Primoris Services Corporation
Primoris Services Corp (Form: 10-Q, Received: 11/08/2011 10:01:44)

Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

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

 

For the quarterly period ended September 30, 2011

 

OR

 

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

 

For the transition period from                    to                 .

 

Commission file number 0001-34145

 

Primoris Services Corporation

(Exact name of registrant as specified in its charter)

 

Delaware
(State or Other Jurisdiction of
Incorporation or Organization)

 

20-4743916
(I.R.S. Employer
Identification No.)

 

2100 McKinney Avenue, Suite 1500
Dallas, Texas

(Address of Principal Executive Offices)

 

75201
(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 x  No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes x No  o

 

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

 

Large accelerated filer  o

 

Accelerated filer  x

 

 

 

Non-accelerated filer  o

 

Smaller reporting company  o

Do not check if a smaller reporting company.

 

 

 

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

 

At November 7, 2011, 51,059,132 shares of the registrant’s common stock 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, 2011 and December 31, 2010

 

3

 

 

 

—Condensed Consolidated Statements of Income for the three months and nine months ended September 30, 2011 and 2010

 

4

 

 

 

— Condensed Consolidated Statements of Cash Flows for the three months and nine months ended September 30, 2011 and 2010

 

5

 

 

 

—Notes to Condensed Consolidated Financial Statements

 

7

 

 

 

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

 

20

 

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

31

 

 

 

Item 4. Controls and Procedures

 

31

 

 

 

Part II. Other Information

 

 

 

 

 

Item 1. Legal Proceedings

 

33

 

 

 

Item 1A. Risk Factors

 

33

 

 

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

33

 

 

 

Item 3. Defaults Upon Senior Securities

 

33

 

 

 

Item 4. (Removed and Reserved)

 

33

 

 

 

Item 5. Other Information

 

33

 

 

 

Item 6. Exhibits

 

33

 

 

 

Signatures

 

34

 

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)

 

 

 

September 30,
2011

 

December 31,
2010

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

95,744

 

$

115,437

 

Short term investments

 

23,000

 

26,000

 

Customer retention deposits and restricted cash

 

21,369

 

12,518

 

Accounts receivable, net

 

157,924

 

208,145

 

Costs and estimated earnings in excess of billings

 

60,474

 

17,275

 

Inventory

 

32,444

 

25,599

 

Deferred tax assets

 

10,397

 

9,533

 

Prepaid expenses and other current assets

 

7,632

 

12,925

 

Total current assets

 

408,984

 

427,432

 

Property and equipment, net

 

123,646

 

123,167

 

Investment in non-consolidated entities

 

17,051

 

18,805

 

Intangible assets, net

 

33,048

 

40,633

 

Goodwill

 

94,179

 

94,179

 

Total assets

 

$

676,908

 

$

704,216

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

84,953

 

$

89,484

 

Billings in excess of costs and estimated earnings

 

145,554

 

205,268

 

Accrued expenses and other current liabilities

 

71,381

 

55,126

 

Dividends payable

 

1,532

 

1,234

 

Current portion of capital leases

 

4,537

 

4,286

 

Current portion of long-term debt

 

9,658

 

9,623

 

Current portion of subordinated debt

 

14,931

 

15,833

 

Current portion of contingent earnout liabilities

 

3,450

 

 

Liabilities of discontinued operations

 

733

 

733

 

Total current liabilities

 

336,729

 

381,587

 

Long-term capital leases, net of current portion

 

7,499

 

7,354

 

Long-term debt, net of current portion

 

30,648

 

38,428

 

Long-term subordinated debt, net of current portion

 

11,216

 

27,378

 

Deferred tax liabilities

 

15,864

 

12,500

 

Contingent earnout liabilities

 

9,097

 

24,591

 

Other long-term liabilities

 

1,862

 

4,147

 

Total liabilities

 

412,915

 

495,985

 

Commitments and contingencies

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

Common stock—$.0001 par value, 90,000,000 shares authorized, 51,059,132 and 49,359,600 issued and outstanding at September 30, 2011 and December 31, 2010

 

5

 

5

 

Additional paid-in capital

 

150,003

 

136,245

 

Retained earnings

 

113,985

 

71,981

 

Total stockholders’ equity

 

263,993

 

208,231

 

Total liabilities and stockholders’ equity

 

$

676,908

 

$

704,216

 

 

See Accompanying Notes to Condensed Consolidated Financial Statements

 

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Table of Contents

 

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,

 

 

 

2011

 

2010

 

2011

 

2010

 

Revenues

 

$

 375,483

 

$

 230,357

 

$

 1,087,084

 

$

 608,526

 

Cost of revenues

 

323,362

 

202,477

 

952,927

 

529,537

 

Gross profit

 

52,121

 

27,880

 

134,157

 

78,989

 

Selling, general and administrative expenses

 

20,103

 

14,580

 

60,425

 

43,849

 

Operating income

 

32,018

 

13,300

 

73,732

 

35,140

 

Other income (expense):

 

 

 

 

 

 

 

 

 

Income from non-consolidated entities

 

2,079

 

1,366

 

7,305

 

4,090

 

Foreign exchange gain (loss)

 

(214

)

80

 

(250

)

266

 

Other expense

 

(314

)

(333

)

(917

)

(964

)

Interest income

 

39

 

151

 

297

 

484

 

Interest expense

 

(1,516

)

(1,345

)

(4,240

)

(3,872

)

 

 

 

 

 

 

 

 

 

 

Income before provision for income taxes

 

32,092

 

13,219

 

75,927

 

35,144

 

Provision for income taxes

 

(12,744

)

(5,642

)

(29,839

)

(13,782

)

Net income

 

$

 19,348

 

$

 7,577

 

$

 46,088

 

$

 21,362

 

 

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

 

 

Basic

 

$

 0.38

 

$

 0.17

 

$

 0.91

 

$

 0.53

 

Diluted

 

$

 0.38

 

$

 0.17

 

$

 0.90

 

$

 0.47

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

51,054

 

44,887

 

50,596

 

40,499

 

Diluted

 

51,054

 

45,528

 

51,085

 

45,486

 

 

See Accompanying Notes to Condensed Consolidated Financial Statements

 

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Table of Contents

 

PRIMORIS SERVICES CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)

(Unaudited)

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2011

 

2010

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

 46,088

 

$

 21,362

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Depreciation

 

17,838

 

12,575

 

Amortization of intangible assets

 

7,585

 

4,291

 

Loss (gain) on sale of property and equipment

 

191

 

(1,352

)

Income from non-consolidated entities

 

(7,305

)

(4,090

)

Non-consolidated entity distributions

 

9,059

 

8,480

 

Net deferred tax (assets) liabilities

 

2,500

 

(1,598

)

Contingent earnout liabilities

 

2,756

 

964

 

Changes in assets and liabilities:

 

 

 

 

 

Customer retention deposits and restricted cash

 

(8,851

)

(2,333

)

Accounts receivable

 

50,221

 

(40,489

)

Costs and estimated earnings in excess of billings

 

(43,199

)

(11,921

)

Inventory, prepaid expenses and other current assets

 

(1,552

)

(4,693

)

Accounts payable

 

(4,531

)

14,246

 

Billings in excess of costs and estimated earnings

 

(59,714

)

8,276

 

Accrued expenses and other current liabilities

 

16,255

 

2,418

 

Other long-term liabilities

 

(2,285

)

3,985

 

Net cash provided by operating activities

 

25,056

 

10,121

 

Cash flows from investing activities:

 

 

 

 

 

Purchase of property and equipment

 

(16,903

)

(17,779

)

Proceeds from sale of property and equipment

 

2,373

 

2,306

 

Investment in non-consolidated entities

 

 

(18,065

)

Sale of short-term investments

 

39,000

 

48,058

 

Purchase of short-term investments

 

(36,000

)

(44,000

)

Net cash used in investing activities

 

(11,530

)

(29,480

)

Cash flows from financing activities:

 

 

 

 

 

Proceeds from issuance of long-term debt

 

2,500

 

20,000

 

Repayment of capital leases

 

(3,582

)

(2,853

)

Repayment of long-term debt

 

(10,245

)

(7,290

)

Repayment of subordinated debt

 

(17,064

)

(10,384

)

Proceeds from issuance of common stock

 

988

 

 

Proceeds from exercise of warrants for the issuance of common stock

 

 

17,822

 

Repurchase of warrants

 

 

(277

)

Purchase of Unit Purchase Option

 

(2,030

)

 

Dividends paid

 

(3,786

)

(3,229

)

Cash distributions to James shareholders

 

 

(1,966

)

Net cash provided by (used in) financing activities

 

(33,219

)

11,823

 

Cash flows from discontinued operations:

 

 

 

 

 

Operating activities

 

 

(874

)

Net cash used in discontinued operations

 

 

(874

)

Net change in cash and cash equivalents

 

(19,693

)

(8,410

)

Cash and cash equivalents at beginning of the period

 

115,437

 

90,004

 

Cash and cash equivalents at end of the period

 

$

 95,744

 

$

 81,594

 

 

See Accompanying Notes to Condensed Consolidated Financial Statements

 

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Table of Contents

 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2011

 

2010

 

 

 

(Unaudited)

 

Cash paid during the period for:

 

 

 

 

 

Interest

 

$

3,647

 

$

3,872

 

Income taxes

 

$

21,038

 

$

15,323

 

 

SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2011

 

2010

 

 

 

(Unaudited)

 

Non-cash activities:

 

 

 

 

 

Obligations incurred for the acquisition of property and equipment

 

$

3,978

 

$

 

Accrued dividends declared

 

$

1,532

 

$

1,173

 

 

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 Per Share Amounts)

(Unaudited)

 

Note 1—Business Activity

 

Organization and operations Primoris Services Corporation and its wholly-owned subsidiaries ARB, Inc. (“ARB”), ARB Structures, Inc., All Day Electric Company, Inc. (a 50% owned entity in 2010 and 100% owned entity in 2011), OnQuest, Inc., Born Heaters Canada, ULC, Cardinal Contractors, Inc., GML Coatings, LLC, Stellaris, LLC, Rockford Corporation (“Rockford”), Alaska Continental Pipeline, Inc. (formerly a division of Rockford), James Construction Group LLC (“JCG”), and Cardinal Mechanical, L.P. (incorporated as a division of JCG in April 2011), collectively, are engaged in various construction and product engineering activities. The Company’s underground and directional drilling operations install, replace and repair natural gas, petroleum, telecommunications and water pipeline systems. The Company’s industrial, civil and engineering operations build and provide maintenance services to industrial facilities including power plants, petrochemical facilities, and other processing plants, and construct multi-level parking structures, engage in the construction of highways, bridges and other environmental construction activities. The Company is incorporated in the State of Delaware and in 2011 moved its corporate headquarters from Lake Forest, California to 2100 McKinney Avenue, Suite 1500, Dallas, Texas 75201.

 

On November 8, 2010, the Company entered into a Stock Purchase Agreement (the “Rockford Agreement”) to acquire all of the outstanding shares of privately held Rockford Corporation (“Rockford”).  Upon completion of the transaction on November 12, 2010, Rockford became a wholly owned subsidiary of Primoris.  Based in Hillsboro (Portland), Oregon, Rockford specializes in the construction of large diameter natural gas and liquid pipelines and related facilities.

 

Unless specifically noted otherwise, as used throughout these condensed consolidated financial statements, “Primoris”, or the “Company”, “we”, “our”, “us” or “its” refers to the business, operations and financial results of the Company and its wholly-owned subsidiaries.

 

Note 2—Basis of Presentation

 

Interim Consolidated Financial Statements The interim condensed consolidated financial statements for the three-month and nine-month periods ended September 30, 2011 and 2010 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 the Company’s latest audited consolidated financial statements, have been omitted. This Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2011 (the “Third Quarter 2011 Report”) should be read in concert with the Company’s Annual Report on Form 10-K, filed on March 16, 2011, which contains the Company’s audited consolidated financial statements for the year ended December 31, 2010.

 

The interim financial information for the three-month and nine-month periods ended September 30, 2011 and 2010 is unaudited and has been prepared on the same basis as the audited consolidated financial statements. However, the financial statements contained in this Third Quarter 2011 Report do not include all of the information and disclosures required by accounting principles generally accepted in the United States of America (“GAAP”) for audited financial statements. In the opinion of management, the unaudited information includes all adjustments (consisting of normal recurring adjustments) necessary for the fair presentation of the interim financial information.  Certain amounts in prior periods have been reclassified to conform to the present period financial statement presentation.

 

Revenue recognition The Company typically structures contracts as unit-price, time and material, fixed-price or cost reimbursable plus fee. Revenue is recognized on the cost-on-total-cost percentage-of-completion method for fixed price contracts.  In the percentage-of-completion method, estimated contract income and resulting revenue is calculated based on the total costs incurred to date as a percentage of total estimated costs. Total estimated costs, and thus contract revenues 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. If an estimate of total contract cost indicates a loss on a contract, the projected loss is recognized in full at the time of the estimate.

 

The caption “Costs and estimated earnings in excess of billings ” represents the excess of contract revenues recognized under the percentage-of-completion method over billings to date. For those contracts in which billings exceed contract revenues recognized to date, the excesses are included in the caption “Billings in excess of costs and estimated earnings ”.

 

Revenues on cost-plus and time and materials contracts are recognized as the related work is completed.

 

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Table of Contents

 

In accordance with applicable terms of construction contracts, certain retainage amounts may be withheld by customers until completion and acceptance of the project. Final payments of the majority of such amounts are expected to be received in the following operating cycle.

 

Customer Concentration — The Company operates in multiple industry segments encompassing the construction of commercial, industrial and public works infrastructure assets throughout primarily the United States. Typically, the top ten customers in any one calendar year generate revenues in excess of 50% of total revenues and frequently consist of a different group of customers in each year.

 

During the three and nine months ended September 30, 2011, revenues generated by Rockford under the Ruby contract were $48.3 million and $264.7 million, respectively, which represented 12.9% and 24.3%, respectively, of total revenues during the periods. The Ruby contract is part of a large project for the construction of a natural gas pipeline from Wyoming to Oregon. The contract is a cost reimbursable plus a fixed fee arrangement and was substantially complete by the end of the third quarter 2011.  Additionally, work for the Louisiana Department of Transportation generated $66.4 million and $191.3 million for the three and nine months ending September 30, 2011, respectively, which represented 17.7% and 17.6% of total revenues for the respective periods.

 

Inventory — Inventory consists of uninstalled contract materials and expendable construction equipment that will be used in construction projects.  Inventory is valued at the lower of cost, using first-in, first-out method, or market.

 

Note 3—Recent Accounting Pronouncements

 

Fair Value Disclosures

 

In May 2011, the FASB issued ASU No. 2011-04, Fair Value Measurement: Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS , which provides amendments to FASB ASC Topic 820, Fair Value Measurement .  The objective of ASU 2011-04 is to create common fair value measurement and disclosure requirements between GAAP and International Financial Reporting Standards (“IFRS”).  The amendments clarify existing fair value measurement and disclosure requirements and make changes to particular principles or requirements for measuring or disclosing information about fair value measurements.   ASU 2011-04 is effective for interim and annual periods beginning after December 15, 2011.  The adoption of this standard is not expected to have an impact on the Company’s consolidated financial statements but may result in additional disclosures.

 

Goodwill Impairment Testing

 

In December 2010, the FASB issued ASU 2010-28,  Intangibles - Goodwill and Other (Topic 350): When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts (“ASU 2010-28”). ASU 2010-28 modifies Step 1 of the annual goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, if it is more likely than not that goodwill impairment exists, an entity is required to perform Step 2 of the goodwill impairment test. In determining whether it is more likely than not that goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating existence of an impairment. ASU 2010-28 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2010. The Company adopted this standard on January 1, 2011, which did not result in a material impact on our financial statements.

 

In September 2011, the FASB issued ASU 2011-08, Intangibles — Goodwill and Other (Topic 350): Testing Goodwill or Impairment (“ASU 2011-08”).  ASU 2011-08 provides an option to assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount.  If an entity determines that the fair value is not less than its carrying amount, then it is not necessary to perform the two-step impairment test.  ASU 2011-08 is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011, with early adoption permitted.  The Company will determine whether to adopt this pronouncement during the fourth quarter 2011.  The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements.

 

Comprehensive Income

 

In June 2011, the FASB issued ASU No. 2011-05, Comprehensive Income: Presentation of Comprehensive Income , which provides amendments to FASB ASC Topic 220, Comprehensive Income .   ASU 2011-05 requires an entity to present the total of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements.  ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of equity.  ASU 2011-05 is effective for interim and annual periods beginning after December 15, 2011 and should be applied retrospectively.  The adoption of this standard is not expected to have an impact on the Company’s consolidated financial statements.

 

Multiemployer Retirement Plans

 

In September 2011, the FASB issued ASU No. 2011-09, Compensation — Retirement Benefits — Multiemployer Plans (Subtopic 715-80) Disclosures about an Employer’s Participation in a Multiemployer Plan” , which provides amendments to FASB ASC Topic 715, Compensation — Retirement Benefits (ASU 2011-09) .  ASU 2011-09 requires that employers with multiemployer pension plans and multiemployer other postretirement benefit plans provide additional quantitative and qualitative disclosures.  The disclosures include (1) the significant multiemployer plan names and identifying numbers; (2) the level of the Company’s participation and contributions to the listed plans and whether the contributions represent more than 5% of the plan’s total contributions; (3) the financial health, funded status and changes or surcharges imposed on the Company by the plan; (4) the nature of the Company’s commitment to the plan, including expiration dates of collective-bargaining agreements and whether minimum contributions are to be made to the plans.  If public information on a plan is not available, additional disclosures are required.  ASU 2011-09 is effective for annual periods for fiscal years ending after December 15, 2011.  The amendment should be applied retrospectively for all prior periods presented.  The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements.

 

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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 use quoted prices (unadjusted) in active markets for identical assets or liabilities. Fair values determined by Level 2 inputs use observable data points 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 uses the fair value hierarchy levels identified under ASC Topic 820 to present the Company’s financial assets that are required to be measured at fair value at September 30, 2011 and December 31, 2010:

 

 

 

 

 

Fair Value Measurements at Reporting Date

 

 

 

Amount
Recorded
on Balance
Sheet

 

Quoted Prices
in Active Markets
for Identical Assets
(Level 1)

 

Significant
Other
Observable
Inputs
(Level 2)

 

Significant
Unobservable
Inputs
(Level 3)

 

Assets at September 30, 2011:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

  95,744

 

$

 95,744

 

 

 

Short-term investments

 

$

  23,000

 

$

  23,000

 

 

 

Assets at December 31, 2010:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

  115,437

 

$

  115,437

 

 

 

Short-term investments

 

$

  26,000

 

$

  26,000

 

 

 

 

Short-term investments consist primarily of Certificates of Deposit (“CDs”) purchased through the CDARS (Certificate of Deposit Account Registry Service) program in order to provide Federal Deposit Insurance Corporation backing of the CDs.

 

In addition to the assets listed in the table, other financial instruments of the Company consist of accounts receivable, accounts payable and certain accrued liabilities.  These financial instruments generally approximate fair value based on the short-term nature of these instruments.  The carrying value of the Company’s long-term debt approximates fair value based on comparison with current prevailing market rates for loans of similar risks and maturities.

 

Note 5—Accounts Receivable

 

The following is a summary of the Company’s accounts receivable at the dates shown:

 

 

 

September 30,
2011

 

December 31,
2010

 

 

 

 

 

 

 

Contracts receivable, net of allowance for doubtful accounts of $273 for September 30, 2011 and $200 for December 31, 2010

 

$

139,148

 

$

185,299

 

Retention - to be paid at project completion

 

17,557

 

20,057

 

 

 

156,705

 

205,356

 

Due from affiliates

 

 

200

 

Other accounts receivable

 

1,219

 

2,589

 

 

 

$

157,924

 

$

208,145

 

 

Amounts “due from affiliates” primarily relate to amounts due from related parties (See Note 7 “Equity Method Investments ” and Note 13 “Related Party Transactions ”) for the performance of construction contracts. Contract revenues earned from related parties were approximately $991 and $79 for the three months, and $5,431 and $1,367 for the nine months ended September 30, 2011 and 2010, respectively.

 

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Table of Contents

 

Note 6—Costs and Estimated Earnings on Uncompleted Contracts

 

Costs and estimated earnings on uncompleted contracts consist of the following at:

 

 

 

September 30,
2011

 

December 31,
2010

 

 

 

 

 

 

 

Costs incurred on uncompleted contracts

 

$

2,637,397

 

$

2,339,551

 

Provision for estimated loss on uncompleted contracts

 

2,290

 

577

 

Gross profit recognized

 

259,884

 

245,974

 

 

 

2,899,571

 

2,586,102

 

Less: billings to date

 

(2,984,651

)

(2,774,095

)

 

 

$

(85,080

)

$

(187,993

)

 

This net amount is included in the accompanying consolidated balance sheet under the following captions:

 

 

 

September 30,
2011

 

December 31,
2010

 

 

 

 

 

 

 

Costs and estimated earnings in excess of billings

 

$

60,474

 

$

17,275

 

Billings in excess of costs and estimated earnings

 

(145,554

)

(205,268

)

 

 

$

(85,080

)

$

(187,993

)

 

Note 7—Equity Method Investments

 

WesPac Energy LLC

 

On July 1, 2010, the Company acquired a 50% membership interest in WesPac Energy LLC, a Nevada limited liability company (“WesPac”). Pursuant to the terms of the Membership Interest Purchase Agreement, dated July 1, 2010, by and among the Company, WesPac and Kealine Holdings, LLC (“Kealine”), a Nevada limited liability company and the sole limited liability company member of WesPac prior to the closing, we acquired 50% of the issued and outstanding limited liability company membership interests of WesPac for total cash consideration of $18,065. Kealine holds the remaining 50% membership interest in WesPac.  We have no future obligation to make any additional investments into WesPac. All key investment, management and operating decisions of WesPac will require unanimous approval from a management committee equally represented by Kealine and us.

 

Founded in 1998 and based in Irvine, California, WesPac develops pipeline and terminal projects in the United States, Canada and Mexico, by building, expanding or enhancing infrastructure in the areas of pipeline transportation and storage efficiency enhancement. To date, WesPac has successfully developed, financed and brought to completion several such projects.  The Company believes the ownership interest in WesPac will broaden our exposure to a variety of pipeline, terminal and energy-related infrastructure opportunities across North America.

 

The following is a summary of the WesPac financial position and results as of and for the periods ended:

 

 

 

September 30,
2011

 

December 31,
2010

 

 

 

 

 

 

 

Wespac Energy, LLC

 

 

 

 

 

Balance sheet data

 

 

 

 

 

Assets

 

$

24,550

 

$

30,161

 

Liabilities

 

419

 

4,248

 

Net assets

 

$

24,131

 

$

25,913

 

Company’s equity investment in venture

 

$

17,023

 

$

17,915

 

 

 

 

Three months ended September 30,

 

Nine months ended September 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

 

 

 

 

 

 

 

 

 

 

Earnings data:

 

 

 

 

 

 

 

 

 

Revenue

 

$

3,862

 

$

 

$

3,862

 

$

 

Expenses

 

$

5,575

 

$

174

 

$

5,644

 

$

174

 

Earnings before taxes

 

$

(1,713

)

$

(174

)

$

(1,782

)

$

(174

)

 

During the three months ended September 30, 2011, WesPac determined that certain projects no longer had value to the joint venture and expensed the $1.8 million impaired costs incurred to date.

 

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Table of Contents

 

St.—Bernard Levee Partners

 

The Company purchased a 30% interest in St. — Bernard Levee Partners (“Bernard”) in the fourth quarter 2009 for $300 and accounts for this investment under the equity method. Bernard engages in construction activities in Louisiana.  Bernard distributed $8,942 and $15,990 to the Company during the nine months ended September 30, 2011 and 2010, respectively, as calculated under the joint venture agreement.  The following is a summary of the financial position and results as of and for the periods ended:

 

 

 

September 30,
2011

 

December 31,
2010

 

 

 

 

 

 

 

St. — Bernard Levee Partners

 

 

 

 

 

Balance sheet data

 

 

 

 

 

Assets

 

$

10,698

 

$

21,981

 

Liabilities

 

10,610

 

17,291

 

Net assets

 

$

88

 

$

4,690

 

Company’s equity investment in venture

 

$

26

 

$

878

 

 

 

 

Three months ended September 30,

 

Nine months ended September 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

 

 

 

 

 

 

 

 

 

 

Earnings data:

 

 

 

 

 

 

 

 

 

Revenue

 

$

10,737

 

$

51,603

 

$

66,447

 

$

159,625

 

Expenses

 

$

4,342

 

$

45,214

 

$

37,775

 

$

140,819

 

Earnings before taxes

 

$

6,395

 

$

6,389

 

$

28,672

 

$

18,806

 

Company’s equity in earnings

 

$

2,901

 

$

1,445

 

$

8,090

 

$

4,450

 

 

Otay Mesa Power Partners

 

During 2007, the Company established a joint venture, Otay Mesa Power Partners, for the sole purpose of constructing a power plant near San Diego, California.  The project was completed in 2010, and a distribution of $106 was received in March 2011.

 

Note 8 — Business Combinations

 

The November 12, 2010 acquisition of Rockford was accounted for using the acquisition method of accounting. The fair value of the consideration transferred to selling shareholders was $79,623.

 

As part of the acquisition, the Company agreed to issue additional cash and common stock to the sellers, contingent upon Rockford meeting certain operating performance targets for the fourth quarter 2010 and for the periods ending December 31, 2011 and 2012.  The 2010 earnout target for the fourth quarter 2010 was achieved and in March 2011, the Company issued 494,095 shares of common stock to the sellers.  The Company determined that the full 2011 earnout target was achieved during the nine months ended September 30, 2011 and has reflected the full value of the $6,900 liability on the balance sheet as of September 30, 2011.  As discussed in Note 12 — “Contingent Earnout Liabilities” , the estimated fair value of the remaining 2012 contingency was $5,647 and $4,076 at September 30, 2011 and December 31, 2010, respectively.

 

There have been no changes in the preliminary estimates of the fair value of the acquired assets and liabilities of Rockford during the nine months ended September 30, 2011.  The Company is continuing its evaluation of the fair value of the construction equipment acquired and expects to complete the final determination of the estimated fair value of the acquisition prior to the end of 2011.

 

Supplemental Unaudited Pro Forma Information for the three and nine months ended September 30, 2010

 

The following pro forma information for the three and nine months ended September 30, 2010 presents the results of operations as if the Rockford acquisition had occurred at the beginning of 2010. 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 allocation;

 

·                                           the pro forma impact of interest expense on the subordinated $16.7 million promissory note, and assumes no early pay down of the promissory note;

 

·                                           the pro forma impact of the expense associated with the amortization of the discount for the fair value of the contingent consideration for potential earnout liabilities that may be achieved in 2011 and 2012;

 

·                                           the pro forma tax effect of both the income before income taxes for Rockford and the Rockford pro forma adjustments, calculated using a tax rate of 39.8% for the three and nine months ended September 30, 2010; and

 

·                                           the pro forma weighted average shares outstanding include 1,605,709 shares of common stock issued as part of the acquisition, plus the 494,095 shares of stock earned as a result of achieving the fourth quarter 2010 earnout target.

 

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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 transaction been completed on January 1, 2010.  The pro forma results do not reflect any operating efficiencies and associated cost savings that the Company may have achieved with respect to the combined companies.

 

 

 

Three months ended
September 30, 2010

 

Nine months ended
September 30, 2010

 

 

 

 

 

 

 

Revenues

 

$

279,414

 

$

688,535

 

Income before provision for income taxes

 

$

12,961

 

$

29,905

 

Net income

 

$

7,421

 

$

18,208

 

 

 

 

 

 

 

Weighted average common shares outstanding:

 

 

 

 

 

Basic — (1)

 

46,987

 

42,599

 

Diluted — (1)

 

47,628

 

47,586

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

Basic

 

$

0.16

 

$

0.43

 

Diluted

 

$

0.16

 

$

0.38

 

 


(1)                                   The adjustment to weighted average shares outstanding excludes the potential impact of any shares of common stock that may be issued contingent upon meeting certain financial targets at the end of 2011 and 2012.

 

Note 9—Intangible Assets

 

At September 30, 2011 and December 31, 2010, intangible assets totaled $33,048 and $40,633, respectively, net of amortization.  The table summarizes the intangible asset categories, amounts and the average amortization periods, which are generally on a straight-line basis, as follows:

 

 

 

Amortization

 

 

 

September 30,

 

December 31,

 

 

 

Period

 

 

 

2011

 

2010

 

Tradename

 

5 to 10 years

 

 

 

$

19,362

 

$

21,078

 

Non-compete agreements

 

5 years

 

 

 

$

5,061

 

$

6,155

 

Customer relationships

 

5 to 10 years

 

 

 

$

7,741

 

$

8,428

 

Backlog

 

0.75 to 2.25 years

 

 

 

$

884

 

$

4,972

 

 

 

 

 

Total

 

$

33,048

 

$

40,633

 

 

Amortization expense of intangible assets was $2,053 and $1,413 for the three months ended September 30, 2011 and 2010, respectively, and amortization expense for the nine months ended September 30, 2011 and 2010 was $7,586 and $4,291, respectively.  Estimated future amortization expense for intangible assets is as follows:

 

For the Years Ending
December 31,

 

Estimated
Intangible
Amortization
Expense

 

2011 (remaining three months)

 

$

1,665

 

2012

 

5,033

 

2013

 

4,655

 

2014

 

4,620

 

2015

 

3,545

 

Thereafter

 

13,530

 

 

 

$

33,048

 

 

Note 10—Accounts Payable and Accrued Liabilities

 

At September 30, 2011 and December 31, 2010, accounts payable includes retention amounts of approximately $13,786 and $14,382, respectively.  These amounts due to subcontractors have been retained pending contract completion and customer acceptance of jobs.

 

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Table of Contents

 

The following is a summary of accrued expenses and other current liabilities at:

 

 

 

September 30,
2011

 

December 31,
2010

 

 

 

 

 

 

 

Payroll and related employee benefits

 

$

35,913

 

$

31,282

 

Insurance, including self-insurance reserves

 

21,196

 

15,992

 

Provision for estimated losses on uncompleted contracts

 

2,290

 

577

 

Corporate income taxes and other taxes

 

6,186

 

1,781

 

Accrued overhead cost

 

1,611

 

1,409

 

Other

 

4,185

 

4,085

 

 

 

$

71,381

 

$

55,126

 

 

Note 11—Credit Arrangements

 

As of September 30, 2011, the Company has a Loan and Security Agreement (the “Agreement”) with The PrivateBank and Trust Company (the “Lender”) for a revolving line of credit in the total aggregate amount of $35,000.  The maturity dates, as amended, are as follows:

 

·                    a revolving loan in the amount of $20,000 (the “Revolving Loan A”), with a maturity date of October 26, 2014; and

·                    a revolving loan in the amount of $15,000 (the “Revolving Loan B”), with a maturity date of October 25, 2012.

 

Under the Agreement, the Lender agreed to issue letters of credit of up to $15,000 under Revolving Loan A.  As of September 30, 2011 and December 31, 2010, total commercial letters of credit outstanding under Revolving Loan A totaled $3,074 and $4,339, respectively.  Other than the commercial letters of credit, there were no borrowings under these two lines of credit during the period January 1, 2010 through September 2011.  At September 30, 2011, available borrowing capacity under Revolving Loan A was $16,926 and $15,000 under Revolving Loan B.

 

Any principal amount of each of Revolving Loan A and Revolving Loan B will bear interest at either: (i) LIBOR plus an applicable margin as specified in the Agreement, or (ii) the prime rate announced by the Lender plus an applicable margin as specified in the Agreement. The principal amount of any loan bearing interest at LIBOR plus an applicable margin may not be prepaid without being subject to certain penalties. There is no prepayment penalty for any loan bearing interest at the prime rate announced by the Lender plus an applicable margin.

 

All loans made by the Lender under the Agreement are secured by our assets, including, among others, our cash, inventory, goods, equipment (excluding equipment subject to certain permitted liens) and accounts receivable. Certain of our subsidiaries have executed joint and several guaranties in favor of the Lender for all amounts under the Agreement.  The Agreement and the line of credit facilities contain various restrictive covenants, including, among others, restrictions on investments, capital expenditures, minimum tangible net worth and debt service coverage requirements.  The Company was in compliance with the bank covenants as of September 30, 2011.

 

The Company has a credit facility with a Canadian bank for purposes of issuing commercial letters of credit in Canada, for an amount of up to $10,000 in Canadian dollars. The credit facility has an annual renewal and provides for the issuance of commercial letters of credit for a term of up to five years. The facility provides for an annual fee of 1% for any issued and outstanding commercial letters of credit. Letters of credit can be denominated in either Canadian or U.S. dollars. As of September 30, 2011 and December 31, 2010, commercial letters of credit outstanding under this credit facility totaled $4,069 and $4,994 in Canadian dollars, respectively.  As of September 30, 2011, the available borrowing capacity under this credit facility was $5,931 in Canadian dollars.

 

The Company entered into an agreement with Bank of the West for the purpose of issuing commercial letters of credit, whereby the Company agrees to maintain a cash balance at the bank in an amount equal to the full amount of the letters of credit. As of September 30, 2011, the amount of letters of credit with a maturity of twelve months and the related restricted cash amounted to $3,823.

 

At the time of the JCG acquisition on December 18, 2009, the Company assumed outstanding letters of credit of $5,600 under an amended credit agreement that expired on February 28, 2010. Upon termination of the credit agreement, the Company made a cash deposit as replacement for the letters of credit.

 

Subordinated Promissory Note — Rockford .   In connection with the acquisition of Rockford, the Company executed an unsecured promissory note (the “Rockford Note”) on November 12, 2010 in favor of the sellers of Rockford with an initial principal amount of $16,712.  The principal amount of the Rockford Note was divided into two portions.  Approximately $9,669 of the Rockford Note was designated as “Note A” and approximately $7,043 of the note was designated as “Note B.”  Note B was paid in full on March 10, 2011.

 

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Table of Contents

 

Note A is due and payable on October 31, 2013 and bears interest at different rates until maturity, averaging 6.67% over its life.  During the first 12 months, Note A bore interest at a rate equal to 5%.  For months 13 through 24, it bears interest at a rate equal to 7%. Thereafter and until maturity, Note A bears interest at a rate equal to 8%.  Payments of principal and interest are payable monthly in an amount of $269 principal plus interest over 36 months.  At September 30, 2011, a total of $6,983 was outstanding.

 

Note A may be prepaid in whole or in part at any time.  If we complete an equity financing while Note A is outstanding, we have agreed to use 15% of the net proceeds in excess of $10 million to prepay a portion or all of Note A.  In addition, we have agreed to use 33% of any cash proceeds raised in connection with incurrence of any indebtedness (other than under a bank line of credit or to finance operating expenses, equipment and capital expenditures), to prepay a portion or all of Note A.

 

While any amount is outstanding under Note A, we have agreed to not take certain actions without the prior written consent of the Rockford Note holders’ representative.  We have agreed not to: (i) incur any obligations for seller financing associated with the acquisition of a business without subordinating it to the Rockford Note, (ii) make any payment on outstanding indebtedness that has been subordinated to the Rockford Note, (iii) make any distribution or declare or pay any dividends (except for regular, quarterly dividends), and (iv) consummate any transaction that would require prepayment under the Rockford Note, if we are not permitted to do so by our senior lender and/or surety companies.

 

The sellers have entered into subordination agreements with our senior lender, bonding agency and the holders of the JCG Note, pursuant to which the Rockford Note is subordinated to amounts owed to our senior lender, bonding agencies and the holders of the JCG Note.

 

Subordinated Promissory Note — JCG .   In connection with the acquisition of JCG, the Company executed an unsecured promissory note on December 18, 2009 in favor of the sellers of JCG with an initial principal amount of $53,500. The JCG Note is due and payable on December 15, 2014 and bears interest at differing rates until maturity.  For the first 9 months of the term of the note, the JCG Note bore interest at an annual rate equal to 5%.  For months 10 through 18, the JCG Note bore interest at an annual rate of 7%.  For months 19 until the maturity date, the JCG Note bears interest at an annual rate of 8%.  Payments of principal and interest will be made on an amortizing basis over 60 months.  The JCG Note is subordinated to amounts owed to our commercial banks for lines of credit and to our bonding agencies.  At September 30, 2011, a total of $19,164 was outstanding.

 

The JCG Note may be prepaid in whole or in part at any time.  If we complete an equity financing while the JCG Note is outstanding, we have agreed to use the first $10 million of the net proceeds, plus 75% of the net proceeds in excess of $10 million, to prepay a portion or all of the JCG Note. In addition, we have agreed to use 33% of any cash proceeds raised in connection with incurrence of any indebtedness (other than under a bank line of credit or to finance operating expenses, equipment and capital expenditures), to prepay a portion or all of the JCG Note.  As long as more than $10,000 is outstanding, we have agreed to not take certain actions without the prior written consent of the JCG Note holders, including, among others, purchase, acquire, redeem or retire any shares of our common stock.

 

Note 12 — Contingent Earnout Liabilities

 

Rockford Earnout Consideration

 

As part of the Rockford acquisition in November 2010, the Company agreed to issue additional cash and common stock to the sellers, contingent upon Rockford meeting certain operating performance targets for certain periods.

 

2010 Earnout Period

 

The earnout target established for the fourth quarter 2010 was achieved in March 2011. The liability of $4,600 was recorded as of December 31, 2010. In March 2011, the Company issued 494,095 shares of common stock to the sellers, reduced the liability and increased Stockholders’ Equity.

 

2011 Earnout Period

 

If Rockford’s financial performance as measured by income before interest, taxes, depreciation and amortization (“EBITDA”), as defined in the purchase agreement, for the fifteen month period from October 1, 2010 through December 31, 2011 is at least $34.0 million, we have agreed to pay $2.3 million in cash and issue an additional number of shares of our common stock equal to $2.3 million divided by the average closing price of our common stock, as reported on NASDAQ, for the 20 business days prior to December 31, 2011 (a total of $4.6 million). Alternatively, if Rockford’s financial performance for the fifteen month period from October 1, 2010 and through December 31, 2011 is at least $38.0 million, we have agreed to pay a cash amount of $3.45 million and issue a number of shares of our common stock equal to $3.45 million divided by the average closing price of our common stock, as reported on NASDAQ, for the 20 business days prior to December 31, 2011 (a total of $6.9 million).

 

The Company determined that the full 2011 earnout target was achieved during the nine months ended September 30, 2011 and has reflected the full value of the $6,900 liability on the balance sheet as of September 30, 2011.  As a result, a charge of $650 was recorded in Selling, General and Administration expense in September 2011.

 

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Table of Contents

 

2012 Earnout Period

 

If Rockford’s financial performance measured by EBITDA, as defined in the purchase agreement, for calendar year 2012 is at least $14.0 million, we have agreed to pay $6.9 million in cash.

 

The estimated fair value of the contingent consideration for the earnout liabilities were as follows:

 

 

 

September 30,
2011

 

December 31,
2010

 

 

 

 

 

 

 

2010 earnout

 

$

 

$

4,600

 

2011 earnout

 

6,900

 

5,715

 

2012 earnout

 

5,647

 

4,076

 

 

 

$

12,547

 

$

14,391

 

 

The $2,756 increase in the estimated fair value of the 2011 and 2012 liability for the nine months ended September 30, 2011 resulted in a $1,840 non-cash charge to Selling, General and Administrative expenses (“SG&A”) and $916 non-cash charge to Other Expense.  The charge to SG&A reflects the operational-related change in the fair value of the liability and the Other Expense charge reflects the time value impact on the fair value amounts.

 

JCG Earnout Consideration

 

As part of the JCG acquisition in December 2009, the Company agreed to issue an additional number of shares of common stock equal to $10.2 million if JCG’s EBITDA, as defined in the purchase agreement, was equal to or greater than $35 million for the year ending December 31, 2010. The earnout contingency was achieved and a liability of $10.2 million was recorded as of December 31, 2010. In March 2011, the Company issued 1,095,602 shares of common stock to the sellers, eliminated the liability and increased Stockholders’ Equity.

 

Note 13—Related Party Transactions

 

Primoris has entered into various transactions with Stockdale Investment Group, Inc. (“SIGI”).  Brian Pratt, our Chief Executive Officer, President and Chairman of the Board of Directors and our largest stockholder, also holds a majority interest in SIGI and is the chairman and a director of SIGI.  John M. Perisich, our Senior Vice President and General Counsel, is secretary of SIGI.

 

In 2010, the Company entered into a $6.0 million agreement to construct a wastewater facility for Pluris, LLC, a private company in which Brian Pratt holds the majority interest. During the nine months ending September 30, 2011, the Company recognized revenues of $5,430. The construction is expected to be completed by December 31, 2011. The transaction was reviewed and approved in advance by the Audit Committee of the Board of Directors of the Company.

 

Primoris leases properties located in Bakersfield, Pittsburg and San Dimas, California, and in Pasadena, Texas from SIGI.  The leases expire from October 2015 through June 2021 and provide for annual cost inflation factors. During the nine months ended September 30, 2011 and 2010, the Company paid $681, and $668, respectively, in lease payments to SIGI for the use of these properties.

 

Primoris leases a property from Roger Newnham, one of our stockholders and a manager of our subsidiary Born Heaters Canada. The property is located in Calgary, Canada. During the nine months ended September 30, 2011 and 2010, Primoris paid $210 and $188, respectively, in lease payments to Mr. Newnham for the use of this property. The term of the lease is through December 31, 2014.

 

As a result of the November 2010 acquisition of Rockford, the Company entered into a lease for property from Lemmie Rockford, one of our stockholders.  The property is located in Toledo, Washington.  During the nine months ended September 30, 2011, Primoris paid $68 in lease payments to Mr. Rockford for the use of this property.  The lease expires on January 15, 2015.

 

Note 14—Income Taxes

 

To determine its quarterly provision for income taxes, the Company uses an estimated annual effective tax rate which is based on expected annual income, statutory tax rates and tax planning opportunities available in the various jurisdictions in which the Company is subject to tax. Certain significant or unusual items are separately recognized in the quarter in which they occur and can be a source of variability in the effective tax rate from quarter to quarter.  The Company recognizes interest and penalties related to uncertain tax positions, if any, as an income tax expense.

 

The Company’s effective income tax rate for the three months and nine months ended September 30, 2011 was 39.7% and 39.3%, respectively.  These rates differ from the U.S. federal statutory rate of 35% primarily as the result of the impact of state taxes offset by the benefit of the “Domestic Production Activity Deduction”.

 

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Table of Contents

 

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences of temporary differences between the financial reporting basis and tax basis of the Company’s assets and liabilities. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.  The completed filing of the 2010 federal and state tax returns resulted in a reclassification of deferred tax and tax liability amounts as of September 30, 2011.

 

The Internal Revenue Service (“IRS”) is presently conducting an examination of our federal income tax returns for 2008 and 2009.  The tax years 2008 through 2010 remain open to examination by the IRS.  The statute of limitations of state and foreign jurisdictions vary generally between 3 to 5 years.  Accordingly, the tax years 2006 through 2010 generally remain open to examination by the other major taxing jurisdictions in which the Company operates.

 

Note 15—Dividends and Earnings Per Share

 

The Company has paid or declared cash dividends during 2011 as follows:

 

·                                     On November 5, 2010, the Company declared a cash dividend of $0.025 per common share, payable to stockholders of record on December 31, 2010.  The dividend, totaling $1,234 was paid on January 15, 2011.

·                                     On March 10, 2011, the Company declared a cash dividend of $0.025 per common share, payable to stockholders of record on March 31, 2011.  The dividend, totaling $1,276 was paid on April 15, 2011.

·                                     On May 6, 2011, the Company declared a cash dividend of $0.025 per common share, payable to stockholders of record on June 30, 2011.  The dividend, totaling $1,276 was paid on July 15, 2011.

·                                     On August 4, 2011, the Company declared a cash dividend of $0.03 per common share, payable to stockholders of record on September 30, 2011.  The dividend, totaling $1,532 was paid on October 14, 2011.

 

The table below presents the computation of basic and diluted earnings per share for the three and nine months ended September 30, 2011 and 2010:

 

 

 

Three months
ended September 30,

 

Nine months
ended September 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

Numerator:

 

 

 

 

 

 

 

 

 

Net income

 

$

19,348

 

$

7,577

 

$

46,088

 

$

21,362

 

Denominator:

 

 

 

 

 

 

 

 

 

Weighted average shares for computation of basic earnings per share

 

51,054

 

44,887

 

50,596

 

40,499

 

Dilutive effect of warrants and units (1)

 

 

641

 

52

 

1,136

 

Dilutive effect of contingently issuable shares (2)

 

 

 

437

 

793

 

Dilutive effect of preferred stock (3)

 

 

 

 

3,058

 

Weighted average shares for computation of diluted earnings per share

 

51,054

 

45,528

 

51,085

 

45,486

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

$

0.38

 

$

0.17

 

$

0.91

 

$

0.53

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share

 

$

0.38

 

$

0.17

 

$

0.90

 

$

0.47

 

 


(1)           Represents the dilutive effect of common stock and warrants available under the Unit Purchase Option (“UPO”).  See Note 16 — “ Stockholders’ Equity ”.

 

(2)           Represents the dilutive effect of the following contingency arrangements which were met at the end of each year, but for which shares of common stock were not issued until the following year:

 

a)                                                   A total of 2,499,975 shares of the Company’s common stock issued on March 25, 2010 for attainment of certain financial targets per the merger agreement between Rhapsody and Former Primoris.

 

b)                                                  The effect of 74,906 shares of common stock issued in March 2010 for attainment of certain financial targets per the merger agreement between Cravens and the Company.  The seller and the Company entered into an agreement during 2010 terminating all future earnout contingencies.

 

c)                                                   A total of 1,095,646 shares issued to JCG’s sellers in March 2011 as a result of JCG meeting its defined performance target per the merger agreement between JCG and the Company.

 

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d)                                                  A total of 494,095 shares issued to Rockford’s former stockholders in March 2011 as a result of Rockford meeting a defined performance target in 2010.  The purchase agreement provided for additional performance targets for 2011 and 2012.  The Company determined that the 2011 target was met as of September 30, 2011, which provided for a cash payment and a stock payout.  The stock component of the earnout is based on the Company’s average closing stock price (as defined in the purchase agreement) during December 2011 and the number of shares cannot yet be calculated.  The 2012 contingent earnout will be paid in cash if the target is met.

 

(3)           Represents the dilutive effect of the conversion of preferred stock into 8,185,278 shares of common stock.  The conversion was approved at a special meeting of the stockholders held on April 12, 2010.

 

Note 16—Stockholders’ Equity

 

Common stock — In March 2011, a total of 1,095,646 shares of common stock were issued to the JCG sellers as a result of JCG meeting a defined performance target in 2010.  A total of 494,095 shares were issued to Rockford’s former stockholders in March 2011 as a result of Rockford meeting a defined performance target in 2010.

 

The Rockford purchase agreement provides for an additional 2011 performance target which includes the potential issuance of common stock.  As of September 30, 2011, the Company determined that the 2011 target was met, which provides for a cash payment of $3.45 million and the issuance of shares of the Company’s common stock valued at $3.45 million.  Since the stock component of the earnout is based on the average closing price of the Company’s common stock, as reported on NASDAQ, for the 20 business days prior to December 31, 2011, the number of shares to be issued cannot yet be calculated.

 

As part of the quarterly compensation of the non-employee members of the Board of Directors, the Company issued 14,825 shares of common stock on August 2, 2011.

 

In March 2011, the Company issued 94,966 shares of stock purchased by our employees under the Primoris Long-term Retention Plan.

 

Unit Purchase Option s — At the time of our initial public offering in October 2006, our underwriter, Early Bird Capital, purchased a total of 450,000 Unit Purchase Options (“UPO”).  Each UPO provided the holder the right to purchase one share of common stock and one warrant.  The UPO expired on October 2, 2011, and the terms of the UPO allowed for a cashless conversion of one share of common stock for $8.80 per share. On June 29, 2011, the underwriter exercised all of their 450,000 UPO on a cashless basis. Using the previous day’s closing price of $13.31 per share, the exercise would have resulted in the issuance of 152,480 shares of common stock. In lieu of issuing these shares, the parties negotiated a cash payment of approximately $2.0 million, which was made on June 30, 2011 and recorded as a reduction of additional paid-in capital on the balance sheet.

 

Note 17—Commitments and Contingencies

 

Leases The Company leases certain property and equipment under non-cancellable operating leases which expire at various dates through 2019. The leases require the Company to pay all taxes, insurance, maintenance and utilities and are classified as operating leases in accordance with ASC Topic 840 “Leases”.

 

Total lease expense during the three and nine months ended September 30, 2011 amounted to $2,237 and $6,858, respectively, including amounts paid to related parties of $325 and $959, respectively.  Total lease expense during the three and nine months ended September 30, 2010 amounted to $2,475 and $7,411, including amounts paid to related parties of $281 and $856, respectively.

 

Letters of credit At September 30, 2011, the Company had letters of credit outstanding of $10,838 and at December 31, 2010, the Company had letters of credit outstanding of $9,306.  The outstanding amounts include the U.S. dollar equivalents for letters of credit issued in Canadian dollars.

 

Self-Insurance— The Company’s insurance policies for general, auto and workers’ compensation are subject to self-insured retentions or deductible levels ranging from $100 to $250 per occurrence.  The Company also has employee health care benefit plans for most employees not subject to collective bargaining agreements.  The health care benefit plans are subject to a specific stop loss of $150 per individual per year.

 

Losses under the insurance programs are accrued based on management’s estimates of the ultimate liability for claims reported and an estimate of claims incurred but not reported.  These insurance liabilities are difficult to assess and estimate due to unknown factors, including the severity of an injury and the extent of damage.  The accruals are based upon known facts and historical trends, and management, with the assistance of third-party actuaries, believes such accruals are adequate.

 

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Table of Contents

 

Litigation— The Company is subject to claims and legal proceedings arising out of its business. Management believes that the Company has meritorious defenses to such claims. Although management is unable to ascertain the ultimate outcome of such matters, after review and consultation with outside counsel and taking into consideration relevant insurance coverage and related deductibles, management believes that the outcome of these matters will not have a materially adverse effect on the consolidated financial position of the Company.

 

Bonding— At September 30, 2011 and December 31, 2010, the Company had bid and completion bonds issued and outstanding totaling approximately $1,035,036 and $849,288, respectively.

 

Note 18—Reportable Operating Segments

 

The Company provides services in three operating segments:  the East Construction Services segment, the West Construction Services segment and the Engineering segment.

 

The East Construction Services segment incorporates the JCG construction business, located primarily in the southeastern United States.  The segment also includes the businesses located in the Gulf Coast region of the United States, including Cardinal Mechanical, L.P., which was recently incorporated as a division of JCG, and the Cardinal Contractors, Inc. business.

 

The West Construction Services segment includes the construction services performed by entities located in the western United States, primarily in the states of California and Oregon.  Entities included in West Construction Services are ARB, ARB Structures, Inc., Stellaris, LLC, and Rockford for 2011.

 

The Engineering segment includes the results of OnQuest, Inc. and Born Heaters Canada, ULC.

 

In the following tables, all intersegment revenues and gross profit, which were immaterial, have been eliminated.

 

Segment Revenues

 

Revenue by segment for the three months ended September 30, 2011 and 2010 were as follows:

 

 

 

For the three months ended September 30,

 

 

 

2011

 

2010

 

Segment

 

Revenue

 

% of
Segment
Revenue

 

Revenue

 

% of
Segment
Revenue

 

 

 

 

 

 

 

 

 

 

 

East Construction Services

 

$

130,682

 

34.8

%

$

126,876

 

55.0

%

West Construction Services

 

230,904

 

61.5

%

86,594

 

37.6

%

Engineering

 

13,897

 

3.7

%

16,887

 

7.4

%

Total

 

$

375,483

 

100.0

%

$

230,357

 

100.0

%

 

Revenue by segment for the nine months ended September 30, 2011 and 2010 were as follows:

 

 

 

For the nine months ended September 30,

 

 

 

2011

 

2010

 

Segment

 

Revenue

 

% of
Segment
Revenue

 

Revenue

 

% of
Segment
Revenue

 

 

 

 

 

 

 

 

 

 

 

East Construction Services

 

$

403,299

 

37.1

%

$

351,583

 

57.8

%

West Construction Services

 

647,640

 

59.6

%

216,302

 

35.5

%

Engineering

 

36,145

 

3.3

%

40,641

 

6.7

%

Total

 

$

1,087,084

 

100.0

%

$

608,526

 

100.0

%

 

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Table of Contents

 

Segment Gross Profit

 

Gross profit by segment for the three months ended September 30, 2011 and 2010 were as follows:

 

 

 

For the three months ended September 30,

 

 

 

2011

 

2010

 

Segment

 

Gross
Profit

 

% of
Segment
Revenue

 

Gross
Profit

 

% of
Segment
Revenue

 

 

 

 

 

 

 

 

 

 

 

East Construction Services

 

$

15,320

 

11.7

%

$

12,889

 

10.1

%

West Construction Services

 

34,377

 

14.9

%

12,689

 

14.7

%

Engineering

 

2,424

 

17.4

%

2,302

 

13.6

%

Total

 

$

52,121

 

13.9

%

$

27,880

 

12.1

%

 

Gross profit by segment for the nine months ended September 30, 2011 and 2010 were as follows:

 

 

 

For the nine months ended September 30,

 

 

 

2011

 

2010

 

Segment

 

Gross
Profit

 

% of
Segment
Revenue

 

Gross
Profit

 

% of
Segment
Revenue

 

 

 

 

 

 

 

 

 

 

 

East Construction Services

 

$

45,658

 

11.3

%

$

36,103

 

10.3

%

West Construction Services

 

80,828

 

12.5

%

35,081

 

16.2

%

Engineering

 

7,671

 

21.2

%

7,805

 

19.2

%

Total

 

$

134,157

 

12.3

%

$

78,989

 

13.0

%

 

Segment Goodwill

 

The following presents the amount of goodwill recorded by segment at September 30, 2011 and at December 31, 2010.

 

Segment

 

September 30,
2011

 

December 31,
2010

 

 

 

 

 

 

 

East Construction Services

 

$

59,659

 

$

59,659

 

West Construction Services

 

32,079

 

32,079

 

Engineering

 

2,441

 

2,441

 

Total

 

$

94,179

 

$

94,179

 

 

Geographic Region — Revenues and Total Assets

 

Revenue and total assets by geographic area for the nine months ended September 30, 2011 and 2010 were as follows:

 

 

 

Revenues

 

 

 

 

 

 

 

For the nine months ended September 30,

 

 

 

 

 

 

 

2011

 

2010

 

Total Assets

 

Country:

 

Revenue

 

% of
Revenue

 

Revenue

 

% of
Revenue

 

September 30,
2011

 

December 31,
2010

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

United States

 

$

1,076,751

 

99.0

%

$

593,727

 

97.6

%

$

667,972

 

$

692,759

 

Non-United States

 

10,333

 

1.0

%

14,799

 

2.4

%

8,936

 

11,457

 

Total

 

$

1,087,084

 

100.0

%

$

608,526

 

100.0

%

$

676,908

 

$

704,216

 

 

All non-United States revenue has been generated in the Engineering Segment.  For the table above, revenues generated by OnQuest’s Canadian subsidiary, Born Heaters Canada, ULC, were used to determine non-United States revenues.

 

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Table of Contents

 

PRIMORIS SERVICES CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS

 

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

 

Forward Looking Statements

 

This Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2011 (“Third Quarter 2011 Report”) contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which are subject to the “safe harbor” created by those sections. Forward-looking statements include information concerning our possible or assumed future results of operations, business strategies, financing plans, competitive position, industry environment, potential growth opportunities, the effects of regulation and the economy, generally. Forward-looking statements include all statements that are not historical facts and can be identified by terms such as “anticipates”, “believes”, “could”, “estimates”, “expects”, “intends”, “may”, “plans”, “potential”, “predicts”, “projects”, “should”, “will”, “would” or similar expressions.

 

Forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. We discuss many of these risks in detail in Part I, Item 1A “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2010 and our other filings with the Securities and Exchange Commission (“SEC”). Also, forward-looking statements represent our management’s beliefs and assumptions only as of the date of this Third Quarter 2011 Report. You should read this Third Quarter 2011 Report, our Annual Report on Form 10-K for the year ended December 31, 2010 and our other filings with the SEC completely and with the understanding that our actual future results may be materially different from what we expect.

 

Given these uncertainties, you should not place undue reliance on these forward-looking statements. We assume no obligation to update these forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in any forward-looking statements, even if new information becomes available.

 

The following discussion and analysis should be read in conjunction with the unaudited financial statements and the accompanying notes included in Part 1, Item 1 of this Third Quarter 2011 Report.

 

Introduction

 

Primoris is a holding company of various subsidiaries which forms one of the larger specialty contractors and infrastructure companies in the United States.  Serving diverse end-markets, Primoris provides a wide range of construction, fabrication, maintenance, replacement, water and wastewater, and engineering services to major public utilities, petrochemical companies, energy companies, municipalities, and other customers. With our acquisitions of James Construction Group LLC (“JCG”) in December 2009 and Rockford Corporation (“Rockford”) in November 2010, Primoris has doubled its size and the Company’s national footprint now extends from Florida, along the Gulf Coast, through California, into the Pacific Northwest and Canada.

 

We install, replace, repair and rehabilitate natural gas, refined product, water and wastewater pipeline systems, large diameter gas and liquid pipeline facilities, heavy civil projects, earthwork and site development and also construct mechanical facilities and other structures, including power plants, petrochemical facilities, refineries, parking structures, highways, bridges and other environmental construction activities. In addition, we provide maintenance services, including inspection, overhaul and emergency repair services, to cogeneration plants, refineries and similar mechanical facilities. Through our subsidiary OnQuest, Inc. (“OnQuest”), we provide engineering and design services for fired heaters and furnaces primarily used in refinery applications. Through our subsidiary Cardinal Contractors, Inc., we construct water and wastewater facilities in Florida.

 

On November 8, 2010, the Company entered into the Rockford Agreement to acquire privately held Rockford.  Upon completion of the acquisition on November 12, 2010, Rockford became a wholly owned subsidiary.  Based in Hillsboro (Portland), Oregon, Rockford specializes in large diameter natural gas and liquid pipeline projects and related facilities construction.  Rockford’s business adds to the Company’s major underground project bidding and performance capabilities.  Rockford, along with a newly created subsidiary, Alaska Continental Pipeline, Inc. also adds to our California underground capacity and provides a northwest United States location to expand the Company’s geographic presence.

 

We make our press releases, our Annual Reports on Form 10-K, our Quarterly Reports on Form 10-Q, our Current Reports on Form 8-K and all other required filings with the SEC available free of charge through our Internet Web site, as soon as reasonably practical after they are electronically filed with, or furnished to, the SEC. Our principal executive offices are located at 2100 McKinney Avenue, Suite 1500, Dallas, Texas 75201, and our telephone number is (214) 740-5600. Our Web site address is www.prim.com . The information on our Internet Web site is neither part of nor incorporated by reference into this Third Quarter 2011 Report.

 

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Table of Contents

 

Range of Services

 

We provide services in three segments: the East Construction Services segment, the West Construction Services segment and the Engineering segment.

 

Construction Services

 

Both the East Construction Services and the West Construction Services segments specialize in a range of services that include designing, building/installing, replacing, repairing/rehabilitating and providing management services for construction related projects. Our services include:

 

·                                                                   Providing installation of underground pipeline, cable and conduits for entities in the petroleum, petrochemical and water industries;

 

·                                                                   Providing installation and maintenance of industrial facilities for entities in the petroleum, petrochemical and water industries;

 

·                                                                   Providing installation of complex commercial and industrial cast-in-place structures; and

 

·                                                                   Providing construction of highways and industrial and environmental construction.

 

East Construction Services

 

The East Construction Services segment consists of the JCG construction business and Cardinal Contractors, Inc., a water and wastewater facility construction business.  The segment covers services primarily in the southeastern and Gulf Coast regions of the United States.  In April 2011, Cardinal Mechanical, L.P., a company specializing in chilled water pipeline construction primarily in the Texas area, was incorporated as a division of JCG.

 

West Construction Services

 

The West Construction Services segment includes the construction services performed in the western United States, primarily in the state of California.  Entities included in West Construction Services are ARB Inc., ARB Structures, Inc. and Stellaris, LLC.  Additionally, the results of the November 12, 2010 acquisition of Rockford, effective on November 1, 2010, are included in the West Construction Services segment.

 

Engineering

 

The Engineering segment includes the results of OnQuest, Inc. and Born Heaters Canada, ULC.  The Engineering group specializes in designing, supplying, and installing high-performance furnaces, heaters, burner management systems and related combustion and process technologies for clients in the oil refining, petrochemical and power generation industries. The group furnishes turnkey project management with technical expertise and the ability to deliver custom engineering solutions worldwide.

 

Material trends and uncertainties

 

We generate our revenue from both large and small construction and engineering projects. The award of these contracts is dependent on a number of factors, many of which are not within our control. Business in the construction industry is cyclical. We depend in part on spending by companies in the energy and oil and gas industries, as well as on municipal water and wastewater customers. Over the past several years, each segment has benefited from demand for more efficient and more environmentally friendly energy and power facilities, local highway and bridge needs and from the strength of the oil and gas industry. Economic factors outside of our control may affect the amount and size of contracts in any particular period.

 

We and our customers are operating in a challenging business environment in light of the economic downturn.  Capital markets have not yet fully recovered and there is a potentially adverse impact of significant changes in spending by governmental units. We are closely monitoring our customers and the effect that changes in economic and market conditions may have on them. We experienced reduced spending by our customers in 2010 and the nine months of 2011, which we attribute to negative economic and market conditions, and we anticipate that these negative conditions will continue to affect demand for our services in the near-term until conditions improve. However, we believe that most of our customers, some of whom are regulated utilities, remain financially stable in general and will be able to continue with their business plans in the long-term without substantial constraints. In addition, the uncertainty surrounding future federal and state funding for highway construction projects may have a negative impact on our heavy civil group in the East Construction Services segment.

 

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Table of Contents

 

Seasonality and cyclicality

 

Our results of operations can be subject to quarterly variations. Some of the variation is the result of weather, particularly rain, which can impact our ability to perform construction services. In addition, demand for new projects can be lower during the early part of the year due to clients’ internal budget cycles.  As a result, the Company usually experiences higher revenues and earnings in the third and fourth quarters of the year as compared to the first two quarters.  We are also dependent on large construction projects which tend not to be seasonal but which tend to fluctuate based on general economic conditions.  As a consequence, the financial results for any period may fluctuate from prior periods, and the Company’s financial condition and operating results may vary from quarter-to-quarter.  Results from one quarter may not be indicative of its financial condition or operating results for any other quarter or for an entire year.

 

In addition to quarter to quarter fluctuations based on the weather and general economic conditions, activity in the construction industry can be highly cyclical. Our volume of business may be adversely affected by declines or delays in new projects in various geographic regions in the United States. Project schedules, in particular in connection with larger, longer-term projects, can also create fluctuations in the services provided, which may adversely affect us in a given period. The financial condition of our customers and their access to capital, variations in the margins of projects performed during any particular period, regional, national and global economic and market conditions, timing of acquisitions, the timing and magnitude of acquisition assimilation costs, interest rate fluctuations and other factors may also materially affect our periodic results. Accordingly, our operating results for any particular year may not be indicative of the results that can be expected for any other year.

 

Results of operations

 

Revenues, gross profit, operating income and net income for the three months ended September 30, 2011 and 2010 were as follows:

 

 

 

Three Months Ended September 30,

 

 

 

2011

 

2010

 

 

 

(Thousands)

 

% of
Revenue

 

(Thousands)

 

% of
Revenue

 

Revenues

 

$

375,483

 

100.0

%

$

230,357

 

100.0

%

Gross profit

 

52,121

 

13.9

%

27,880

 

12.1

%

Selling, general and administrative expense

 

20,103

 

5.4

%

14,580

 

6.3

%

Operating income

 

32,018

 

8.5

%

13,300

 

5.8

%

Other income (expense)

 

74

 

0.0

%

(81

)

0.0

%

Income before income taxes

 

32,092

 

8.5

%

13,219

 

5.8

%

Income tax provision

 

(12,744

)

(3.3

)%

(5,642

)

(2.5

)%

Net income

 

$

19,348

 

5.2

%

$

7,577

 

3.3

%

 

Revenues, gross profit, operating income and net income for the nine months ended September 30, 2011 and 2010 were as follows:

 

 

 

Nine Months Ended September 30,

 

 

 

2011

 

2010

 

 

 

(Thousands)

 

% of
Revenue

 

(Thousands)

 

% of
Revenue

 

Revenues

 

$

1,087,084

 

100.0

%

$

608,526

 

100.0

%

Gross profit

 

134,157

 

12.3

%

78,989

 

13.0

%

Selling, general and administrative expense

 

60,425

 

5.5

%

43,849

 

7.2

%

Operating income

 

73,732

 

6.8

%

35,140

 

5.8

%

Other income (expense)

 

2,195

 

0.2

%

4

 

%

Income before income taxes

 

75,927

 

7.0

%

35,144

 

5.8

%

Income tax provision

 

(29,839

)

(2.8

)%

(13,782

)

(2.3

)%

Net income

 

$

46,088

 

4.2

%

$

21,362

 

3.5

%

 

Revenues for the three months ended September 30, 2011 were $375.5 million, an increase of $145.1 million, or 63.0%, compared to the same period in 2010.   Rockford, which we acquired in the fourth quarter 2010, contributed $85.9 million for the three months ended September 30, 2011, mainly from the Ruby project for the construction of a natural gas pipeline from Wyoming to Oregon.  The project was substantially completed by the end of the third quarter 2011.  With completion of this significant project, we expect Rockford revenues and profit to decrease in future periods.  Excluding the impact of Rockford, revenues for the three months ended September 30, 2011 increased by $59.2 million, or 25.7%, compared to the same period in 2010, due primarily to growth of $14.3 million in the East Construction Segment’s JCG heavy civil group, growth in the West Construction Segment’s underground business of $38.9 million and $18.9 million in the industrial business offset by reductions in infrastructure and maintenance and industrial projects in JCG.

 

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Table of Contents

 

Revenues for the nine months ended September 30, 2011 were $1,087.1 million, an increase of $478.6 million, or 78.7%, compared to the same period in 2010.  Rockford contributed $304.9 million for the nine months ended September 30, 2011, or 63.7%, of the total increase. Excluding the impact of Rockford, revenues for the nine months ended September 30, 2011 increased by $173.6 million, or 28.5%, compared to the same period in 2010, due primarily to growth of $50.9 million in the East Construction Segment’s JCG heavy civil group, growth in the West Construction Segment’s underground business of $77.6 million and $41.9 million in the industrial business.

 

Gross profit increased by $24.2 million, or 87.0%, for the three months ended September 30, 2011 and increased by $55.2 million, or 69.8%, for the nine months ended September 30, 2011 compared to the same periods in 2010.  Rockford gross profit of $10.6 million accounted for 43.7% of the increase in the three months ended September 30, 2011.  For the nine months ended September 30, 2011, Rockford’s $36.0 million gross profit was a primary reason for the increase.  Excluding the impact of Rockford, the gross profit increased by $19.1 million, due primarily to a $9.6 million increase in the East Construction Services segment associated with projects in the heavy civil division and due to a $9.7 million increase in the West Construction Services segment as a result of increased activity primarily with industrial and underground projects.

 

Gross profit as a percent of revenues increased to 13.9% for the three months ended September 30, 2011 and decreased to 12.3% for the nine months ended September 30, 2011 compared to 12.1% and 13.0% in the same periods in 2010, respectively. The decreased margins for the nine months ended September 30, 2011 were primarily impacted by higher margin projects completed in the prior year and the impact of the settlement of issues related to the early termination of a refinery project in 2010.

 

Geographic areas financial information

 

Revenue by geographic area for the nine months ended September 30, 2011 and 2010 was as follows:

 

 

 

Nine Months Ended September 30,

 

 

 

2011

 

2010

 

 

 

(Thousands)

 

% of
Revenue

 

(Thousands)

 

% of
Revenue

 

 

 

 

 

 

 

 

 

 

 

Country:

 

 

 

 

 

 

 

 

 

United States

 

$

1,076,751

 

99.0

%

$

593,727

 

97.6

%

Non—United States

 

10,333

 

1.0

%

14,799

 

2.4

%

Total revenues

 

$

1,087,084

 

100.0

%

$

608,526

 

100.0

%

 

All non-United States revenue was generated in the Engineering Segment.  For the table above, we use revenues generated by OnQuest’s Canadian subsidiary, Born Heaters Canada, ULC to determine non-United States revenues.

 

Segment results

 

The following discusses the significant factors contributing to the results of our operating segments.

 

East Construction Services Segment

 

Revenue and gross profit for the East Construction Services segment for the three and nine months ended September 30, 2011 and 2010 were as follows:

 

 

 

Three Months Ended September 30,

 

 

 

2011

 

2010

 

 

 

(Thousands)

 

% of
Revenue

 

(Thousands)

 

% of
Revenue

 

East Construction Services

 

 

 

 

 

 

 

 

 

Revenue

 

$

130,682

 

 

 

$

126,876

 

 

 

Gross profit

 

15,320

 

11.7

%

12,889

 

10.2

%

 

 

 

Nine Months Ended September 30,

 

 

 

2011

 

2010

 

 

 

(Thousands)

 

% of
Revenue

 

(Thousands)

 

% of
Revenue

 

East Construction Services

 

 

 

 

 

 

 

 

 

Revenue

 

$

403,299

 

 

 

$

351,583

 

 

 

Gross profit

 

45,658

 

11.3

%

36,103

 

10.3

%

 

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Table of Contents

 

Revenue for the East Construction Services segment increased by $3.8 million, or 3.0%, for the three months ended September 30, 2011 and by $51.7 million, or 14.7%, for the nine months ended September 30, 2011 compared to the same periods of the prior year.  The revenue increases occurred primarily in the JCG heavy civil group which showed revenue increases of $14.4 million and $51.1 million for the three and nine month periods, respectively, compared to the previous year.  Continuing work on large highway construction projects for state agencies in Louisiana and Texas accounted for most of the growth. This increase was offset by decreased volume in the industrial and infrastructure and maintenance groups.  Temporary slowdown in construction activity within the petrochemical sector along the Gulf Coast attributed to the decline in revenues during the three months ended September 30, 2011.

 

Gross profit for the East Construction Services segment increased by $2.4 million, or 18.9%, for the three months ended September 30, 2011 and by $9.6 million, or 26.5%, for the nine months ended September 30, 2011 compared to the same periods in the prior year.  The margin increase for both periods was primarily due to the revenue increases associated with the large construction projects of the heavy civil division.

 

For the three months ended September 30, 2011, gross profit as a percent of revenues increased to 11.7% compared to 10.2% in the prior year quarter, primarily as a result of increased margin percentages realized on heavy civil projects.  Similarly, the gross profit as a percent of revenues increased to 11.3% compared to 10.3% in the same period for the nine months ended September 30, 2011 compared to the previous year.  The increased margin contribution also reflected the benefit of improved efficiency on a large causeway project in South Louisiana.

 

West Construction Services Segment

 

Revenue and gross profit for the West Construction Services segment for the three and nine months ended September 30, 2011 and 2010 were as follows:

 

 

 

Three Months Ended September 30,

 

 

 

2011

 

2010

 

 

 

(Thousands)

 

% of
Revenue

 

(Thousands)

 

% of
Revenue

 

West Construction Services

 

 

 

 

 

 

 

 

 

Revenue

 

$

230,904

 

 

 

$

86,594

 

 

 

Gross profit

 

34,377

 

14.9

%

12,689

 

14.7

%

 

 

 

Nine Months Ended September 30,

 

 

 

2011

 

2010

 

 

 

(Thousands)

 

% of
Revenue

 

(Thousands)

 

% of
Revenue

 

West Construction Services

 

 

 

 

 

 

 

 

 

Revenue

 

$

647,640

 

 

 

$

216,302

 

 

 

Gross profit

 

80,828

 

12.5

%

35,081

 

16.2

%

 

Revenue for the West Construction Services segment increased by $144.3 million, or 166.7%, and by $431.3 million, or 199.4%, respectively, for the three and nine months ended September 30, 2011 compared to the same periods in 2010.  Rockford’s project work, primarily the Ruby pipeline project, contributed $85.9 million and $304.9 million for the three and nine months ended September 30, 2011, respectively.  Excluding the revenue contribution from Rockford, revenues increased by $58.4 million and $126.4 million for the respective periods.  The increase in revenues was due primarily from our California underground business, which increased by $38.9 million and $77.6 million, and our California industrial business, which increased by $18.9 million and $41.9 million, for the three and nine months ended September 30, 2011, respectively.  A significant contributor to the underground increase was pipeline integrity work for the major gas utilities while work on power plants provided the major increase to the industrial business.

 

Gross profit for the West Construction Services segment increased by $21.7 million, or 170.9%, for the three months ended September 30, 2011 and $45.7 million, or 130.4%, for the nine months ended September 30, 2011, respectively, compared to the prior year.  Rockford contributed gross profit of $10.6 million for the three month period and $36.0 million for the nine month period ended September 30, 2011.  Excluding Rockford, gross profit for the third quarter increased by $11.1 million and gross profit for the nine month period increased by $9.7 million compared to the same periods in the previous year.  The primary reason for the increase in gross profit for the three months ended September 30, 2011, compared with the same period in 2010, was the increased activity in industrial, underground projects and increased profitability in the structures group. The gross profit increase for the nine months ended September 30, 2011, compared with the same period in 2010, was affected by a significant increase in expected cost amounts and contingencies of one of the power plant construction projects.

 

Gross profit as a percent of revenues increased to 14.9% during the three months ended September 30, 2011 from 14.7% in the same period in 2010, and for the nine months ended September 30, 2011, gross profit as a percent of revenue decreased to 12.5% compared to 16.2% in the same period in the prior year.  The decrease for the nine month period is based on completion of several higher margin projects during the prior year and settlement of issues related to the early termination of a refinery project in 2010.  Additionally, the nine month period was negatively impacted by the increase in the expected cost and contingency amounts for a power plant project.

 

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Table of Contents

 

Engineering Segment

 

Revenue and gross profit for the Engineering segment for the three and nine months ended September 30, 2011 and 2010 were as follows:

 

 

 

Three Months Ended September 30,

 

 

 

2011

 

2010

 

 

 

(Thousands)

 

% of
Revenue

 

(Thousands)

 

% of
Revenue

 

Engineering

 

 

 

 

 

 

 

 

 

Revenue

 

$

13,897

 

 

 

$

16,887

 

 

 

Gross profit

 

2,424

 

17.4

%

2,302

 

13.6

%

 

 

 

Nine Months Ended September 30,

 

 

 

2011

 

2010

 

 

 

(Thousands)

 

% of
Revenue

 

(Thousands)

 

% of
Revenue

 

Engineering

 

 

 

 

 

 

 

 

 

Revenue

 

$

36,145

 

 

 

$

40,641

 

 

 

Gross profit

 

7,671

 

21.2

%

7,805

 

19.2

%

 

Revenue for the Engineering segment decreased by $3.0 million, or 17.7%, and by $4.5 million, or 11.1%, for the three and nine months ended September 30, 2011, respectively, compared to the same periods in 2010.  The decrease reflected completion of a large international project and a U.S.-based refinery project in the first nine months of 2010.

 

Gross profit for the Engineering segment for the three and nine months ended September 30, 2011 increased by $0.1 million and decreased $0.1 million, compared to the same periods in 2010.  The decrease for the nine months was primarily the result of the decrease in revenues for the segment.  Gross profit as a percent of revenues for the three and nine months ended September 30, 2011 was 17.4% and 21.2%, compared to 13.6% and 19.2% for the same periods in 2010.  The increased margins were due primarily to higher margin project close-outs during the third quarter of 2011.

 

Selling, general and administrative expenses

 

Selling, general and administrative expenses (“SG&A”) increased $5.5 million, or 37.9%, for the three months ended September 30, 2011 compared to the same period in 2010.  Of this amount, approximately $4.5 million was from an increase in the West Construction Services segment, approximately $0.7 million from a decrease in the East Construction Services segment, and approximately $1.7 million from an increase in Primoris corporate expenses.  The West Construction Services segment included an increase from the acquisition of Rockford and All Day of $2.8 million and an increase of $1.7 million in compensation related expenses.  SG&A for the East Construction Services segment decreased due to a reduction in intangible amortization and other miscellaneous expenses.  Corporate SG&A increased due primarily to the fair value increase of the Rockford contingent earn-out consideration.

 

SG&A increased by $16.6 million, or 37.8%, for the nine months ended September 30, 2011 compared to the same period in 2010.  The total was the result of a $10.9 million increase in the West Construction Services segment, an increase of $3.0 million in the East Construction Services segment, an increase of $0.5 million in the Engineering segment, and an increase of $2.2 million in Primoris corporate expenses.  Of the $10.9 million increase in the West Construction Services segment SG&A, $6.6 million was the result of the acquisition of Rockford and All Day, $1.3 million was the impact of not recording a gain on sale in 2011 compared to 2010, and $3.0 million was primarily the result of increased compensation and compensation related expenses.  In the East Construction Services segment, the increase was due primarily to increases in compensation and compensation related expenses.  The $0.5 million increase for the Engineering segment was primarily due to a $0.3 reduction in overhead charged to projects and increases primarily in compensation and compensation related expenses.  The $2.2 million increase for Primoris corporate was due to the fair value increase of the Rockford contingent earn-out consideration of $1.7 million and due to expenses associated with opening a corporate office in Dallas and increases in compensation and compensation related expenses.

 

Starting in 2011, we account for gains and losses on the sales of operating equipment as a cost of revenues rather than a component of SG&A since the operating equipment expenses are recorded as cost of revenues.  In 2011, for the nine month period ended September 30, total gain on the sale of equipment was $0.2 million, recorded in cost of revenues, compared to $1.4 million, recorded in SG&A, in the nine month period ended September 30, 2010.

 

SG&A as a percentage of revenue decreased to 5.4% for the three months ended September 30, 2011, from 6.3% for the same period in 2010 and decreased to 5.5% for the nine months ended September 30, 2011 compared to 7.2% for the same period in the prior year.  The reduction in percent was primarily as a result of SG&A leverage as revenues increased, especially with the increases from the acquisition of Rockford Corporation.

 

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Table of Contents

 

Other income and expense

 

Non-operating income and expense items for the three and nine months ended September 30, 2011 and 2010 were as follows:

 

 

 

Three Months
Ended September 30,

 

 

 

2011

 

2010

 

 

 

(Thousands)

 

Other income (expense)

 

 

 

 

 

Income from non-consolidated investments

 

$

2,079

 

$

1,366

 

Foreign exchange gain (loss)

 

(214

)

80

 

Other income (expense)

 

(314

)

(333

)

Interest income

 

39

 

151

 

Interest (expense)

 

(1,516

)

(1,345

)

Total other income

 

$

74

 

$

(81

)

 

 

 

Nine Months
Ended September 30,

 

 

 

2011

 

2010

 

 

 

(Thousands)

 

Other income (expense)

 

 

 

 

 

Income from non-consolidated investments

 

$

7,305

 

$

4,090

 

Foreign exchange gain (loss)

 

(250

)

266

 

Other income (expense)

 

(917

)

(964

)

Interest income

 

297

 

484

 

Interest (expense)

 

(4,240

)

(3,872

)

Total other income

 

$

2,195

 

$

4

 

 

For the three months ended September 30, 2011, income from non-consolidated joint ventures was $2.1 million, which was primarily due to income contributed from the St.-Bernard joint venture, offset by $0.9 million for the write-down of impaired WesPac project costs.  Income from non-consolidated joint ventures for the nine months ended September 30, 2011 of $7.3 million included $8.1 million from the St.-Bernard joint venture, offset by $0.9 million in costs from the WesPac investment.

 

Foreign exchange gains for the nine months ended September 30, 2011 and for the same period in 2010 reflect currency exchange fluctuations of the United States dollar compared to the Canadian dollar.  Some of our business is conducted in Canadian dollars and we acquire assets and liabilities using Canadian dollars.  For financial statement purposes, we convert these transactions to United States dollars creating currency exchange gains or losses.

 

Other expense of $0.3 million and $0.9 million for the three and nine months ended September 30, 2011, respectively, represents the change in the estimated fair value of the contingent earnout liabilities for Rockford in 2011 and 2012 and JCG in 2010.

 

For the three and nine months ended September 30, 2011, interest expense was $1.5 million and $4.2 million, respectively, compared to $1.3 million and $3.9 million for the same periods in 2010.  The increase over both the prior periods was due primarily to interest payments due on the subordinated debt from the Rockford acquisition,  the scheduled rate increases of the subordinated debt from the JCG acquisition and accrual of look-back interest associated with book and tax differences for percentage of completion accounting.

 

Provision for income taxes

 

Our provision for income tax increased $7.1 million for the three months ended September 30, 2011 to $12.7 million, and increased $16.1 million for the nine months ended September 30, 2011 to $29.8 million, compared to the same periods in 2010 as a result of improved