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 March 31, 2019

 

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.)

 

 

 

2300 N. Field Street, Suite 1900

 

 

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 ☒

 

Securities registered pursuant to Section 12(b) of the Act:

 

 

 

 

Title of each class

Trading symbol(s)

Name of each exchange on which registered

Common Stock, $0.0001 par value

PRIM

The Nasdaq Stock Market LLC

 

At May 6, 2019, 50,932,282 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 March 31, 2019 and December 31, 2018 (Unaudited) 

 

3

 

 

 

—Condensed Consolidated Statements of Income for the three months ended March 31, 2019 and 2018 (Unaudited) 

 

4

 

 

 

—Condensed Consolidated Statements of Comprehensive Income for the three months ended March 31, 2019 and 2018 (Unaudited) 

 

5

 

 

 

—Condensed Consolidated Statements of Stockholders’ Equity for the three months ended March 31, 2019 and 2018 (Unaudited) 

 

6

 

 

 

—Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2019 and 2018 (Unaudited) 

 

7

 

 

 

—Notes to Condensed Consolidated Financial Statements (Unaudited) 

 

9

 

 

 

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

 

27

 

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk 

 

38

 

 

 

Item 4. Controls and Procedures 

 

39

 

 

 

Part II. Other Information 

 

 

 

 

 

Item 1. Legal Proceedings 

 

39

 

 

 

Item 1A. Risk Factors 

 

39

 

 

 

Item 6. Exhibits 

 

40

 

 

 

Signatures 

 

41

 

2


 

Table of Contents 

PART I.  FINANCIAL INFORMATION

 

ITEM 1.  FINANCIAL STATEMENTS

 

PRIMORIS SERVICES CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(In Thousands, Except Share Amounts)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

March 31, 

 

 

December 31, 

 

 

    

2019

    

2018

 

ASSETS

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents ($9,213 and $3,127 related to VIEs. See Note 11)

 

$

73,985

 

$

151,063

 

Accounts receivable, net

 

 

397,786

 

 

372,695

 

Contract assets

 

 

366,435

 

 

364,245

 

Prepaid expenses and other current assets

 

 

38,123

 

 

36,444

 

Total current assets

 

 

876,329

 

 

924,447

 

Property and equipment, net

 

 

369,128

 

 

375,884

 

Operating lease assets

 

 

153,168

 

 

 —

 

Deferred tax assets

 

 

1,492

 

 

1,457

 

Intangible assets, net

 

 

78,450

 

 

81,198

 

Goodwill

 

 

207,410

 

 

206,159

 

Other long-term assets

 

 

4,789

 

 

5,002

 

Total assets

 

$

1,690,766

 

$

1,594,147

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

 

$

190,244

 

$

249,217

 

Contract liabilities

 

 

194,094

 

 

189,539

 

Accrued liabilities

 

 

165,923

 

 

117,527

 

Dividends payable

 

 

3,051

 

 

3,043

 

Current portion of long-term debt

 

 

66,872

 

 

62,488

 

Total current liabilities

 

 

620,184

 

 

621,814

 

Long-term debt, net of current portion

 

 

307,273

 

 

305,669

 

Noncurrent operating lease liabilities, net of current portion

 

 

104,039

 

 

 —

 

Deferred tax liabilities

 

 

7,268

 

 

8,166

 

Other long-term liabilities

 

 

41,617

 

 

51,515

 

Total liabilities

 

 

1,080,381

 

 

987,164

 

Commitments and contingencies (See Note 17)

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

 

 

Common stock—$.0001 par value; 90,000,000 shares authorized; 50,842,902 and 51,715,518 issued and outstanding at March 31, 2019 and December 31, 2018

 

 

 5

 

 

 5

 

Additional paid-in capital

 

 

147,208

 

 

144,048

 

Retained earnings

 

 

459,959

 

 

461,075

 

Accumulated other comprehensive loss

 

 

(534)

 

 

(908)

 

Noncontrolling interest

 

 

3,747

 

 

2,763

 

Total stockholders’ equity

 

 

610,385

 

 

606,983

 

Total liabilities and stockholders’ equity

 

$

1,690,766

 

$

1,594,147

 

 

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

 

 

March 31, 

 

 

2019

    

2018

 

Revenue

$

661,558

 

$

504,119

 

Cost of revenue

 

609,098

 

 

459,559

 

Gross profit

 

52,460

 

 

44,560

 

Selling, general and administrative expenses

 

42,931

 

 

36,956

 

Merger and related costs

 

 —

 

 

1,695

 

Operating income

 

9,529

 

 

5,909

 

Other income (expense):

 

 

 

 

 

 

Foreign exchange (loss) gain

 

(185)

 

 

257

 

Other income (expense), net

 

(370)

 

 

(12)

 

Interest income

 

349

 

 

272

 

Interest expense

 

(5,592)

 

 

(1,998)

 

Income before provision for income taxes

 

3,731

 

 

4,428

 

Provision for income taxes

 

(795)

 

 

(212)

 

Net income

$

2,936

 

$

4,216

 

 

 

 

 

 

 

 

Less net income attributable to noncontrolling interests

$

(989)

 

$

(3,528)

 

 

 

 

 

 

 

 

Net income attributable to Primoris

$

1,947

 

$

688

 

 

 

 

 

 

 

 

Dividends per common share

$

0.060

 

$

0.060

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

Basic

$

0.04

 

$

0.01

 

Diluted

$

0.04

 

$

0.01

 

Weighted average common shares outstanding:

 

 

 

 

 

 

Basic

 

50,770

 

 

51,479

 

Diluted

 

51,188

 

 

51,747

 

 

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

 

 

March 31, 

 

 

2019

    

2018

 

Net income

$

2,936

 

$

4,216

 

Other comprehensive income, net of tax:

 

 

 

 

 

 

Foreign currency translation adjustments

 

374

 

 

 —

 

Comprehensive income

 

3,310

 

 

4,216

 

Less net income attributable to noncontrolling interests

 

(989)

 

 

(3,528)

 

Comprehensive income attributable to Primoris

$

2,321

 

$

688

 

 

See Accompanying Notes to Condensed Consolidated Financial Statements

 

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Table of Contents 

 

 

 

PRIMORIS SERVICES CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In Thousands, Except Share Amounts)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

Other

 

Non

 

Total

 

 

 

Common Stock

 

Paid-in

 

Retained

 

Comprehensive

 

Controlling

 

Stockholders’

 

 

    

Shares

    

Amount

    

Capital

    

Earnings

0

Loss

    

Interest

    

Equity

 

Balance, December 31, 2018

 

50,715,518

 

$

 5

 

$

144,048

 

$

461,075

 

$

(908)

 

$

2,763

 

$

606,983

 

Net income

 

 —

 

 

 —

 

 

 —

 

 

1,947

 

 

 —

 

 

989

 

 

2,936

 

Foreign currency translation adjustments, net of tax

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

374

 

 

 —

 

 

374

 

Issuance of shares to employees and directors

 

127,384

 

 

 —

 

 

2,661

 

 

 —

 

 

 —

 

 

 —

 

 

2,661

 

Amortization of Restricted Stock Units

 

 —

 

 

 —

 

 

487

 

 

 —

 

 

 —

 

 

 —

 

 

487

 

Dividend equivalent Units accrued - Restricted Stock Units

 

 —

 

 

 —

 

 

12

 

 

(12)

 

 

 —

 

 

 —

 

 

 —

 

Distribution of non-controlling entities

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(5)

 

 

(5)

 

Dividends declared

 

 —

 

 

 —

 

 

 —

 

 

(3,051)

 

 

 —

 

 

 —

 

 

(3,051)

 

Balance, March 31, 2019

 

50,842,902

 

$

 5

 

$

147,208

 

$

459,959

 

$

(534)

 

$

3,747

 

$

610,385

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

Other

 

Non

 

Total

 

 

 

Common Stock

 

Paid-in

 

Retained

 

Comprehensive

 

Controlling

 

Stockholders’

 

 

    

Shares

    

Amount

    

Capital

    

Earnings

 

Loss

    

Interest

0

Equity

 

Balance, December 31, 2017

 

51,448,753

 

$

 5

 

$

160,502

 

$

395,961

 

$

 —

 

$

5,715

 

$

562,183

 

Net income

 

 —

 

 

 —

 

 

 —

 

 

688

 

 

 —

 

 

3,528

 

 

4,216

 

Issuance of shares to employees and directors

 

81,819

 

 

 —

 

 

1,974

 

 

 —

 

 

 —

 

 

 —

 

 

1,974

 

Amortization of Restricted Stock Units

 

 —

 

 

 —

 

 

215

 

 

 —

 

 

 —

 

 

 —

 

 

215

 

Dividend equivalent Units accrued - Restricted Stock Units

 

 —

 

 

 —

 

 

10

 

 

(10)

 

 

 —

 

 

 —

 

 

 —

 

Dividends declared

 

 —

 

 

 —

 

 

 —

 

 

(3,092)

 

 

 —

 

 

 —

 

 

(3,092)

 

Balance, March 31, 2018

 

51,530,572

 

$

 5

 

$

162,701

 

$

393,547

 

$

 —

 

$

9,243

 

$

565,496

 

 

 

 

 

 

 

 

 

 

 

 

 

See Accompanying Notes to Condensed Consolidated Financial Statements

 

 

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PRIMORIS SERVICES CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

 

    

2019

    

2018

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net income

 

$

2,936

 

$

4,216

 

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

 

 

 

 

 

 

 

Depreciation

 

 

18,952

 

 

14,368

 

Amortization of intangible assets

 

 

2,748

 

 

2,424

 

Stock-based compensation expense

 

 

487

 

 

215

 

Gain on sale of property and equipment

 

 

(2,217)

 

 

(1,104)

 

Other non-cash items

 

 

80

 

 

40

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

 

(24,722)

 

 

30,669

 

Contract assets

 

 

(2,328)

 

 

2,970

 

Other current assets

 

 

(2,231)

 

 

(6,356)

 

Other long-term assets

 

 

182

 

 

(499)

 

Accounts payable

 

 

(59,198)

 

 

(9,987)

 

Contract liabilities

 

 

2,590

 

 

(31,721)

 

Operating lease assets and liabilities, net

 

 

(1,447)

 

 

 —

 

Accrued liabilities

 

 

(9,663)

 

 

(1,806)

 

Other long-term liabilities

 

 

1,735

 

 

231

 

Net cash (used in) provided by operating activities

 

 

(72,096)

 

 

3,660

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Purchase of property and equipment

 

 

(14,377)

 

 

(19,125)

 

Issuance of a note receivable

 

 

 —

 

 

(10,000)

 

Proceeds from sale of property and equipment

 

 

4,398

 

 

3,734

 

Net cash used in investing activities

 

 

(9,979)

 

 

(25,391)

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Borrowings under revolving line of credit

 

 

40,000

 

 

 —

 

Payments on revolving line of credit

 

 

(40,000)

 

 

 —

 

Proceeds from issuance of long-term debt

 

 

23,105

 

 

 —

 

Repayment of long-term debt

 

 

(17,170)

 

 

(12,870)

 

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

 

 

1,804

 

 

1,498

 

Dividends paid

 

 

(3,043)

 

 

(3,087)

 

Other

 

 

(26)

 

 

(23)

 

Net cash provided by (used in) financing activities

 

 

4,670

 

 

(14,482)

 

Effect of exchange rate changes on cash and cash equivalents

 

 

327

 

 

 —

 

Net change in cash and cash equivalents

 

 

(77,078)

 

 

(36,213)

 

Cash and cash equivalents at beginning of the period

 

 

151,063

 

 

170,385

 

Cash and cash equivalents at end of the period

 

$

73,985

 

$

134,172

 

 

See Accompanying Notes to Condensed Consolidated Financial Statements

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SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

 

    

2019

    

2018

 

 

 

(Unaudited)

 

Cash paid for interest

 

$

4,065

 

$

1,965

 

Cash paid for income taxes, net of refunds received

 

$

(707)

 

$

88

 

Leased assets obtained in exchange for new operating leases

 

$

8,847

 

$

 —

 

 

SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

 

    

2019

    

2018

 

 

 

(Unaudited)

 

Dividends declared and not yet paid

 

$

3,051

 

$

3,092

 

 

 

See Accompanying Notes to Condensed Consolidated Financial Statements

 

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Table of Contents 

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. We are incorporated in the State of Delaware, and our corporate headquarters are located at 2300 N. Field Street, Suite 1900, Dallas, Texas 75201. Unless specifically noted otherwise, as used throughout these consolidated financial statements, “Primoris”, “the Company”, “we”, “our”, “us” or “its” refers to the business, operations and financial results of the Company and its 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, 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 Group, Inc. (“Willbros”) for approximately $110.6 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 5— “Business Combinations”.

 

Joint Ventures —  We own a 50% interest in the Carlsbad Power Constructors joint venture (“Carlsbad”), which is engineering and constructing a gas-fired power generation facility located in Southern California, and its operations are included as part of the Power segment. As a result of determining that we are the primary beneficiary of the variable interest entity (“VIE”), the results of the Carlsbad joint venture are consolidated in our financial statements. The project was substantially complete as of December 31, 2018. 

 

We owned a 50% interest in the “ARB Inc. & B&M Engineering Co.” joint venture (“Wilmington”), which engineered and constructed a gas-fired power generation facility in Southern California, and its operations were included as part of the Power segment. As a result of determining that we were the primary beneficiary of the VIE, the results of the Wilmington joint venture were consolidated in our financial statements. The project has been completed, the project warranty period expired, and dissolution of the joint venture was completed in the first quarter of 2019.

 

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 month periods ended March 31, 2019 and 2018 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, filed on February 28, 2019, which contains our audited consolidated financial statements for the year ended December 31, 2018, have been omitted. 

 

This First Quarter 2019 Report on Form 10-Q should be read in conjunction 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. 

 

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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 that is approximately 50% of total revenue; however, the group that comprises the top ten customers varies from year to year.

 

During the three months ended March 31, 2019, revenue generated by the top ten customers were approximately $324.7 million, which represented 49.1% of total revenue during the period. During the three months ended March 31, 2019, an electric utility customer represented 9.0%, and a midstream energy customer represented 6.3% of total revenue, respectively.

 

During the three months ended March 31, 2018, revenues generated by the top ten customers were approximately $261.7 million, which represented 51.9% of total revenues during the period. During the three months ended March 31, 2018, a California utility customer represented 9.3% of total revenues, and a state department of transportation customer represented 9.2% of total revenues.

 

At March 31, 2019, approximately 9.7% of our accounts receivable were due from one customer, and that customer provided 9.0% of our revenue for the three months ended March 31, 2019.

 

On January 29, 2019, one of our utility customers filed for reorganization under Chapter 11 of the U.S. Bankruptcy Code. As of March 31, 2019, the utility customer comprised approximately 9.0% of our total accounts receivable.  In addition to accounts receivable, there is approximately $36.0 million in unbilled revenue, net as of March 31, 2019. For the three months ended March 31, 2019, the customer accounted for approximately 5.5% of our total revenue. A portion of the accounts receivable balance is past due, but we do not believe a reserve for the accounts receivable and unbilled revenue is appropriate at this time. However, we will closely monitor our current and future potential exposure.

 

Note 3—Recent Accounting Pronouncements

 

Recently adopted accounting pronouncements

 

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)”, with several clarifying updates. ASU 2016-02 requires 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 also requires 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 requires a modified retrospective transition method where a company applies the new lease standard at (i) the beginning of the earliest period presented in the financial statements, or  (ii) the adoption date and recognizes a cumulative effect adjustment to the opening balance of retained earnings. We adopted the new standard as of January 1, 2019 using the modified retrospective transition method and elected to apply the new lease standard at the adoption date.  See Note 16 — “Leases” for further details.

 

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, with early adoption permitted. We adopted the standard on January 1, 2019, and it did not have an impact on our financial position, results of operations, or cash flows.

 

Recently issued accounting pronouncements not yet adopted

 

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.

 

 

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Note 4—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 March 31, 2019 and December 31, 2018 (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 March 31, 2019:

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

73,985

 

$

 —

 

$

 —

 

Liabilities as of March 31, 2019: 

 

 

 

 

 

 

 

 

 

 

Interest rate swap

 

$

 —

 

$

4,276

 

$

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets as of December 31, 2018:

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

151,063

 

$

 —

 

$

 —

 

Liabilities as of December 31, 2018: 

 

 

 

 

 

 

 

 

 

 

Interest rate swap

 

$

 —

 

$

2,829

 

$

 —

 

 

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.

 

 

 

Note 5 — 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 $110.6 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

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$21.7 million. In addition, fair value adjustments to our acquired insurance liabilities and lease obligations reduced our liabilities assumed by approximately $9.3 million and $8.0 million, respectively. 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 $10.3 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.

 

 

 

 

 

 

Purchase consideration (in thousands)

 

 

 

 

Total purchase consideration

 

$

164,758

 

Less cash and restricted cash acquired

 

 

(54,138)

 

Net cash paid

 

 

110,620

 

 

 

 

 

 

 

 

Preliminary identifiable assets acquired and liabilities assumed (in thousands)

 

 

 

 

Cash and restricted cash

 

$

54,138

 

Accounts receivable

 

 

102,758

 

Contract assets

 

 

30,762

 

Other current assets

 

 

18,712

 

Property, plant and equipment

 

 

30,522

 

Intangible assets:

 

 

 

 

Customer relationships

 

 

47,500

 

Tradename

 

 

200

 

Deferred income taxes

 

 

24,915

 

Other non-current assets

 

 

2,261

 

Accounts payable and accrued liabilities

 

 

(114,141)

 

Contract liabilities

 

 

(66,037)

 

Other non-current liabilities

 

 

(20,868)

 

Total identifiable net assets

 

 

110,722

 

Goodwill

 

 

54,036

 

Total purchase consideration

 

$

164,758

 

 

We separated the operations of Willbros among two of our existing segments, and created a new segment for the utility transmission and distribution operations called 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 $51.6 million of goodwill to the Transmission segment, $1.6 million to the Power segment, and $0.8 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 March 31, 2019, substantially all of the restricted cash had been released.

 

For the three months ended March 31, 2019, Willbros contributed revenue of $157.8 million and gross profit of $7.6 million.

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Acquisition related costs were $1.7 million for the three months ended March 31, 2018, 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 professional fees paid to advisors.

 

Supplemental Unaudited Pro Forma Information for the three months ended March 31, 2018

 

The following pro forma information for the three months ended March 31, 2018 presents our results of operations as if the acquisitions of Willbros had occurred at the beginning of 2018.  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;

 

·

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

 

·

the pro forma impact of interest expense relating to the acquisition; 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% for the three months ended March 31, 2018.

 

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 Willbros acquisition been completed on January 1, 2018.  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 acquisition.

 

 

 

 

 

 

Three Months Ended

 

 

March 31, 2018

 

 

(unaudited)

 

Revenue

$

705,099

 

Loss before provision for income taxes

$

(2,120)

 

Net loss attributable to Primoris

$

(4,027)

 

 

 

 

 

Weighted average common shares outstanding:

 

 

 

Basic

 

51,479

 

Diluted

 

51,747

 

 

 

 

 

Loss per share:

 

 

 

Basic

$

(0.08)

 

Diluted

$

(0.08)

 

 

 

 

Note 6—Revenue

 

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. ASC 606 defines a performance obligation as a contractual promise to transfer a distinct good or service to a customer. A 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

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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 March 31, 2019, we had $1.65 billion of remaining performance obligations. We expect to recognize approximately 64% of our remaining performance obligations as revenue during the next four quarters and substantially all of the remaining balance by the first quarter of 2021.

 

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 months ended March 31, 2019, revenue recognized from performance obligations satisfied in previous periods was $6.5 million. 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 recognized over time, the accrued loss provision is adjusted so that the gross profit for the contract remains zero in future periods.

 

At March 31, 2019, we had approximately $73.5 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

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of business. Approximately $68.8 million of the contract modifications had been recognized as revenue on a cumulative catch-up basis through March 31, 2019.

 

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, 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):

 

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31, 

 

 

    

2019

    

2018

 

Unbilled revenue

 

$

257,058

 

$

249,577

 

Retention receivable

 

 

89,034

 

 

88,953

 

Contract materials (not yet installed)

 

 

20,343

 

 

25,715

 

 

 

$

366,435

 

$

364,245

 

 

Contract assets increased by $2.2 million compared to December 31, 2018 due primarily to higher unbilled revenue, partially offset by a reduction in contract materials net yet installed.

 

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

 

Contract liabilities consist of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31, 

 

 

    

2019

    

2018

 

Deferred revenue

 

$

188,146

 

$

182,232

 

Accrued loss provision

 

 

5,948

 

 

7,307

 

 

 

$

194,094

 

$

189,539

 

 

Contract liabilities increased by $4.6 million compared to December 31, 2018 primarily due to an increase in deferred revenue, partially offset by a reduction in the accrued loss provision.

 

Revenue recognized for the three months ended March 31, 2019, that was included in the contract liability balance at December 31, 2018 was approximately $123.8 million.

 

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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 March 31, 2019

 

Segment

    

MSA

    

Non-MSA

    

Total

 

Power

 

$

49,195

 

$

96,188

 

$

145,383

 

Pipeline

 

 

21,849

 

 

112,965

 

 

134,814

 

Utilities

 

 

119,462

 

 

26,744

 

 

146,206

 

Transmission

 

 

101,723

 

 

16,720

 

 

118,443

 

Civil

 

 

650

 

 

116,062

 

 

116,712

 

Total

 

$

292,879

 

$

368,679

 

$

661,558

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended March 31, 2018

 

Segment

    

MSA

    

Non-MSA

    

Total

 

Power

 

$

19,398

 

$

147,157

 

$

166,555

 

Pipeline

 

 

7,280

 

 

50,303

 

 

57,583

 

Utilities

 

 

119,767

 

 

46,943

 

 

166,710

 

Transmission

 

 

 —

 

 

 —

 

 

 —

 

Civil

 

 

 —

 

 

113,271

 

 

113,271

 

Total

 

$

146,445

 

$

357,674

 

$

504,119

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended March 31, 2019

 

Segment

    

Fixed-price

    

Unit-price

    

Cost reimbursable (1)

    

Total

 

Power

 

$

75,143

 

$

6,613

 

$

63,627

 

$

145,383

 

Pipeline

 

 

17,227

 

 

374

 

 

117,213

 

 

134,814

 

Utilities

 

 

22,767

 

 

67,878

 

 

55,561

 

 

146,206

 

Transmission

 

 

8,463

 

 

105,841

 

 

4,139

 

 

118,443

 

Civil

 

 

22,685

 

 

78,494

 

 

15,533

 

 

116,712

 

Total

 

$

146,285

 

$

259,200

 

$

256,073

 

$

661,558

 


(1)

Includes time and material and cost reimbursable plus fee contracts.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended March 31, 2018

 

Segment

    

Fixed-price

    

Unit-price

    

Cost reimbursable (1)

    

Total

 

Power

 

$

116,655

 

$

11,112

 

$

38,788

 

$

166,555

 

Pipeline

 

 

12,520

 

 

18,645

 

 

26,418

 

 

57,583

 

Utilities

 

 

64,064

 

 

66,751

 

 

35,895

 

 

166,710

 

Transmission

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Civil

 

 

9,643

 

 

87,080

 

 

16,548