prim_Current_Folio_10Q

Table of Contents 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

 

For the quarterly period ended September 30, 2018

 

OR

 

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 0001-34145

 

Primoris Services Corporation

(Exact name of registrant as specified in its charter)

 

Delaware

    

20-4743916

(State or Other Jurisdiction of

 

(I.R.S. Employer

Incorporation or Organization)

 

Identification No.)

 

 

 

2100 McKinney Avenue, Suite 1500

 

 

Dallas, Texas

 

75201

(Address of Principal Executive Offices)

 

(Zip Code)

 

Registrant’s telephone number, including area code: (214) 740-5600

 

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 ☒  No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes  ☒ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.:

 

 

 

Large accelerated filer  ☒

    

Accelerated filer  ☐

 

 

 

Non-accelerated filer  ☐

 

Smaller reporting company  ☐

 

 

 

 

 

Emerging growth company  ☐

 

      If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ☐  No ☒

 

At November 5, 2018, 51,204,959 shares of the registrant’s common stock, par value $0.0001 per share, were outstanding.

 

 

 

 


 

Table of Contents 

PRIMORIS SERVICES CORPORATION

 

INDEX

 

 

 

 

 

    

Page No.

 

 

 

Part I. Financial Information 

 

 

 

 

 

Item 1. Financial Statements:

 

 

 

 

 

—Condensed Consolidated Balance Sheets at September 30, 2018 and December 31, 2017 (Unaudited) 

 

3

 

 

 

—Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2018 and 2017 (Unaudited) 

 

4

 

 

 

—Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2018 and 2017 (Unaudited) 

 

5

 

 

 

—Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2018 and 2017 (Unaudited) 

 

6

 

 

 

—Notes to Condensed Consolidated Financial Statements (Unaudited) 

 

8

 

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 

 

33

 

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk 

 

51

 

 

 

Item 4. Controls and Procedures 

 

51

 

 

 

Part II. Other Information 

 

 

 

 

 

Item 1. Legal Proceedings 

 

52

 

 

 

Item 1A. Risk Factors 

 

52

 

 

 

Item 6. Exhibits 

 

52

 

 

 

Signatures 

 

53

 

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Table of Contents 

PART I.  FINANCIAL INFORMATION

 

ITEM 1.  FINANCIAL STATEMENTS

 

PRIMORIS SERVICES CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(In Thousands, Except Share Amounts)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

September 30, 

 

 

December 31, 

 

 

    

2018

    

2017

 

ASSETS

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents ($15,729 and $60,256 related to VIEs. See Note 11)

 

$

60,039

 

$

170,385

 

Accounts receivable, net

 

 

473,045

 

 

291,589

 

Contract assets

 

 

382,492

 

 

265,902

 

Prepaid expenses and other current assets

 

 

22,383

 

 

15,338

 

Total current assets

 

 

937,959

 

 

743,214

 

Property and equipment, net

 

 

369,123

 

 

311,777

 

Deferred tax assets

 

 

13,441

 

 

 —

 

Intangible assets, net

 

 

85,813

 

 

44,800

 

Goodwill

 

 

208,130

 

 

153,374

 

Other long-term assets

 

 

6,680

 

 

2,575

 

Total assets

 

$

1,621,146

 

$

1,255,740

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

 

$

241,288

 

$

140,943

 

Contract liabilities

 

 

219,232

 

 

169,377

 

Accrued liabilities

 

 

130,382

 

 

76,027

 

Dividends payable

 

 

3,072

 

 

3,087

 

Current portion of long-term debt

 

 

63,947

 

 

65,464

 

Total current liabilities

 

 

657,921

 

 

454,898

 

Long-term debt, net of current portion

 

 

306,093

 

 

193,351

 

Deferred tax liabilities

 

 

 —

 

 

13,571

 

Other long-term liabilities

 

 

64,652

 

 

31,737

 

Total liabilities

 

 

1,028,666

 

 

693,557

 

Commitments and contingencies (See Note 17)

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

 

 

Common stock—$.0001 par value; 90,000,000 shares authorized; 51,204,959 and 51,448,753 issued and outstanding at September 30, 2018 and December 31, 2017

 

 

 5

 

 

 5

 

Additional paid-in capital

 

 

155,051

 

 

160,502

 

Retained earnings

 

 

431,764

 

 

395,961

 

Accumulated other comprehensive income

 

 

577

 

 

 —

 

Noncontrolling interest

 

 

5,083

 

 

5,715

 

Total stockholders’ equity

 

 

592,480

 

 

562,183

 

Total liabilities and stockholders’ equity

 

$

1,621,146

 

$

1,255,740

 

 

See Accompanying Notes to Condensed Consolidated Financial Statements

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PRIMORIS SERVICES CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In Thousands, Except Per Share Amounts)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30, 

 

September 30, 

 

 

    

2018

    

2017

    

2018

    

2017

 

Revenue

 

$

908,902

 

$

608,311

 

$

2,061,808

 

$

1,800,978

 

Cost of revenue

 

 

802,397

 

 

537,890

 

 

1,839,324

 

 

1,591,021

 

Gross profit

 

 

106,505

 

 

70,421

 

 

222,484

 

 

209,957

 

Selling, general and administrative expenses

 

 

51,604

 

 

42,321

 

 

132,049

 

 

126,835

 

Merger and related costs

 

 

3,827

 

 

238

 

 

13,190

 

 

1,555

 

Operating income

 

 

51,074

 

 

27,862

 

 

77,245

 

 

81,567

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment income

 

 

 —

 

 

6,066

 

 

 —

 

 

6,066

 

Foreign exchange (loss) gain

 

 

(69)

 

 

167

 

 

1,444

 

 

299

 

Other income (expense), net

 

 

32

 

 

(39)

 

 

(751)

 

 

(52)

 

Interest income

 

 

932

 

 

228

 

 

1,544

 

 

411

 

Interest expense

 

 

(6,448)

 

 

(2,198)

 

 

(11,637)

 

 

(6,605)

 

Income before provision for income taxes

 

 

45,521

 

 

32,086

 

 

67,845

 

 

81,686

 

Provision for income taxes

 

 

(10,716)

 

 

(9,952)

 

 

(14,633)

 

 

(28,644)

 

Net income

 

$

34,805

 

$

22,134

 

$

53,212

 

$

53,042

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less net income attributable to noncontrolling interests

 

 

(2,114)

 

 

(1,537)

 

$

(8,118)

 

$

(3,209)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to Primoris

 

$

32,691

 

$

20,597

 

$

45,094

 

$

49,833

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends per common share

 

$

0.060

 

$

0.055

 

$

0.180

 

$

0.170

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.64

 

$

0.40

 

$

0.88

 

$

0.97

 

Diluted

 

$

0.63

 

$

0.40

 

$

0.87

 

$

0.96

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

51,403

 

 

51,441

 

 

51,471

 

 

51,491

 

Diluted

 

 

51,735

 

 

51,707

 

 

51,760

 

 

51,751

 

 

See Accompanying Notes to Condensed Consolidated Financial Statements

 

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PRIMORIS SERVICES CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In Thousands, Except Per Share Amounts)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30, 

 

September 30, 

 

 

    

2018

    

2017

    

2018

    

2017

 

Net income

 

$

34,805

 

$

22,134

 

$

53,212

 

$

53,042

 

Other comprehensive income, net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

200

 

 

 —

 

 

577

 

 

 —

 

Comprehensive income

 

 

35,005

 

 

22,134

 

 

53,789

 

 

53,042

 

Less net income attributable to noncontrolling interests

 

 

(2,114)

 

 

(1,537)

 

 

(8,118)

 

 

(3,209)

 

Comprehensive income attributable to Primoris

 

$

32,891

 

$

20,597

 

$

45,671

 

$

49,833

 

 

See Accompanying Notes to Condensed Consolidated Financial Statements

 

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PRIMORIS SERVICES CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

September 30, 

 

 

    

2018

    

2017

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net income

 

$

53,212

 

$

53,042

 

Adjustments to reconcile net income to net cash (used in) provided by operating activities (net of effect of acquisitions):

 

 

 

 

 

 

 

Depreciation

 

 

47,708

 

 

43,064

 

Amortization of intangible assets

 

 

8,287

 

 

6,184

 

Intangible asset impairment

 

 

 —

 

 

477

 

Stock-based compensation expense

 

 

748

 

 

911

 

Gain on short-term investments

 

 

 —

 

 

(5,980)

 

Gain on sale of property and equipment

 

 

(3,212)

 

 

(3,880)

 

Other non-cash items

 

 

180

 

 

131

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

 

(78,819)

 

 

54,865

 

Contract assets

 

 

(85,817)

 

 

(42,011)

 

Other current assets

 

 

11,061

 

 

7,186

 

Other long-term assets

 

 

(957)

 

 

(2,745)

 

Accounts payable

 

 

24,099

 

 

(17,813)

 

Contract liabilities

 

 

(11,061)

 

 

46,210

 

Accrued liabilities

 

 

16,400

 

 

17,848

 

Other long-term liabilities

 

 

5,298

 

 

3,943

 

Net cash (used in) provided by operating activities

 

 

(12,873)

 

 

161,432

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Purchase of property and equipment

 

 

(80,766)

 

 

(57,346)

 

Issuance of a note receivable

 

 

(15,000)

 

 

 —

 

Proceeds from a note receivable

 

 

15,000

 

 

 —

 

Proceeds from sale of property and equipment

 

 

9,655

 

 

7,027

 

Purchase of short-term investments

 

 

 —

 

 

(13,588)

 

Sale of short-term investments

 

 

 —

 

 

350

 

Cash paid for acquisitions, net of cash and restricted cash acquired

 

 

(111,030)

 

 

(66,205)

 

Net cash used in investing activities

 

 

(182,141)

 

 

(129,762)

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Borrowings under revolving line of credit

 

 

170,000

 

 

 —

 

Payments on revolving line of credit

 

 

(170,000)

 

 

 —

 

Proceeds from issuance of long-term debt

 

 

239,467

 

 

30,000

 

Repayment of long-term debt and capital leases

 

 

(127,363)

 

 

(41,279)

 

Payment of debt issuance cost

 

 

(1,041)

 

 

(631)

 

Proceeds from issuance of common stock purchased under a long-term incentive plan

 

 

1,498

 

 

1,148

 

Payment of contingent earnout liability

 

 

(1,200)

 

 

 —

 

Cash distribution to non-controlling interest holders

 

 

(8,750)

 

 

 —

 

Repurchase of common stock

 

 

(8,479)

 

 

(4,999)

 

Dividends paid

 

 

(9,271)

 

 

(8,497)

 

Net cash provided by (used in) financing activities

 

 

84,861

 

 

(24,258)

 

Effect of exchange rate changes on cash and cash equivalents

 

 

(193)

 

 

 —

 

Net change in cash and cash equivalents

 

 

(110,346)

 

 

7,412

 

Cash and cash equivalents at beginning of the period

 

 

170,385

 

 

135,823

 

Cash and cash equivalents at end of the period

 

$

60,039

 

$

143,235

 

 

See Accompanying Notes to Condensed Consolidated Financial Statements

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SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 

 

 

    

2018

    

2017

 

 

 

(Unaudited)

 

Cash paid:

 

 

 

 

 

 

 

Interest

 

$

11,658

 

$

6,236

 

 

 

 

 

 

 

 

 

Income taxes, net of refunds received

 

$

5,379

 

$

25,618

 

 

SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 

 

 

    

2018

    

2017

 

 

 

(Unaudited)

 

Obligations incurred for the acquisition of property

 

$

 —

 

$

4,163

 

 

 

 

 

 

 

 

 

Dividends declared and not yet paid

 

$

3,072

 

$

2,829

 

 

 

See Accompanying Notes to Condensed Consolidated Financial Statements

 

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PRIMORIS SERVICES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars In Thousands, Except Share and Per Share Amounts)

(Unaudited)

 

Note 1—Nature of Business

 

Organization and operations  Primoris Services Corporation is a holding company of various construction and product engineering subsidiaries. Our underground and directional drilling operations install, replace and repair natural gas, petroleum, telecommunications and water pipeline systems, including large diameter pipeline systems. Our industrial, civil and engineering operations build and provide maintenance services to industrial facilities including power plants, petrochemical facilities, and other processing plants; construct multi-level parking structures; and engage in the construction of highways, bridges and other environmental construction activities. Our transmission and distribution operations install, replace and repair gas and electric utility systems. We are incorporated in the state of Delaware, and our corporate headquarters are located at 2100 McKinney Avenue, Suite 1500, Dallas, Texas 75201. Unless specifically noted otherwise, as used throughout these condensed consolidated financial statements, “Primoris”, “the Company”, “we”, “our”, “us” or “its” refers to the business, operations and financial results of us and our wholly-owned subsidiaries.

 

Reportable Segments — We segregate our business into five reportable segments: the Power, Industrial and Engineering (“Power”) segment, the Pipeline and Underground (“Pipeline”) segment, the Utilities and Distribution (“Utilities”) segment, the Transmission and Distribution (“Transmission”) segment, which is a new reportable segment created in connection with the acquisition of Willbros Group, Inc. (“Willbros”), and the Civil segment.  See Note 18 – “Reportable Segments” for a brief description of the reportable segments and their operations.

 

The classification of revenue and gross profit for segment reporting purposes can at times require judgment on the part of management. Our segments may perform services across industries or perform joint services for customers in multiple industries. To determine reportable segment gross profit, certain allocations, including allocations of shared and indirect costs, such as facility costs, equipment costs and indirect operating expenses were made.

 

Acquisition of Willbros Group, Inc. — On June 1, 2018, we completed our acquisition of Willbros for approximately $111.0 million, net of cash and restricted cash acquired. Willbros is a specialty energy infrastructure contractor serving the oil and gas and power industries through its utility transmission and distribution, oil and gas, and Canadian operations, which principally executes industrial and power projects. The utility transmission and distribution operations formed the Transmission segment, the oil and gas operations are included in the Pipeline segment, and the Canadian operations are included in the Power segment. See Note 6— “Business Combinations”.

 

Other Acquisitions —  On May 26, 2017, we acquired the net assets of Florida Gas Contractors (“FGC”) for $37.7 million; on May 30, 2017, we acquired certain engineering assets for approximately $2.3 million; and on June 16, 2017, we acquired the net assets of Coastal Field Services (“Coastal”) for $27.5 million.  FGC operations are included in the Utilities segment, the engineering assets are included in the operations of the Power segment, and Coastal operations are included in the Pipeline segment.  See Note 6— “Business Combinations”.

 

Joint Ventures —We own a 50% interest in two separate joint ventures, both formed in 2015.  The Carlsbad Power Constructors joint venture (“Carlsbad”) is engineering and constructing a gas-fired power generation facility, and the ARB Inc. & B&M Engineering Co. joint venture (“Wilmington”) is also engineering and constructing a gas-fired power generation facility.  Both projects are located in Southern California.  The joint venture operations are included as part of the Power segment.  As a result of determining that we are the primary beneficiary of the two variable interest entities ("VIEs”), the results of the Carlsbad and Wilmington joint ventures are consolidated in our financial statements.  The Wilmington project was substantially complete as of December 31, 2017, and the Carlsbad project is expected to be completed in 2018.  Financial information for the joint ventures is presented in Note 11 – “Noncontrolling Interests”.

 

Note 2—Basis of Presentation

 

Interim condensed consolidated financial statements  The interim condensed consolidated financial statements for the three and nine month periods ended September 30, 2018 and 2017 have been prepared in accordance with Rule 10-01 of Regulation S-X of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). As such, certain disclosures, which would substantially duplicate the disclosures contained in our Annual Report on Form 10-K,

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filed on February 26, 2018, which contains our audited consolidated financial statements for the year ended December 31, 2017, have been omitted. 

 

This Third Quarter 2018 Report on Form 10-Q should be read in concert with our most recent Annual Report on Form 10-K. The interim financial information is unaudited.  In the opinion of management, the interim information includes all adjustments (consisting of normal recurring adjustments) necessary for the fair presentation of the interim financial information. 

 

Reclassification Certain previously reported amounts have been reclassified to conform to the current period presentation.

 

Customer concentration — We operate in multiple industry segments encompassing the construction of commercial, industrial and public works infrastructure assets primarily throughout the United States. Typically, the top ten customers in any one calendar year generate revenue in excess of 50% of total revenue; however, the group that comprises the top ten customers varies from year to year.

 

During the three and nine months ended September 30, 2018, revenue generated by the top ten customers were approximately $483.0 million and $1,045.9 million, respectively, which represented 53.1% and 50.7%, respectively, of total revenue during the applicable period. During the three and nine months ended September 30, 2018, a Midwest utility customer represented 7.9% and 8.4% of total revenue, respectively, and a California utility customer represented 8.2% and 8.6% of total revenue, respectively.

 

During the three and nine months ended September 30, 2017, revenues generated by the top ten customers were approximately $317.2 million and $1,058.5 million, respectively, which represented 52.2% and 58.8%, respectively, of total revenues during the applicable period. During the three and nine months ended September 30, 2017, a California utility project represented 10.6% and 8.8% of total revenues, respectively, and a state department of transportation customer represented 8.4% and 9.8% of total revenues, respectively.

 

At September 30, 2018, approximately 10.2% of our accounts receivable were due from one customer, and that customer provided 8.4% of our revenue for the nine months ended September 30, 2018. In addition, of total accounts receivable, approximately 4.4% are from one customer with whom we are currently engaged in a dispute resolution. See Note 17 – “Commitments and Contingencies”.

 

At September 30, 2017, approximately 10.8% of our accounts receivable were due from one customer, and that customer provided 7.9% of our revenue for the nine months ended September 30, 2017. In addition, approximately 11.2% of total accounts receivable at September 30, 2017 were from one customer with whom we are currently engaged in a dispute resolution.

 

Multiemployer plans  Various of our subsidiaries are signatories to collective bargaining agreements. These agreements require that we participate in and contribute to a number of multiemployer benefit plans for our union employees at rates determined by the agreements. The trustees for each multiemployer plan determine the eligibility and allocations of contributions and benefit amounts, determine the types of benefits, and administer the plan. To the extent that any plans are underfunded, the Employee Retirement Income Security Act of 1974, as amended by the Multi-Employer Pension Plan Amendments Act of 1980, requires that if we were to withdraw from an agreement or if a plan is terminated, we may incur a withdrawal obligation. The potential withdrawal obligation may be significant. In accordance with Generally Accepted Accounting Principles (“GAAP”), any withdrawal liability would be recorded when it is probable that a liability exists and can be reasonably estimated. In November 2011, we withdrew from the Central States Southeast and Southwest Areas Pension Fund multiemployer plan, and fully paid off the withdrawal liability in the third quarter of 2018 as discussed in Note 17 — “Commitments and Contingencies”. We have no plans to withdraw from any other agreements.

 

Derivative Instruments and Hedging Activities  We recognize all derivative instruments as either assets or liabilities on the balance sheet at their respective fair values. Our use of derivatives consists of an interest rate swap agreement. The interest rate swap agreement was entered into to improve the predictability of cash flows from interest payments related to variable rate debt for the duration of the term loan. The interest rate swap matures in July 2023 and is not designated as a hedge for accounting purposes. Therefore, the change in the fair value of the derivative asset or

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liability is reflected in net income in the Condensed Consolidated Statements of Income (mark-to-market accounting). Cash flows from derivatives settled are reported as cash flow from operating activities.

 

Note 3—Recent Accounting Pronouncements

 

Recently adopted accounting pronouncements

 

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)”, with several clarifying updates issued during 2016 and 2017. The new standard is effective for reporting periods beginning after December 15, 2017 and supersedes all prior revenue recognition standards including the guidance in ASC Topic 605, “Revenue Recognition”.  Under Topic 606, revenue recognition occurs when promised goods or services are transferred to customers in amounts that reflect the consideration to which the company expects to be entitled to in exchange for those goods or services. We adopted Topic 606 as of January 1, 2018 using the modified retrospective transition method. See Note 4 — “Revenue” for further details.

 

In November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows (Topic 230)”, which requires a reporting entity to include restricted cash and restricted cash equivalents in its cash and cash-equivalent balances presented in the entity’s statement of cash flows. A reconciliation between the statement of financial position and the statement of cash flows must be disclosed when the balance sheet includes more than one line item for cash, cash equivalents, restricted cash and restricted cash equivalents. Transfers between non-restricted and restricted cash should not be presented as cash flow activities in the statement of cash flows. Furthermore, an entity with a material restricted cash balance must disclose information regarding the nature of the restrictions. ASU 2016-18 is effective for annual periods beginning after December 15, 2017, including interim periods within those annual reporting periods. We adopted the ASU as of January 1, 2018, and it did not have a material impact on our Condensed Consolidated Statements of Cash Flows.

 

In January 2017, the FASB issued ASU 2017-01, "Business Combinations (Topic 805): Clarifying the Definition of a Business", which changes the definition of a business to assist entities with evaluating when a set of acquired assets and activities is a business. ASU 2017-01 requires an entity to evaluate if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets; if so, the set of transferred assets and activities is not a business. ASU 2017-01 is effective for interim and annual reporting periods beginning after December 15, 2017. We adopted the ASU as of January 1, 2018, and it did not impact the determination of our business combinations.

 

In May 2017, the FASB issued ASU 2017-09, “Compensation — Stock Compensation (Topic 718) — Scope of Modification Accounting”.  The ASU amends the scope of modification accounting for share-based payment arrangements.  The amendments in the ASU clarify when to account for a change in the terms or conditions of share-based payment awards as a modification under ASC 718, “Compensation — Stock Compensation”.  The ASU is effective for interim and annual reporting periods beginning after December 15, 2017.  We adopted the ASU as of January 1, 2018, and it did not have a material impact on our consolidated financial statements.

 

In March 2018, the FASB issued ASU No. 2018-05, “Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118”. The ASU added guidance previously issued by the Securities and Exchange Commission (“SEC”) in Staff Accounting Bulletin No. 118 (“SAB 118”) to ASC 740 “Income Taxes”. SAB 118 was issued by the SEC in December 2017 to provide guidance for accounting implications of U.S. tax reform under the Tax Cuts and Jobs Act (the “Tax Act”). We have evaluated the potential impacts of SAB 118 and have applied this guidance to our consolidated financial statements and related disclosures beginning in the fourth quarter of our fiscal year 2017. See Note 14 — “Income Taxes for additional information on SAB 118 and the impacts of the Tax Act.

 

Recently issued accounting pronouncements not yet adopted

 

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)”. In July 2018, the FASB issued two updates to ASU 2016-02, ASU 2018-10, “Codification Improvements to Topic 842, Leases”, and ASU 2018-11, “Leases (Topic 842): Targeted Improvements”. ASU 2016-02 will require recognition of operating leases with lease terms of more than twelve months on the balance sheet as both assets for the rights and liabilities for the obligations created by the leases. The ASU will require disclosures that provide qualitative and quantitative information for the lease assets and liabilities recorded in the financial statements. The standard is effective for fiscal years beginning after December 15, 2018, and initially required a modified retrospective transition method where a company applies the new

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leases standard at the beginning of the earliest period presented in the financial statements. ASU 2018-11 added an optional transition method where a company applies the new leases standard at the adoption date and recognizes a cumulative effect adjustment to the opening balance of retained earnings. We intend to take advantage of the transition practical expedients permitted with the new standard, which among other things, allows us to carryforward the historical lease classification. In addition, we expect to elect the hindsight practical expedient to determine the reasonably certain lease term for existing leases. We also plan to make an accounting policy election that will keep leases with an initial term of 12 months or less off of the balance sheet and will result in recognizing those lease payments in the Consolidated Statements of Income on a straight-line basis over the lease term.

 

While we are continuing to assess all potential impacts of the ASUs, we expect total liabilities to increase by $110.0 to $125.0 million. We expect the right of use assets to approximate the lease liability as of the date of adoption with any difference between these amounts recorded as an adjustment to retained earnings as of January 1, 2019. These estimates, which are based on our current lease portfolio may change as we continue to evaluate the new standard and as we implement a new lease accounting information system. The estimates could also change due to changes in the lease portfolio, which could include lease volume, lease commencement dates, and renewal option and lease termination expectations. We do not believe the ASUs will materially affect our consolidated net income. We will update our estimates each quarter as changes occur.

 

We do not believe the ASUs will have a notable impact on our liquidity. Additionally, the ASUs will have no impact on our debt covenant compliance as we have already revised our credit agreements to address the impact of the ASUs.

 

In January 2017, the FASB issued ASU 2017-04, "Simplifying the Test for Goodwill Impairment". ASU 2017-04 removes the second step of the goodwill impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit's carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. ASU 2017-04 is effective for interim and annual reporting periods beginning after December 15, 2019 and will be applied prospectively. We do not expect the adoption of ASU 2017-04 to have an impact on our financial position, results of operations, or cash flows.

 

In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement”, which eliminates certain disclosure requirements for recurring and nonrecurring fair value measurements. The ASU eliminates such disclosures as the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, and adds new disclosure requirements for Level 3 measurements. This ASU is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, with early adoption permitted for any eliminated or modified disclosures. We are currently evaluating the impact this ASU will have on our disclosures.

 

Note 4—Revenue

 

On January 1, 2018, we adopted Topic 606 using the modified retrospective method applied to those contracts that were not completed as of January 1, 2018. In adopting Topic 606, we changed our accounting policy for revenue recognition. Results for periods prior to January 1, 2018 are not adjusted and continue to be reported in accordance with our historic accounting under ASC Topic 605. The cumulative impact of adopting Topic 606 was immaterial and did not require an adjustment to retained earnings. However, we reclassified prior year balance sheet and cash flow amounts to conform to current year presentation.

 

We generate revenue under a range of contracting types, including fixed-price, unit-price, time and material, and cost reimbursable plus fee contracts. A substantial portion of our revenue is derived from contracts that are fixed-price or unit-price and is recognized over time as work is completed because of the continuous transfer of control to the customer (typically using an input measure such as costs incurred to date relative to total estimated costs at completion to measure progress). For time and material and cost reimbursable plus fee contracts, revenue is recognized primarily on an input basis, based on contract costs incurred as defined within the respective contracts. Costs to obtain contracts are generally not significant and are expensed in the period incurred.

 

We evaluate whether two or more contracts should be combined and accounted for as one single performance obligation and whether a single contract should be accounted for as more than one performance obligation. Topic 606 defines a performance obligation as a contractual promise to transfer a distinct good or service to a customer. A

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contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. Our evaluation requires significant judgment and the decision to combine a group of contracts or separate a contract into multiple performance obligations could change the amount of revenue and profit recorded in a given period. The majority of our contracts have a single performance obligation, as the promise to transfer the individual goods or services is not separately identifiable from other promises in the contract and, therefore, is not distinct. However, occasionally we have contracts with multiple performance obligations. For contracts with multiple performance obligations, we allocate the contract’s transaction price to each performance obligation using the observable standalone selling price, if available, or alternatively our best estimate of the standalone selling price of each distinct performance obligation in the contract. The primary method used to estimate standalone selling price is the expected cost plus a margin approach for each performance obligation. 

 

As of September 30, 2018, we had $1.73 billion of remaining performance obligations. We expect to recognize approximately 81% of our remaining performance obligations as revenue during the next four quarters and substantially all of the remaining balance by the year-end 2020.

 

Accounting for long-term contracts involves the use of various techniques to estimate total transaction price and costs. For long-term contracts, transaction price, estimated cost at completion and total costs incurred to date are used to calculate revenue earned. Unforeseen events and circumstances can alter the estimate of the costs and potential profit associated with a particular contract.  Total estimated costs, and thus contract revenue and income, can be impacted by changes in productivity, scheduling, the unit cost of labor, subcontracts, materials and equipment. Additionally, external factors such as weather, client needs, client delays in providing permits and approvals, labor availability, governmental regulation and politics may affect the progress of a project’s completion, and thus the timing of revenue recognition. To the extent that original cost estimates are modified, estimated costs to complete increase, delivery schedules are delayed, or progress under a contract is otherwise impeded, cash flow, revenue recognition and profitability from a particular contract may be adversely affected.

 

The nature of our contracts gives rise to several types of variable consideration, including contract modifications (change orders and claims), liquidated damages, volume discounts, performance bonuses, incentive fees, and other terms that can either increase or decrease the transaction price. We estimate variable consideration as the most likely amount to which we expect to be entitled. We include estimated amounts in the transaction price to the extent we believe we have an enforceable right, and it is probable that a significant reversal of cumulative revenue recognized will not occur. Our estimates of variable consideration and the determination of whether to include estimated amounts in the transaction price are based largely on an assessment of our anticipated performance and all information (historical, current and forecasted) that is reasonably available to us at this time.

 

Contract modifications result from changes in contract specifications or requirements. We consider unapproved change orders to be contract modifications for which customers have not agreed to both scope and price. We consider claims to be contract modifications for which we seek, or will seek, to collect from customers, or others, for customer-caused changes in contract specifications or design, or other customer-related causes of unanticipated additional contract costs on which there is no agreement with customers. Claims can also be caused by non-customer-caused changes, such as rain or other weather delays. Costs associated with contract modifications are included in the estimated costs to complete the contracts and are treated as project costs when incurred. In most instances, contract modifications are for goods or services that are not distinct, and, therefore, are accounted for as part of the existing contract. The effect of a contract modification on the transaction price, and our measure of progress for the performance obligation to which it relates, is recognized as an adjustment to revenue on a cumulative catch-up basis. In some cases, settlement of contract modifications may not occur until after completion of work under the contract.

 

As a significant change in one or more of these estimates could affect the profitability of our contracts, we review and update our contract-related estimates regularly. We recognize adjustments in estimated profit on contracts under the cumulative catch-up method. Under this method, the cumulative impact of the profit adjustment is recognized in the period the adjustment is identified. Revenue and profit in future periods of contract performance are recognized using the adjusted estimate. In the three and nine months ended September 30, 2018, revenue recognized from performance obligations satisfied in previous periods was $2.5 million and $27.5 million, respectively. If at any time the estimate of contract profitability indicates an anticipated loss on a contract, the projected loss is recognized in full, including any previously recognized profit, in the period it is identified and recognized as an “accrued loss provision” which is included in “Contract liabilities” on the Condensed Consolidated Balance Sheets. For contract revenue

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recognized over time, the accrued loss provision is adjusted so that the gross profit for the contract remains zero in future periods.

 

At September 30, 2018, we had approximately $90.4 million of unapproved contract modifications included in the aggregate transaction prices. These contract modifications were in the process of being negotiated in the normal course of business. Approximately $82.9 million of the contract modifications had been recognized as revenue on a cumulative catch-up basis through September 30, 2018.

 

In all forms of contracts, we estimate the collectability of contract amounts at the same time that we estimate project costs.  If we anticipate that there may be issues associated with the collectability of the full amount calculated as the transaction price, we may reduce the amount recognized as revenue to reflect the uncertainty associated with realization of the eventual cash collection. For example, when a cost reimbursable project exceeds the client’s expected budget amount, the client frequently requests an adjustment to the final amount. Similarly, some utility clients reserve the right to audit costs for significant periods after performance of the work.

 

The timing of when we bill our customers is generally dependent upon agreed-upon contractual terms, milestone billings based on the completion of certain phases of the work, or when services are provided. Sometimes, billing occurs subsequent to revenue recognition, resulting in unbilled revenue, which is a contract asset. Also, we sometimes receive advances or deposits from our customers before revenue is recognized, resulting in deferred revenue, which is a contract liability.

 

The caption “Contract assets” in the Condensed Consolidated Balance Sheets represents the following:

 

·

unbilled revenue (formerly costs and estimated earnings in excess of billings), which arise when revenue has been recorded but the amount will not be billed until a later date;

 

·

retainage amounts for the portion of the contract price earned by us for work performed, but held for payment by the customer as a form of security until we reach certain construction milestones; and

 

·

contract materials for certain job specific materials not yet installed, which are valued using the specific identification method relating the cost incurred to a specific project.

 

Contract assets consist of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

September 30, 

 

December 31, 

 

 

    

2018

    

2017

 

Unbilled revenue

 

$

262,510

 

$

160,092

 

Retention receivable

 

 

91,473

 

 

66,586

 

Contract materials (not yet installed)

 

 

28,509

 

 

39,224

 

 

 

$

382,492

 

$

265,902

 

 

Contract assets increased by $116.6 million compared to December 31, 2017 due primarily to a $30.8 million increase from the acquisition of Willbros in the second quarter of 2018 and higher unbilled revenue from our legacy operations.

 

The caption “Contract liabilities” in the Condensed Consolidated Balance Sheets represents deferred revenue (formerly billings in excess of costs and estimated earnings) on billings in excess of contract revenue recognized to date, and the accrued loss provision.

 

Contract liabilities consist of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

September 30, 

 

December 31, 

 

 

    

2018

    

2017

 

Deferred revenue

 

$

200,865

 

$

159,310

 

Accrued loss provision

 

 

18,367

 

 

10,067

 

 

 

$

219,232

 

$

169,377

 

 

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Contract liabilities increased by $49.9 million compared to December 31, 2017 primarily due to a $61.0 million increase from the acquisition of Willbros in the second quarter of 2018, partially offset by lower deferred revenue from our legacy operations.

 

Revenue recognized for the nine months ended September 30, 2018, that was included in the contract liability balance at December 31, 2017 was approximately $145.4 million.

 

The following tables present our revenue disaggregated into various categories.

 

Master Service Agreements (“MSA”) and Non-MSA revenue was as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended September 30, 2018

 

Segment

 

MSA

 

Non-MSA

 

Total

 

Power

 

$

48,004

 

$

133,818

 

$

181,822

 

Pipeline

 

 

14,986

 

 

198,087

 

 

213,073

 

Utilities

 

 

227,192

 

 

42,460

 

 

269,652

 

Transmission

 

 

100,227

 

 

21,299

 

 

121,526

 

Civil

 

 

 —

 

 

122,829

 

 

122,829

 

Total

 

$

390,409

 

$

518,493

 

$

908,902

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the nine months ended September 30, 2018

 

Segment

    

MSA

    

Non-MSA

    

Total

 

Power

 

$

90,074

 

$

425,304

 

$

515,378

 

Pipeline

 

 

34,479

 

 

326,782

 

 

361,261

 

Utilities

 

 

515,295

 

 

149,919

 

 

665,214

 

Transmission

 

 

135,744

 

 

28,236

 

 

163,980

 

Civil

 

 

 —

 

 

355,975

 

 

355,975

 

Total

 

$

775,592

 

$

1,286,216

 

$

2,061,808

 

 

Revenue by contract type was as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended September 30, 2018

 

Segment

 

Fixed-price

 

Unit-price

 

Cost reimbursable (1)

 

Total

 

Power

 

$

85,561

 

$

10,371

 

$

85,890

 

$

181,822

 

Pipeline

 

 

41,772

 

 

7,924

 

 

163,377

 

 

213,073

 

Utilities

 

 

42,763

 

 

144,611

 

 

82,278

 

 

269,652

 

Transmission

 

 

20,259

 

 

84,646

 

 

16,621

 

 

121,526

 

Civil

 

 

21,380

 

 

90,418

 

 

11,031

 

 

122,829

 

Total

 

$

211,735

 

$

337,970

 

$

359,197

 

$

908,902

 


(1)

Includes time and material and cost reimbursable plus fee contracts.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the nine months ended September 30, 2018

 

Segment

    

Fixed-price

    

Unit-price

    

Cost reimbursable (1)

    

Total

 

Power

 

$

310,599

 

$

36,015

 

$

168,764

 

$

515,378

 

Pipeline

 

 

82,394

 

 

58,247

 

 

220,620

 

 

361,261

 

Utilities

 

 

148,126

 

 

339,225

 

 

177,863

 

 

665,214

 

Transmission

 

 

28,259

 

 

110,103

 

 

25,618

 

 

163,980

 

Civil

 

 

45,803

 

 

269,630

 

 

40,542

 

 

355,975

 

Total

 

$

615,181

 

$

813,220

 

$

633,407

 

$

2,061,808

 


(1)

Includes time and material and cost reimbursable plus fee contracts.

 

Each of these contract types has a different risk profile. Typically, we assume more risk with fixed-price contracts. Unforeseen events and circumstances can alter the estimate of the costs and potential profit associated with a particular contract. However, these types of contracts offer additional profits when we complete the work for less cost

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than originally estimated. Unit-price and cost reimbursable contracts generally subject us to lower risk. Accordingly, the associated fees are usually lower than fees earned on fixed-price contracts. Under these contracts, our profit may vary if actual costs vary significantly from the negotiated rates.

 

 

Note 5—Fair Value Measurements

 

ASC Topic 820, “Fair Value Measurements and Disclosures”, defines fair value, establishes a framework for measuring fair value in GAAP and requires certain disclosures about fair value measurements.  ASC Topic 820 addresses fair value GAAP for financial assets and financial liabilities that are re-measured and reported at fair value at each reporting period and for non-financial assets and liabilities that are re-measured and reported at fair value on a non-recurring basis.

 

In general, fair values determined by Level 1 inputs use quoted prices (unadjusted) in active markets for identical assets or liabilities. Fair values determined by Level 2 inputs use data points that are observable such as quoted prices, interest rates and yield curves. Fair values determined by Level 3 inputs are “unobservable data points” for the asset or liability and include situations where there is little, if any, market activity for the asset or liability.

 

The following table presents, for each of the fair value hierarchy levels identified under ASC Topic 820, our financial assets and liabilities that are required to be measured at fair value at September 30, 2018 and December 31, 2017 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements at Reporting Date

 

 

    

 

 

    

Significant

    

 

 

 

 

 

Quoted Prices

 

Other

 

Significant

 

 

 

in Active Markets

 

Observable

 

Unobservable

 

 

 

for Identical Assets

 

Inputs

 

Inputs

 

 

    

(Level 1)

    

(Level 2)

    

(Level 3)

 

Assets as of September 30, 2018:

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

60,039

 

$

 —

 

$

 —

 

Interest rate swap

 

 

 —

 

 

18

 

 

 —

 

Liabilities as of September 30, 2018: 

 

 

 

 

 

 

 

 

 

 

None

 

$

 —

 

$

 —

 

$

 —

 

 

 

 

 

 

 

 

 

 

 

 

Assets as of December 31, 2017:

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

170,385

 

$

 —

 

$

 —

 

Liabilities as of December 31, 2017: 

 

 

 

 

 

 

 

 

 

 

Contingent consideration

 

$

 —

 

$

 —

 

$

716

 

 

Other financial instruments not listed in the table consist of accounts receivable, accounts payable and certain accrued liabilities.  These financial instruments generally approximate fair value based on their short-term nature.  The carrying value of our long-term debt approximates fair value based on comparison with current prevailing market rates for loans of similar risks and maturities. 

 

The interest rate swap is measured at fair value using the income approach, which discounts the future net cash settlements expected under the derivative contracts to a present value. These valuations primarily utilize indirectly observable inputs, including contractual terms, interest rates and yield curves observable at commonly quoted intervals. See Note 10 – “Derivative Instruments” for additional information.

 

The following table provides changes to our contingent consideration liability Level 3 fair value measurements during the nine months ended September 30, (in thousands):

 

 

 

 

 

 

 

 

 

 

 

Significant Unobservable Inputs

 

 

 

(Level 3)

 

Contingent Consideration Liability

    

2018

    

2017

 

Beginning balance, January 1,

 

$

716

 

$

 —

 

FGC acquisition

 

 

 —

 

 

1,200

 

Change in fair value of contingent consideration liability during year

 

 

753

 

 

52

 

Payment of earn-out liability to FGC sellers

 

 

(1,469)

 

 

 —

 

Ending balance, September 30, 

 

$

 —

 

$

1,252

 

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On a quarterly basis, we assess the estimated fair value of the contractual obligation to pay the contingent consideration and any changes in estimated fair value are recorded as a non-operating charge in our Statement of Income.  Fluctuations in the fair value of contingent consideration are impacted by two unobservable inputs, management’s estimate of the probability (which has ranged from 33% to 100%) of the acquired company meeting the contractual operating performance target and the estimated discount rate (a rate that approximates our cost of capital). Significant changes in either of those inputs in isolation would result in a different fair value measurement.  Generally, a change in the assumption of the probability of meeting the performance target is accompanied by a directionally similar change in the fair value of contingent consideration liability, whereas a change in assumption of the estimated discount rate is accompanied by a directionally opposite change in the fair value of contingent consideration liability. Upon meeting the target, we reflect the full liability on the balance sheet and record a charge to “Other income (expense), net” for the change in the fair value of the liability from the prior period.

 

The May 2017 acquisition of FGC included an earnout of $1.5 million, contingent upon meeting certain performance targets. The estimated fair value of the contingent consideration on the acquisition date was $1.2 million.  Under ASC 805, we are required to estimate the fair value of contingent consideration based on facts and circumstances that existed as of the acquisition date and remeasure to fair value at each reporting date until the contingency is resolved.  As a result of that remeasurement, we increased the fair value of the contingent consideration in the second quarter of 2018 related to the FGC performance target contemplated in their purchase agreement, and increased the liability by $0.8 million with a corresponding increase in non-operating expense. We paid the full $1.5 million liability in the third quarter of 2018.

 

 

 

Note 6 — Business Combinations

 

2018 Acquisition

 

Acquisition of Willbros Group, Inc.

 

On June 1, 2018, we acquired all of the outstanding common stock of Willbros, a specialty energy infrastructure contractor serving the oil and gas and power industries for approximately $111.0 million, net of cash and restricted cash acquired. The total purchase price was funded through a combination of existing cash balances and borrowings under our revolving credit facility.

 

The tables below represent the purchase consideration and preliminary estimated fair values of the assets acquired and liabilities assumed. Significant changes since our initial estimates reported in the second quarter of 2018 primarily relate to fair value adjustments to our acquired contracts, which resulted in an increase to contract liabilities of $16.7 million. In addition, fair value adjustments to our acquired lease obligations reduced our liabilities assumed by approximately $8.0 million. As a result of these and other adjustments to the initial estimated fair values of the assets acquired and liabilities assumed, goodwill increased by approximately $11.1 million since the second quarter of 2018. Adjustments recorded to the estimated fair values of the assets acquired and liabilities assumed are recognized in the period in which the adjustments are determined and calculated as if the accounting had been completed as of the acquisition date.

 

The final determination of fair value for certain assets and liabilities is subject to further change and will be completed as soon as the information necessary to complete the analysis is obtained. These amounts, which may differ materially from these preliminary estimates, will continue to be refined and will be finalized as soon as possible, but no later than one year from the acquisition date. The primary areas of the preliminary estimates that are not yet finalized relate to property, plant and equipment, contract assets and liabilities, deferred income taxes, uncertain tax positions, and the fair value of certain contractual obligations.

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Purchase consideration (in thousands)

 

 

 

 

Total purchase consideration

 

$

164,758

 

Less cash and restricted cash acquired

 

 

(53,728)

 

Net cash paid

 

 

111,030

 

 

 

 

 

 

 

Preliminary identifiable assets acquired and liabilities assumed (in thousands)

 

 

 

 

Cash and restricted cash

 

$

53,728

 

Accounts receivable

 

 

102,719

 

Contract assets

 

 

30,762

 

Other current assets

 

 

17,914

 

Property, plant and equipment

 

 

31,286

 

Intangible assets:

 

 

 

 

Customer relationships

 

 

47,500

 

Non-compete agreements

 

 

1,600

 

Tradename

 

 

200

 

Deferred income taxes

 

 

27,014

 

Other non-current assets

 

 

2,261

 

Accounts payable and accrued liabilities

 

 

(116,321)

 

Contract liabilities

 

 

(61,004)

 

Other non-current liabilities

 

 

(27,657)

 

Total identifiable net assets

 

 

110,002

 

Goodwill

 

 

54,756

 

Total purchase consideration

 

$

164,758

 

 

We separated the operations of Willbros among two of our segments, and created a new segment for the utility transmission and distribution operations. The utility transmission and distribution operations formed the Transmission segment, the oil and gas operations are included in the Pipeline segment, and the Canadian operations are included in the Power segment. Goodwill associated with the Willbros acquisition principally consists of expected benefits from the expansion of our services into electric utility-focused offerings and the expansion of our geographic presence.  Goodwill also includes the value of the assembled workforce. We allocated $43.5 million of goodwill to the Transmission segment, $7.6 million to the Power segment, and $3.6 million to the Pipeline segment.  Based on the current tax treatment, goodwill is not expected to be deductible for income tax purposes.

 

As part of the Willbros acquisition, we acquired approximately $40.2 million of restricted cash that was pledged by Willbros to secure letters of credit. Subsequent to the acquisition, we issued new letters of credit under our Credit Facility to replace the Willbros letters of credit secured by the restricted cash. As of September 30, 2018, substantially all of the restricted cash had been released.

 

For the three months ended September 30, 2018, Willbros contributed revenue of $175.8 million and gross profit of $18.6 million. For the period June 1, 2018, the acquisition date, to September 30, 2018, Willbros contributed revenue of $236.8 million and gross profit of $25.4 million.

 

Acquisition related costs were $3.8 million and $13.1 million for the three and nine months ended September 30, 2018, respectively, related to the acquisition of Willbros and are included in “Merger and related costs” on the Condensed Consolidated Statements of Income. Such costs primarily consisted of severance and retention bonus costs for certain employees of Willbros, professional fees paid to advisors, and exiting or impairing certain duplicate facilities.

 

2017 Acquisitions

 

Acquisition of Florida Gas Contractors

 

On May 26, 2017, we acquired certain assets of FGC, a utility contractor specializing in underground natural gas infrastructure, for approximately $33.0 million in cash.  In addition, the sellers could receive a contingent earnout

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amount of up to $1.5 million over a one-year period ending May 26, 2018, based on the achievement of certain operating targets.  The estimated fair value of the potential contingent consideration as of the acquisition date was $1.2 million.  FGC operates in the Utilities segment and expands our presence in the Florida and Southeast markets.  The purchase was accounted for using the acquisition method of accounting.  During the fourth quarter of 2017, we finalized the estimate of fair value of the acquired assets of FGC, which included $4.8 million of fixed assets; $3.3 million of working capital; $9.1 million of intangible assets; and $17.0 million of goodwill. In connection with the FGC acquisition, we also paid $3.5 million to acquire certain land and buildings. Intangible assets primarily consist of customer relationships.  Goodwill associated with the FGC acquisition principally consists of expected benefits from providing expertise for our construction efforts in the underground utility business as well as the expansion of our geographic presence.  Goodwill also includes the value of the assembled workforce that FGC provides to us.  Based on the current tax treatment, goodwill will be deductible for income tax purposes over a fifteen-year period.

 

For the three and nine months ended September 30, 2018, FGC contributed revenue of $8.1 million and $24.1 million, respectively, and gross profit of $1.6 million and $6.6 million, respectively. For the three months ended September 30, 2017, FGC contributed revenue of $6.1 million and gross profit of $1.5 million. For the period May 26, 2017, the acquisition date, to September 30, 2017, FGC contributed revenue of $8.3 million and gross profit of $2.0 million.

 

Acquisition of Engineering Assets

 

On May 30, 2017, we acquired certain engineering assets for approximately $2.3 million in cash, which further enhances our ability to provide quality service for engineering and design projects.  The purchase was accounted for using the acquisition method of accounting.  The allocation of the total purchase price consisted of $0.2 million of fixed assets and $2.1 million of intangible assets. Intangible assets primarily consist of customer relationships. The operations of this acquisition were fully integrated into our Power segment operations and no separate financial results were maintained. Therefore, it is impracticable for us to report separately the amounts of revenue and gross profit included in the Condensed Consolidated Statements of Income.

 

Acquisition of Coastal Field Services

 

On June 16, 2017, we acquired certain assets and liabilities of Coastal for approximately $27.5 million.  Coastal provides pipeline construction and maintenance, pipe and vessel coating and insulation, and integrity support services for companies in the oil and gas industry.  Coastal operates in the Pipeline segment and increases our market share in the Gulf Coast energy market.  The purchase was accounted for using the acquisition method of accounting.  During the second quarter of 2018, we finalized the estimate of the fair value of the acquired assets, which included $4.0 million of fixed assets; $4.6 million of working capital; $9.9 million of intangible assets; $9.3 million of goodwill; and $0.3 million of long-term capital leases. Intangible assets primarily consist of customer relationships and tradename. Goodwill associated with the Coastal acquisition principally consists of expected benefits from providing expertise for our expansion of services in the pipeline construction and maintenance business. Goodwill also includes the value of the assembled workforce that Coastal provides to us. Based on the current tax treatment, goodwill will be deductible for income tax purposes over a fifteen-year period.

 

For the three and nine months ended September 30, 2018, Coastal contributed revenue of $2.8 million and $12.0 million, respectively, and gross profit of $0.3 million and $1.3 million, respectively. For the three months ended September 30, 2017, Coastal contributed revenue of $7.6 million and gross profit of $1.1 million. For the period June 16, 2017, the acquisition date, to September 30, 2017, Coastal contributed revenue of $8.6 million and gross profit of $1.5 million.

 

Supplemental Unaudited Pro Forma Information for the three and nine months ended September 30, 2018 and 2017

 

The following pro forma information for the three and nine months ended September 30, 2018 and 2017 presents our results of operations as if the acquisitions of Willbros, FGC, and Coastal had occurred at the beginning of 2017.  The supplemental pro forma information has been adjusted to include:

 

·

the pro forma impact of amortization of intangible assets and depreciation of property, plant and equipment, based on the purchase price allocations;

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·

the pro forma impact of the expense associated with the amortization of the discount for the fair value of the contingent consideration liability associated with the FGC acquisition;

 

·

the pro forma impact of nonrecurring merger and related costs directly attributable to the acquisitions;

 

·

the pro forma impact of interest expense relating to the acquisitions; and

 

·

the pro forma tax effect of both income before income taxes, and the pro forma adjustments, calculated using a tax rate of 28.0% and 40.0% for the three and nine months ended September 30, 2018 and 2017, respectively.

 

The pro forma results are presented for illustrative purposes only and are not necessarily indicative of, or intended to represent, the results that would have been achieved had the various acquisitions been completed on January 1, 2017.  For example, the pro forma results do not reflect any operating efficiencies and associated cost savings that we might have achieved with respect to the acquisitions.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 

 

Nine Months Ended September 30, 

 

 

 

2018

    

2017

    

2018

    

2017

 

 

 

(unaudited)

 

(unaudited)

 

(unaudited)

 

(unaudited)

 

Revenue

 

$

908,902

 

$

849,084

 

$

2,388,020

 

$

2,218,392

 

Income before provision for income taxes

 

$

45,521

 

$

3,487

 

$

61,709

 

$

68,254

 

Net income attributable to Primoris

 

$

32,691

 

$

3,438

 

$

40,676

 

$

41,774

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

51,403