) the uncertainty of the effects of the Energy Act; (xii) failure to profitably realize backlog; (xiii) project delays or cancellations; (xiv) work hindrance due to seasonal and other variations, including adverse weather conditions; (xv) the failure to meet schedule or performance requirements of contracts; (xvi) significant competition in our industry; (xvii) the presence of competitors with greater financial resources and the impact of competitive products, services and pricing; (xviii) ability to successfully identify, integrate and complete acquisitions; (xix) the effectiveness of internal controls over financial reporting; (xx) limitations in financing agreements that restrict business operations; (xxi) ability to obtain surety bonds; (xxii) construction accidents and injuries; (xxiii) the impact of our unionized workforce on operations; and (xxiv) a change in government laws or regulations.

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 and audited financial statements and notes included in the Company’s 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, Infrastructure Construction Services and Telecommunication Services. We operate in multiple service territories throughout the United States and do not have significant operations or assets outside the United States.

          In December 2006, we acquired all of the voting interests of Realtime Utility Engineers, Inc. (“RUE”), a company that provides substation and transmission line engineering services for electric utilities.

          During the first quarter of 2007:

	•		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.

          For the three months ended March 31, 2007, revenues were $203.8 million compared with $214.3 million for the three months ended March 31, 2006. The revenue mix by end market for the three months ended March 31, 2006 and 2007 is presented in the table below:

		Three Months Ended				Three Months Ended
End Market		March 31, 2006				March 31, 2007
Electric 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	%

          The Company’s top ten customers accounted for approximately 42% and 47% of consolidated revenues for the three months ended March 31, 2006 and 2007, respectively. Exelon accounted for approximately 17% and 12% of consolidated revenues for the three months ended March 31, 2006 and 2007, respectively. Approximately 41% and 46% of the telecommunications end market revenues were from the TS segment for the three months ended March 31, 2006 and 2007, respectively.

          Below is a period-over-period (first quarter 2006 as to first quarter 2007) and sequential (fourth quarter 2006 as to first quarter 2007) comparison of end market backlog:

		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	%

          Below is a period-over-period (first quarter 2006 as to first quarter 2007) and sequential (fourth quarter 2006 as to first quarter 2007) comparison of backlog by business segment:

		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	%

Results of Operations

Seasonality and Cyclicality

          The ICS segment’s results of operations 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, the ICS segment typically generates lower gross profit and operating income in the first quarter. However, demand for repair and maintenance services attributable to damage caused by inclement weather may partially offset the loss of revenues from lower demand for new projects and new MSAs. During the three months ended March 31, 2006, unusually mild weather contributed to increased volume and financial performance in natural gas, underground telecommunications and electric transmission services. For the same period in 2007, adverse weather conditions accounted for a portion of revenue decline as compared to 2006.

          Working capital needs are influenced by the seasonality of our business. Generally, additional working capital is required during the spring and summer when outdoor construction increases in weather-affected regions of the country. Conversely, working capital assets are typically converted 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 (“IPP”) sectors. As a result, volume of business may be adversely affected by declines in new projects in various geographic regions or industries in the United States. The TS segment’s leasing of point-to-point telecommunications infrastructure is not significantly affected by seasonality.

Consolidated Results

Three months ended March 31, 2007 compared to the three months ended March 31, 2006

		Three Months								Three Months
		Ended March				% of				Ended March				% of
		31, 2006				Revenue				31, 2007				Revenue
Revenues		$	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: Revenues decreased $10.5 million, or 5%, to $203.8 million for the three months ended March 31, 2007, compared to the three months ended March 31, 2006. Electric revenues increased by $0.8 million, natural gas revenues decreased by $16.1 million, telecommunications revenues increased by $0.8 million and other revenues increased by $4.0 million.

          Gross profit: Gross profit decreased $0.5 million, or 2%, to $28.4 million for the three months ended March 31, 2007, compared to the three months ended March 31, 2006. Gross profit margins for the

same periods 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 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 RUE service revenues and an increase in the volume of dark fiber lease revenue, offset by the adverse impacts of the decline in housing starts, severe weather and lower profitability on electric transmission work.

          Selling, general and administrative expenses: First quarter 2007 selling, general and administrative expenses were $25.6, an increase of $2.9 million, or 13%, compared to the three months ended March 31, 2006. The increase was due primarily to an increase in salaries and benefits of $2.7 million for additional personnel hired to manage business growth.

          Interest expense: We incurred $1.0 million of interest expense for the three months ended March 31, 2007, a decrease of $1.1 million from the three months ended March 31, 2006, due to the effects of lower average debt levels and lower average interest rates resulting from the refinancing of our senior credit facility.

          Provision for income taxes: The provision for income taxes for the three months ended March 31, 2007 was an income tax benefit of $0.6 million, compared to an expense of $1.7 million for the three months ended March 31, 2006. The benefit was due primarily to the loss incurred in the three months ended March 31, 2007, as compared to taxable income in the first quarter of 2006.

          Discontinued operations, net of tax: The loss from discontinued operations for the three months ended March 31, 2006 and 2007 included the results of operations of MSI.

Segment Results

          Operations are managed in two segments, ICS and TS. The primary financial measures used to evaluate segment operations are 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 acquisitions, share-based compensation and merger related costs, because we believe those expenses do not reflect the core performance of business segments’ operations. A reconciliation of income (loss) from operations as adjusted to the nearest GAAP equivalent, income (loss) from operations, is provided in Note 10 to condensed consolidated financial statements, included elsewhere in this report on Form 10-Q.

          Corporate overhead expenses have not been allocated to segments because segment performance is evaluated based on revenues and expenses within their control, without the effect of corporate expenses.

Three months ended March 31, 2007 compared to the three months ended March 31, 2006

		Three Months				Three Months
		Ended March 31,				Ended March 31,				Change
		2006				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	%

		Three Months				Three Months
		Ended March 31,				Ended March 31,				Change
		2006				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	%