Primoris Services Corporation
Primoris Services Corp (Form: 10-Q, Received: 11/05/2013 08:17:16)

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, 2013

 

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

 

20-4743916

(State or Other Jurisdiction of

 

(I.R.S. Employer

Incorporation or Organization)

 

Identification No.)

 

 

 

2100 McKinney Avenue, Suite 1500

 

 

Dallas, Texas

 

75201

(Address of Principal Executive Offices)

 

(Zip Code)

 

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

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  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 6, 2013, 51,571,394 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, 2013 and December 31, 2012

3

 

 

—Condensed Consolidated Statements of Income for the three months and nine months ended September 30, 2013 and 2012

4

 

 

— Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2013 and 2012

5

 

 

—Notes to Condensed Consolidated Financial Statements

7

 

 

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

25

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

39

 

 

Item 4. Controls and Procedures

39

 

 

Part II. Other Information

 

 

 

Item 1. Legal Proceedings

40

 

 

Item 1A. Risk Factors

40

 

 

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

40

 

 

Item 3. Defaults Upon Senior Securities

40

 

 

Item 4. (Removed and Reserved)

40

 

 

Item 5. Other Information

40

 

 

Item 6. Exhibits

41

 

 

Signatures

42

 

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,
2013

 

December 31,
2012

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

174,034

 

$

157,551

 

Short term investments

 

3,179

 

3,441

 

Customer retention deposits and restricted cash

 

15,377

 

35,377

 

Accounts receivable, net

 

284,497

 

268,095

 

Costs and estimated earnings in excess of billings

 

80,434

 

41,701

 

Inventory and uninstalled contract materials

 

43,616

 

37,193

 

Deferred tax assets

 

10,477

 

10,477

 

Prepaid expenses and other current assets

 

12,830

 

10,800

 

Total current assets

 

624,444

 

564,635

 

Property and equipment, net

 

220,179

 

184,840

 

Investment in non-consolidated entities

 

6,546

 

12,813

 

Intangible assets, net

 

48,002

 

51,978

 

Goodwill

 

118,626

 

116,941

 

Other long-term assets

 

1,214

 

 

Total assets

 

$

1,019,011

 

$

931,207

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

119,882

 

$

151,546

 

Billings in excess of costs and estimated earnings

 

147,464

 

158,892

 

Accrued expenses and other current liabilities

 

101,881

 

76,152

 

Dividends payable

 

1,805

 

 

Current portion of capital leases

 

3,928

 

3,733

 

Current portion of long-term debt

 

26,910

 

19,446

 

Current portion of contingent earnout liabilities

 

8,763

 

10,900

 

Total current liabilities

 

410,633

 

420,669

 

Long-term capital leases, net of current portion

 

2,760

 

3,831

 

Long-term debt, net of current portion

 

188,713

 

128,367

 

Deferred tax liabilities

 

20,018

 

20,018

 

Long-term contingent earnout liabilities, net of current portion

 

6,083

 

12,531

 

Other long-term liabilities

 

13,243

 

13,153

 

Total liabilities

 

641,450

 

598,569

 

Commitments and contingencies

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

Common stock—$.0001 par value, 90,000,000 shares authorized, 51,571,394 and 51,403,686 issued and outstanding at September 30, 2013 and December 31, 2012

 

5

 

5

 

Additional paid-in capital

 

159,058

 

155,605

 

Retained earnings

 

217,540

 

175,517

 

Noncontrolling interests

 

958

 

1,511

 

Total stockholders’ equity

 

377,561

 

332,638

 

Total liabilities and stockholders’ equity

 

$

1,019,011

 

$

931,207

 

 

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,

 

 

 

2013

 

2012

 

2013

 

2012

 

Revenues

 

$

551,333

 

$

431,842

 

$

1,406,341

 

$

1,060,851

 

Cost of revenues

 

475,868

 

375,551

 

1,225,243

 

922,960

 

Gross profit

 

75,465

 

56,291

 

181,098

 

137,891

 

Selling, general and administrative expenses

 

36,478

 

26,014

 

96,657

 

69,684

 

Operating income

 

38,987

 

30,277

 

84,441

 

68,207

 

Other income (expense):

 

 

 

 

 

 

 

 

 

Income (loss) from non-consolidated entities

 

113

 

(159

)

169

 

895

 

Foreign exchange gain (loss)

 

91

 

18

 

3

 

(30

)

Other expense

 

(376

)

(382

)

(809

)

(961

)

Interest income

 

32

 

96

 

95

 

143

 

Interest expense

 

(1,579

)

(937

)

(4,501

)

(3,044

)

 

 

 

 

 

 

 

 

 

 

Income before provision for income taxes

 

37,268

 

28,913

 

79,398

 

65,210

 

Provision for income taxes

 

(14,075

)

(10,965

)

(30,272

)

(24,875

)

Net income

 

$

23,193

 

$

17,948

 

$

49,126

 

$

40,335

 

 

 

 

 

 

 

 

 

 

 

Less net income attributable to noncontrolling interests

 

(1,348

)

(432

)

(1,947

)

(600

)

 

 

 

 

 

 

 

 

 

 

Net income attributable to Primoris

 

$

21,845

 

$

17,516

 

$

47,179

 

$

39,735

 

 

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.42

 

$

0.34

 

$

0.92

 

$

0.77

 

Diluted

 

$

0.42

 

$

0.34

 

$

0.91

 

$

0.77

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

51,568

 

51,398

 

51,529

 

51,387

 

Diluted

 

51,671

 

51,404

 

51,595

 

51,402

 

 

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,

 

 

 

2013

 

2012

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

49,126

 

$

40,335

 

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

 

 

 

 

 

Depreciation

 

31,003

 

20,719

 

Amortization of intangible assets

 

5,576

 

4,669

 

Gain on sale of property and equipment

 

(1,176

)

(2,396

)

Income from non-consolidated entities

 

(169

)

(895

)

Impairment expense for non-consolidated entities

 

3,250

 

 

Non-consolidated entity distributions

 

3,186

 

1,260

 

Stock—based compensation expense

 

229

 

 

Changes in assets and liabilities:

 

 

 

 

 

Customer retention deposits and restricted cash

 

20,000

 

(3,324

)

Accounts receivable

 

(16,402

)

(64,933

)

Costs and estimated earnings in excess of billings

 

(38,733

)

(21,089

)

Other current assets

 

(8,665

)

475

 

Accounts payable

 

(32,551

)

20,433

 

Billings in excess of costs and estimated earnings

 

(11,428

)

7,329

 

Contingent earnout liabilities

 

(9,287

)

(2,489

)

Accrued expenses and other current liabilities

 

26,626

 

20,688

 

Other long-term liabilities

 

90

 

(1,510

)

Net cash provided by operating activities

 

20,675

 

19,272

 

Cash flows from investing activities:

 

 

 

 

 

Purchase of property and equipment

 

(68,749

)

(23,720

)

Proceeds from sale of property and equipment

 

6,554

 

7,683

 

Purchase of short-term investments

 

(5,620

)

(6,380

)

Sale of short-term investments

 

5,882

 

23,000

 

Cash paid for acquisitions

 

(2,273

)

(38,110

)

Net cash used in investing activities

 

(64,206

)

(37,527

)

Cash flows from financing activities:

 

 

 

 

 

Proceeds from issuance of long-term debt

 

97,035

 

16,671

 

Repayment of capital leases

 

(3,399

)

(8,018

)

Repayment of long-term debt

 

(29,225

)

(12,177

)

Repayment of subordinated debt

 

 

(17,501

)

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

 

1,455

 

1,240

 

Dividends paid

 

(3,352

)

(4,611

)

Payment of accumulated earnings to non-controlling interest holder

 

(2,500

)

 

Repurchase of common stock

 

 

(1,001

)

Net cash provided by (used in) financing activities

 

60,014

 

(25,397

)

Net change in cash and cash equivalents

 

16,483

 

(43,652

)

Cash and cash equivalents at beginning of the period

 

157,551

 

120,306

 

Cash and cash equivalents at end of the period

 

$

174,034

 

$

76,654

 

 

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,

 

 

 

2013

 

2012

 

 

 

(Unaudited)

 

Cash paid during the period for:

 

 

 

 

 

Interest

 

$

3,369

 

$

2,282

 

 

 

 

 

 

 

Income taxes, net of refunds received

 

$

32,379

 

$

18,082

 

 

SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES

 

 

 

Nine months Ended

 

 

 

September 30,

 

 

 

2013

 

2012

 

 

 

(Unaudited)

 

 

 

 

 

 

 

Obligations incurred for the acquisition of property and equipment

 

$

2,523

 

$

1,854

 

 

 

 

 

 

 

Dividends declared and not yet paid

 

$

1,805

 

$

1,542

 

 

See Accompanying Notes to Condensed Consolidated Financial Statements

 

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Table of Contents

 

PRIMORIS SERVICES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)

 

Note 1—Nature of Business

 

Organization and operations Primoris Services Corporation is a holding company of various construction and product engineering subsidiaries. The Company’s underground and directional drilling operations install, replace and repair natural gas, petroleum, telecommunications and water pipeline systems, including large diameter 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; construct multi-level parking structures; and engage in the construction of highways, bridges and other environmental construction activities. The Company is incorporated in the State of Delaware and its corporate headquarters are located at 2100 McKinney Avenue, Suite 1500, Dallas, Texas 75201.

 

The following table lists the Company’s primary operating subsidiaries and their reportable operating segment:

 

Subsidiary

 

Operating Segment

ARB, Inc. (“ARB”)

 

West Construction Services

ARB Structures, Inc.

 

West Construction Services

Q3 Contracting, Inc. (“Q3C”); acquired 2012

 

West Construction Services

Rockford Corporation (“Rockford”)

 

West Construction Services

Stellaris, LLC.

 

West Construction Services

OnQuest, Inc.

 

Engineering

OnQuest, Canada, ULC (Born Heaters Canada, ULC prior to 2013)

 

Engineering

Cardinal Contractors, Inc.

 

East Construction Services

Force Specialty Services, Inc. (“FSSI”); acquired 2013

 

East Construction Services

James Construction Group, LLC (“JCG”)

 

East Construction Services

Sprint Pipeline Services, L.P. (“Sprint”); acquired 2012

 

East Construction Services

Silva Group (“Silva”); acquired 2012

 

East Construction Services

The Saxon Group (“Saxon”); acquired 2012

 

East Construction Services

 

The Company is a party to the Blythe Power Constructors joint venture (“Blythe”) for the installation of a parabolic trough solar field and steam generation system in California.

 

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

 

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, 2013 and 2012 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 Annual Report on Form 10-K, filed on March 7, 2013, which contains the Company’s audited consolidated financial statements for the year ended December 31, 2012, have been omitted.

 

This Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2013 (the “Third Quarter 2013 Report”) should be read in concert with the Company’s most recent Annual Report on form 10-K.  The interim financial information is unaudited.  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.

 

Revenue recognition

 

Fixed-price contracts — Historically, a substantial portion of the Company’s revenue has been generated under fixed-price contracts. For fixed-price contracts, the Company recognizes revenues using the percentage-of-completion method, which may result in uneven and irregular results. In the percentage-of-completion method, estimated revenues and resulting contract income are calculated based on the total costs incurred to date as a percentage of total estimated costs. 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 loss amount is recognized as an “accrued loss provision” and is included in the accrued expenses and other liabilities amount on the balance sheet.  As the percentage-of-completion method is used to calculate revenues, the accrued loss provision is changed so that the gross profit for the contract is zero.

 

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Table of Contents

 

Unforeseen events and circumstances can alter the estimate of the costs and potential profit associated with a particular contract.  Total estimated costs, and thus contract 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.  To the extent that original cost estimates are modified, estimated costs to complete increase, delivery schedules are delayed, or progress under a contract is otherwise impeded, cash flow, revenue recognition and profitability from a particular contract may be adversely affected.

 

Other contract forms — The Company also uses unit-price, time and material, and cost reimbursable plus fee contracts.  For these jobs, revenue is recognized based on contractual terms.  For example, time and material contract revenues are recognized based on purchasing and employee time records.  Similarly, unit price contracts recognize revenue based on completion of specific units at a specified unit price.

 

For all of its contracts, the Company includes any provision for estimated losses on uncompleted contracts in accrued expenses. Changes in job performance, job conditions and estimated profitability, including those arising from final contract settlements, may result in revisions to costs and income. These revisions are recognized in the period in which the revisions are identified.

 

The caption “ Costs and estimated earnings in excess of billings ” represents unbilled receivables which arise when revenues have been recorded but the amount will not be billed until a later date.  Balances represent:  (a) unbilled amounts arising from the use of the percentage-of-completion method of accounting which may not be billed under the terms of the contract until a later date, (b) incurred costs to be billed under cost reimbursement type contracts, or (c) amounts arising from routine lags in billing.  For those contracts in which billings exceed contract revenues recognized to date, the excess amounts are included in the caption “ Billings in excess of costs and estimated earnings ”.

 

The Company considers unapproved change orders to be contract variations for which it has customer approval for a change in scope but for which it does not have an agreed upon price change.  Costs associated with unapproved change orders are included in the estimated cost to complete the contracts and are treated as project costs as incurred. The Company recognizes revenue equal to costs incurred on unapproved change orders when realization of price approval is probable.  Unapproved change orders involve the use of estimates, and it is reasonably possible that revisions to the estimated costs and recoverable amounts may be required in future reporting periods to reflect changes in estimates or final agreements with customers.

 

The Company considers claims to be amounts it seeks, or will seek, to collect from customers or others for customer-caused changes in contract specifications or design, or other customer-related causes of unanticipated additional contract costs on which there is no agreement with customers on both scope and price changes. Claims are included in the calculation of revenues when realization is probable and amounts can be reliably determined. Revenues in excess of contract costs incurred on claims are recognized when the amounts have been agreed upon with the customer.  Revenue in excess of contract costs from claims is recognized when agreement is reached with customers as to the value of the claims, which in some instances may not occur until after completion of work under the contract. Costs associated with claims are included in the estimated costs to complete the contracts and are treated as project costs when incurred.

 

In accordance with applicable terms of certain construction contracts, retainage amounts may be withheld by customers until completion and acceptance of the project.  Some payments of the retainage may not be received for a significant period after completion of our portion of a project.  In some jurisdictions, retainage amounts are deposited into an escrow account.

 

Significant revision in contract estimate As previously discussed, revenue recognition is based on the percentage-of-completion method for firm fixed-price contracts. Under this method, the costs incurred to date as a percentage of total estimated costs are used to calculate revenue. Total estimated costs, and thus contract revenues and margin, are impacted by many factors which can cause significant changes in estimates during the life cycle of a project.

 

For projects that were in process in the prior year, but are either completed or continue to be in process during the current year, there can be a difference in revenues and profits recognized to the prior year, had current year estimates of costs to complete been known in the prior year.

 

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

 

During the three months and nine months ending September 30, 2013, revenues generated by the top ten customers were $274 million and $717 million, respectively, which represented 49.7% and 51.0%, respectively, of total revenues during the periods.  During the three and nine month periods ending September 30, 2013, a large gas and electric utility represented 8.8% and 8.3%, respectively, of total revenues and a large pipeline company represented 9.7% and 6.8%, respectively, of total revenues.

 

During the three and nine months ending September 30, 2012, revenues generated by the top ten customers were $243.6 million and $607.8 million, respectively, which represented 56.4% and 57.3%, respectively, of total revenues during the periods.  During the three and nine month periods ending September 30, 2012, the Louisiana Department of Transportation represented 11.9% and 12.7%, respectively, of total revenues and a large gas and electric utility represented 16.1% and 13.6%, respectively, of total revenues.

 

At September 30, 2013, approximately 13.1% of the Company’s accounts receivable were due from one customer, and that customer provided 7.4% of the Company’s revenues for the nine months ended September 30, 2013.  At September 30, 2012, approximately 10.8% of the Company’s accounts receivable were due from one customer, and that customer provided 13.6% of the Company’s revenues for the nine months ended September 30, 2012.

 

Multiemployer Plans Various subsidiaries in the West Construction Services segment are signatories to collective bargaining agreements.  These agreements require that the Company participate in and contribute to a number of multiemployer benefit plans for its union employees at rates determined by the agreements.  The trustees for each multiemployer plan determine the eligibility and allocations of contributions and benefit amounts, determine the types of benefits and administer the plan.  Federal law requires that if the Company were to withdraw from an agreement, it will incur a withdrawal obligation.  The potential withdrawal obligation may be significant.  Any withdrawal liability would be recorded when it is probable that a liability exists and can be reasonably estimated, in accordance with generally accepted accounting principles (“GAAP”).  In November 2011, the Company withdrew from the Central States Southeast and Southwest Areas Pension Fund multiemployer pension plan.  The Company has no plans to withdraw from any other agreements.  See Note 19 — Commitments and Contingencies.

 

Inventory and uninstalled contract materials — Inventory consists of expendable construction materials and small tools that will be used in construction projects and is valued at the lower of cost, using first-in, first-out method, or market.  Uninstalled contract materials include certain job specific materials not yet installed which are valued using the specific identification method relating the cost incurred to a specific project.

 

Note 3—Recent Accounting Pronouncements

 

In January 2013, the FASB issued ASU 2013-01, which clarifies which instruments and transactions are subject to the offsetting disclosure requirements established by ASU 2011-11 , “Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities” .  The ASU was effective for the fiscal years and interim periods beginning January 1, 2013.  Retrospective application is required for any period presented that begins before the entity’s initial application of the new requirements.  The adoption of this guidance did not have a material impact on the Company’s financial statements.

 

In February 2013, the FASB issued ASU 2013-04, “Liabilities (Topic 405): Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date (a consensus of the FASB Emerging Issues Task Force)”  (“ASU 2013-04”).  ASU 2013-04 provides guidance for the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of this guidance is fixed at the reporting date. This ASU is an update to FASB ASC Topic 405, “ Liabilities” .  The amendments in this ASU are effective for fiscal years, and interim periods, beginning after December 15, 2013.  The adoption of this guidance is not expected to have a material impact on the Company’s financial statements.

 

Note 4—Fair Value Measurements

 

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

 

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ASC Topic 820 also establishes three reporting levels for fair value measurements.  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 data points that are observable such as quoted prices, interest rates and yield curves. Fair values determined by Level 3 inputs are “unobservable data points” for an asset or liability and include situations where there is little, if any, market activity for the asset or liability.

 

The following table presents, for each of the fair value hierarchy levels identified under ASC Topic 820, the Company’s financial assets and liabilities that are required to be measured at fair value at September 30, 2013 and December 31, 2012:

 

 

 

 

 

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 as of September 30, 2013:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

174,034

 

$

174,034

 

 

 

Short-term investments

 

$

3,179

 

$

3,179

 

 

 

Liabilities as of September 30, 2013:

 

 

 

 

 

 

 

 

 

Contingent consideration

 

$

14,846

 

 

 

$

14,846

 

 

 

 

 

 

 

 

 

 

 

Assets as of December 31, 2012:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

157,551

 

$

157,551

 

 

 

Short-term investments

 

$

3,441

 

$

3,441

 

 

 

Liabilities as of December 31, 2012:

 

 

 

 

 

 

 

 

 

Contingent consideration

 

$

23,431

 

 

 

$

23,431

 

 

Short-term investments consist primarily of Certificates of Deposit (“CDs”) purchased through the CDARS (Certificate of Deposit Account Registry Service) process and U.S. Treasury bills with various financial institutions that are backed by the federal government.

 

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

 

The following table provides changes to the Company’s contingent consideration liability Level 3 fair value measurements during the nine months ended September 30, 2013:

 

Contingent Consideration

 

 

 

Balance at December 31, 2012

 

$

23,431

 

Additions:

 

 

 

FSSI acquisition on March 11, 2013

 

702

 

Change in fair value of contingent consideration

 

1,613

 

Reductions:

 

 

 

Payment to Rockford sellers

 

(6,900

)

Payment to Sprint sellers

 

(4,000

)

Balance at September 30, 2013

 

$

14,846

 

 

On a quarterly basis, the Company assesses the estimated fair value of the contractual obligation to pay the contingent consideration and any changes in estimated fair value are recorded as other non-operating expense or income in the Company’s statement of operations.  Fluctuations in the fair value of contingent consideration are impacted by two unobservable inputs, management’s estimate of the probability (which range from 33% to 100%) of the acquired company meeting the contractual operating performance target and the estimated discount rate (a rate that approximates the Company’s cost of capital). Significant changes in either of those inputs in isolation would result in a significantly different fair value measurement.  Generally, a change in the assumption of the probability of meeting the performance target is accompanied by a directionally similar change in the fair value of contingent consideration liability, whereas a change in assumption of the estimated discount rate is accompanied by a directionally opposite change in the fair value of contingent consideration liability.

 

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Note 5—Accounts Receivable

 

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

 

 

 

September 30,
2013

 

December 31,
2012

 

 

 

 

 

 

 

Contracts receivable, net of allowance for doubtful accounts of $535 at September 30, 2013 and $432 at December 31, 2012

 

$

235,302

 

$

227,548

 

Retention

 

48,768

 

39,710

 

 

 

284,070

 

267,258

 

Other accounts receivable

 

427

 

837

 

 

 

$

284,497

 

$

268,095

 

 

Note 6—Costs and Estimated Earnings on Uncompleted Contracts

 

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

 

 

 

September 30,
2013

 

December 31,
2012

 

 

 

 

 

 

 

Costs incurred on uncompleted contracts

 

$

4,256,810

 

$

3,882,968

 

Reserve for estimated losses on uncompleted contracts

 

2,018

 

764

 

Gross profit recognized

 

516,451

 

448,928

 

 

 

4,775,279

 

4,332,660

 

Less: billings to date

 

(4,842,309

)

(4,449,851

)

 

 

$

(67,030

)

$

(117,191

)

 

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

 

 

 

September 30,
2013

 

December 31,
2012

 

 

 

 

 

 

 

Costs and estimated earnings in excess of billings

 

$

80,434

 

$

41,701

 

Billings in excess of costs and estimated earnings

 

(147,464

)

(158,892

)

 

 

$

(67,030

)

$

(117,191

)

 

Note 7—Equity Method Investments

 

WesPac Energy LLC and WesPac Midstream LLC

 

On July 1, 2010, the Company acquired a 50% membership interest in WesPac Energy LLC, a Nevada limited liability company (“WesPac”), from Kealine Holdings, LLC (“Kealine”), a Nevada limited liability company.  Kealine held the remaining 50% membership interest in WesPac.  WesPac developed pipeline and terminal projects in the United States, Canada and Mexico.

 

On September 30, 2013, WesPac, Kealine and the Company entered into a contribution agreement (the “Agreement”) with Highstar Capital IV, LP (“Highstar”), to form a new entity, WesPac Midstream LLC, a Delaware limited liability company (“WesPac-Midstream”), owned collectively by Highstar, Kealine and the Company.  WesPac contributed certain project assets to WesPac-Midstream.  Highstar contributed $6.1 million in cash for an 85% ownership interest in certain developmental projects.  Of this amount, $3.04 million was distributed to the Company and accounted for as a reduction of the carrying value of the WesPac investment.  Highstar also obtained a 75% interest in two of WesPac-Midstream’s more mature projects.  Highstar may make additional payments to Kealine and the Company for the two projects contingent on completion of certain milestones as follows:

 

1.               When the first project reaches “commercial acceptance” (as that term is defined in the Agreement), a payment of $4.5 million will be made ($2.25 million to the Company), and an additional payment of $4.5 million when the project goes into production ($2.25 million to the Company).

 

2.               If the second project successfully reaches “commercial acceptance” prior to January 31, 2014, a payment of $4.5 million ($2.25 million to the Company) will be made and a similar payment when the project goes into production.  If “commercial acceptance” is not received prior to July 1, 2014, no contingent payments will be made for this project.

 

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Highstar will fund WesPac-Midstream’s operations over the next two years.  The Company is not required to fund any of WesPac-Midstream’s activities and retains one of five board seats.

 

During the third quarter 2013 and prior to the Agreement, WesPac recorded a third quarter loss of $0.2 million and the Company recorded its 50% share of the loss of $0.1 million.  After recording the loss, the carrying value of the WesPac investment prior to the sale to Highstar, was $11.5 million.

 

In July 2010, the Company recorded a $5 million amount greater than its pro-rata share of the WesPac equity as part of its original investment (“basis difference”).  In December 2011, as a result of certain events impacting WesPac, the Company recorded a reduction of $1.7 million of its $5 million basis difference.  As a result of the Agreement, the Company eliminated the remaining basis difference of $3.25 million to recognize an other than temporary decrease in the value of its basis difference.  The non-cash impairment charge was recorded as a Selling, General and Administrative expense.  The Company’s remaining $4.76 million investment represents the Company’s pro-rata equity ownership in both the WesPac and WesPac-Midstream entities.

 

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

 

 

 

September 30,
2013

 

December 31,
2012

 

 

 

 

 

 

 

WesPac & WesPac-Midstream

 

 

 

 

 

Balance sheet data

 

 

 

 

 

Assets

 

$

18,856

 

$

16,896

 

Liabilities

 

1,067

 

1,063

 

Net assets

 

$

17,789

 

$

15,833

 

Company’s equity investment

 

$

4,757

 

$

11,463

 

 

 

 

Three months ended September 30,

 

Nine months ended September 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

Earnings data:

 

 

 

 

 

 

 

 

 

Revenue

 

$

10

 

$

 

$

99

 

$

511

 

Expenses

 

$

235

 

$

358

 

$

754

 

$

1,002

 

Earnings before taxes

 

$

(225

)

$

(358

)

$

(655

)

$

(491

)

Company’s equity in earnings

 

$

(113

)

$

(178

)

$

(328

)

$

(245

)

 

St.—Bernard Levee Partners

 

The Company purchased a 30% interest in St.—Bernard Levee Partners (“Bernard”) in 2009 for $300 and accounts for this investment using the equity method.  Bernard engaged in construction activities in Louisiana, and all work was completed in January 2013. The Company’s share of Bernard distributions for the nine months ended September 30, 2013 and 2012, was $145 and $1,260, respectively.  The following is a summary of the financial position and results as of and for the periods ended:

 

 

 

September 30,
2013

 

December 31,
2012

 

 

 

 

 

 

 

St. — Bernard Levee Partners

 

 

 

 

 

Balance sheet data

 

 

 

 

 

Assets

 

$

22

 

$

592

 

Liabilities

 

22

 

86

 

Net assets

 

$

 

$

506

 

Company’s equity investment

 

$

 

$

150

 

 

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Table of Contents

 

 

 

Three months ended September 30,

 

Nine months ended September 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

Earnings data:

 

 

 

 

 

 

 

 

 

Revenue

 

$

 

$

36

 

$

 

$

3,970

 

Expenses

 

$

 

$

(36

)

$

16

 

$

162

 

Earnings before taxes

 

$

 

$

72

 

$

(16

)

$

3,808

 

Company’s equity in earnings

 

$

 

$

19

 

$

(5

)

$

1,140

 

 

Alvah, Inc.

 

As part of the acquisition of Q3C, the Company acquired a 49% membership interest in Alvah, Inc., a California corporation (“Alvah”).  Alvah is engaged in electrical contracting activities, primarily in Northern California and worked as a subcontractor for ARB both prior to and subsequent to the Q3C acquisition.  In December 2012, the company received $98 from a distribution by Alvah.  During the three and nine months ending September 30, 2013, payments made by ARB to Alvah were $2,154 and $5,064, respectively, and payments made by Q3C were $2 and $214, respectively.  For the same periods in the prior year, ARB made payments of $1,609 and $3,762, respectively and Q3C made payments of $120 and $353, respectively.

 

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

 

 

 

September 30,
2013

 

December 31,
2012

 

 

 

 

 

 

 

Balance sheet data

 

 

 

 

 

Assets

 

$

3,849

 

$

2,177

 

Liabilities

 

1,677

 

1,208

 

Net assets

 

$

2,172

 

$

969

 

Company’s equity investment in venture

 

$

1,789

 

$

1,200

 

 

 

 

Three months ended September 30,

 

Nine months ended September 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

Earnings data:

 

 

 

 

 

 

 

 

 

Revenue

 

$

4,824

 

$

 

$

10,832

 

$

 

Expenses

 

$

4,185

 

$

 

$

9,630

 

$

 

Earnings after taxes

 

$

639

 

$

 

$

1,202

 

$

 

Company’s equity in earnings

 

$

313

 

$

 

$

589

 

$

 

 

Because Alvah was not acquired until November 2012, no activity is shown for the prior year.

 

Note 8 — Business Combinations

 

2013 Acquisition - FSSI

 

On March 11, 2013, the Company’s subsidiary, Primoris Energy Services (“PES”), purchased the assets of Force Specialty Services Inc. (“FSSI”) which specializes in turn-around work at refineries and chemical plants in the Gulf Coast area.  Based in the greater Houston, Texas area, FSSI’s location provides a presence and convenient access to refineries in south Texas, the Houston ship channel and Louisiana.

 

The fair value of the consideration for the acquisition was $2,377.  Consideration consisted of cash totaling $1,675, of which $1,025 was paid at closing and $650 was paid in the second quarter 2013.  The agreement provides for three future potential payments, contingent upon FSSI meeting certain operating performance targets for the remainder of calendar year 2013 and calendar years 2014 and 2015.

 

The contingent consideration is as follows:  (1) $500 in cash for the achievement of pretax income of at least $553 for the remainder of the year ending December 31, 2013; (2) a payment of $500 in cash if pretax income for the year 2014 is at least $2,502; and (3), a payment of $500 in cash if pretax income for the year 2015 is at least $4,227.  The estimated fair value of the potential contingent consideration on the acquisition date was $702 and at September 30, 2013 was $741.

 

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Table of Contents

 

The purchase agreement also included a provision that PES make an up-front payment of $1,000 for a five-year employment, non-competition and non-solicitation agreement with a key employee.  If the employee terminates his employment or violates the agreement prior to the end of the five-year period, he is required to repay the unamortized amount of the $1,000 payment.  This agreement has been accounted for as a prepaid asset and is being amortized equally over the five-year period.

 

At closing the Company received $302 in small tools inventory, $448 in property, plant and equipment, and recorded accounts payable of $1,060.

 

The acquisition was accounted for using the acquisition method of accounting.  The assets acquired and liabilities assumed were measured at their estimated fair value at the acquisition date Since its March 11, 2013 acquisition date, FSSI contributed revenues of $670 and $4,143 and gross profit of $14 and $325, for the three and nine months ended September 30, 2013, respectively.

 

During the second quarter 2013, the Company finalized its estimates of the fair value of the contingent consideration, intangible assets and goodwill for the acquisition.  The final revision resulted in a change from the estimated values recorded at March 31, 2013, including a decrease in the fair value of the contingent consideration of $136, increases in intangible assets of $800 and a decrease of $936 for goodwill

 

The customer relationships were valued at $950 utilizing the “excess earnings method” of the income approach.  The estimated discounted cash flows associated with existing customers and projects were based on historical and market participant data.  Such discounted cash flows were net of fair market returns on the various tangible and intangible assets that are necessary to realize the potential cash flows.

 

The fair value of the tradename of $550 was determined based on the “relief from royalty” method.  A royalty rate was selected based on consideration of several factors, including external research of third party tradename licensing agreements and their royalty rate levels, and management estimates.  The useful life was estimated at five years based on management’s expectation for continuing value of the tradename in the future.

 

The fair value for the non-compete agreement of $100 was based on a discounted “income approach” model, including estimated financial results with and without the non-compete agreement in place.  The agreement was analyzed based on the potential impact of competition that certain individuals could have on the financial results, assuming the agreement was not in place.  An estimate of the probability of competition was applied and the results were compared to a similar model assuming the agreement was in place.

 

Goodwill of $1,087 largely consists of expected benefits from the greater presence and convenient access to south Texas, the Houston ship channel and Louisiana and FSSI’s expertise in turn-around work for refineries and chemical plants.  Goodwill also includes the value of the assembled workforce of the FSSI business.  Based on the current tax treatment, goodwill and other intangible assets will be deductible for income tax purposes over a fifteen-year period.

 

2012 Acquisition - Sprint Pipeline Services, L.P.

 

The March 12, 2012 acquisition of Sprint was accounted for using the acquisition method of accounting.  The fair value of the consideration totaled $28,377, which included cash payments of $21,197, Company stock valued at $980 (or 62,052 shares of restricted common stock) and contingent consideration of $6,200.

 

The contingent consideration was as follows:  if income before interest, taxes, depreciation and amortization (“EBITDA”) for 2012, as defined in the purchase agreement, was at least $7,000, we would pay $4,000 in cash to the sellers. The earnout target was achieved in 2012 and was paid in April 2013.

 

The 2013 earnout target provides for an additional cash payment of $4,000 to the sellers if 2013 EBITDA is at least $7,750.  The estimated fair value of the 2013 contingent consideration as of the acquisition date was $2,745 and at September 30, 2013 and December 31, 2012, the estimated fair value of the contingent consideration was $3,300 and $3,020, respectively.

 

2012 Acquisition - Silva Companies

 

The May 30, 2012 acquisition of Silva was accounted for using the acquisition method of accounting.  The fair value of the consideration was $14,090.

 

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Table of Contents

 

2012 Acquisition - The Saxon Group

 

The September 28, 2012 acquisition of Saxon was accounted for using the acquisition method of accounting.  The fair value of the consideration was $550 in cash, payment of a banknote for $2,429, and contingent consideration valued at $1,950 for total consideration of $4,929.

 

The contingent consideration included an earnout where the Company would pay $2,500 to the sellers, contingent upon Saxon meeting one of the following two targets:  (1) EBITDA for the fifteen month period ending December 31, 2013 of at least $4,000 or; (2) EBITDA for the twenty-one month period ending September 30, 2014 of at least $4,750.  The estimated fair value of the contingent consideration on the acquisition date was $1,950.  The estimated fair value of the contingent consideration was $2,269 and $2,028 at September 30, 2013 and December 31, 2012, respectively.

 

2012 Acquisition — Q3 Contracting

 

Using the acquisition method of accounting, the fair value of the consideration for the November 17, 2012 acquisition of Q3C totaled $56,592.  At closing we made a cash payment of $48,116 and recorded a contingent earnout with a fair value of $7,448 and a liability for a future payment of $430 in Company common stock.

 

The contingent earnout requires the Company to pay additional cash to the sellers, contingent on Q3C meeting certain EBITDA targets (as that term is defined in the stock purchase agreement).  The targets are as follows:

 

1.                                    For the period November 18, 2012 through December 31, 2013, if EBITDA is at least $17,700, the Company will pay an additional $3,750.  The payment amount increases by $1,250, to $5,000, if EBITDA exceeds $19,000.

 

2.                                    For calendar year 2014, if EBITDA is at least $19,000, the Company will pay an additional $3,750.  The payment amount increases by $1,250, to $5,000, if EBITDA exceeds $22,000.

 

As of the purchase date, the estimated fair value of the contingent consideration was $7,448.  The fair value estimate is based on management’s evaluation of the probability of Q3C meeting the financial performance targets for the two periods, discounted at the Company’s estimated average cost of capital.  The estimated fair value at September 30, 2013 and December 31, 2012 was $8,536 and $7,490, respectively (which includes the expectation that the 2013 target, item 1 above, will be met, with the fair value of $5,000 at September 30, 2013).

 

In January 2013, we issued 29,273 shares of unregistered stock.  In August 2013, we paid $598 in cash to the sellers as part of tax-related elections that were made under the terms of the purchase agreement.

 

During the third quarter of 2013, the Company finalized its estimate of the fair value of the acquired assets and liabilities for the acquisition, resulting in no change to the initial estimate.  Additionally, under the purchase agreement, the Company made a final true-up of the purchase amount during the third quarter 2013, resulting in an additional payment to the sellers of $598.  This increased goodwill as of September 30, 2013, an increase in the original estimated goodwill value that had been recorded at December 31, 2012, March 31, 2013 and June 30, 2013.

 

Summary of Cash Paid for Acquisitions for the nine months ended September 30, 2013 and 2012

 

The following table summarizes the cash paid for acquisitions for the nine months ended September 30, 2013 and 2012.  The Q3C acquisition was made on November 17, 2012 and included a cash payment of $48,116.  The Company made an additional post-closing payment to the sellers in August 2013, which is included below:

 

 

 

Nine Months ended September 30,

 

 

 

2013

 

2012

 

 

 

 

 

 

 

Sprint — Purchased March 12, 2012

 

$

 

$

21,197

 

Silva — purchased May 30, 2012

 

 

13,934

 

Saxon — purchased September 28, 2012

 

 

2,979

 

FSSI — purchased March 11, 2013

 

1,675

 

 

Additional cash paid August 2013 — Q3C — purchased November 17, 2012

 

598

 

 

 

 

$

2,273

 

$

38,110

 

 

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Table of Contents

 

Supplemental Unaudited Pro Forma Information for the three and nine months ended September 30, 2013 and 2012

 

In accordance with ASC Topic 805 we are combining the pro forma information for the FSSI, Sprint, Silva, Saxon and Q3C acquisitions (“the Acquisitions”).  The following pro forma information for the three and nine months ended September 30, 2013 and 2012 presents the combined results of operations of the Acquisitions combined, as if the Acquisitions had each occurred at the beginning of 2012. The supplemental pro forma information has been adjusted to include:

 

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

 

·                                           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 2013 for the Sprint and FSSI acquisitions and 2013 or 2014 for the Saxon, Q3C and FSSI acquisitions;

 

·                                           the pro forma tax effect of both the income before income taxes and the pro forma adjustments, calculated using a tax rate of 39.0% for the three and nine months ended September 30, 2012 and the same periods in 2013; and

 

·                                           the pro forma increase in weighted average shares outstanding including 62,052 unregistered shares of common stock issued as part of the Sprint acquisition and 29,273 shares of unregistered common stock issued as part of the Q3C acquisition.

 

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 Acquisitions been completed on January 1, 2012.  For example, the pro forma results do not reflect any operating efficiencies and associated cost savings that the Company might have achieved with respect to the combined companies.

 

 

 

Three months
ended September 30,

 

Nine months
ended September 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

551,333

 

476,570

 

1,409,140

 

1,192,167

 

Income before provision for income taxes

 

37,268

 

31,967

 

79,283

 

65,395

 

Net income attributable to Primoris

 

21,845

 

19,379

 

47,109

 

39,848

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

51,568

 

51,427

 

51,530

 

51,433

 

Diluted

 

51,671

 

51,433

 

51,594

 

51,448

 

 

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.42

 

$

0.38

 

$

0.91

 

$

0.77

 

Diluted

 

$

0.42

 

$

0.38

 

$

0.91

 

$

0.77

 

 

Note 9—Intangible Assets

 

At September 30, 2013 and December 31, 2012, intangible assets totaled $48,002 and $51,978, respectively, net of amortization.  The September 30, 2013 balance includes the effect of the FSSI acquisition (See Note 8).  The table below 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

 

2013

 

2012

 

Tradename

 

3 to 10 years

 

$

21,808

 

$

23,586

 

Non-compete agreements

 

2 to 5 years

 

$

2,991

 

$

4,130

 

Customer relationships

 

5 to 15 years

 

$

23,203

 

$

24,212

 

Backlog

 

0.75 years

 

$

 

$

50

 

Total

 

 

 

$

48,002

 

$

51,978

 

 

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Table of Contents

 

Amortization expense of intangible assets was $1,891 and $1,476 for the three months ended September 30, 2013 and 2012, respectively, and amortization expense for the nine months ended September 30, 2013 and 2012 was $5,576 and $4,669, respectively. Estimated future amortization expense for intangible assets is as follows:

 

For the Years Ending
December 31,

 

Estimated
Intangible
Amortization
Expense

 

2013 (remaining three months)

 

$

1,891

 

2014

 

7,454

 

2015

 

6,404

 

2016

 

6,029

 

2017

 

5,909

 

Thereafter

 

20,315

 

 

 

$

48,002

 

 

Note 10—Accounts Payable and Accrued Liabilities

 

At September 30, 2013 and December 31, 2012, accounts payable included retention amounts of approximately $8,359 and $15,946, respectively.  These amounts are due to subcontractors but have been retained pending contract completion and customer acceptance of jobs.

 

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

 

 

 

September 30,
2013

 

December 31,
2012

 

 

 

 

 

 

 

Payroll and related employee benefits

 

$

51,354

 

$

33,086

 

Insurance, including self-insurance reserves

 

35,233

 

22,982

 

Reserve for estimated losses on uncompleted contracts

 

2,018

 

764

 

Corporate income taxes and other taxes

 

2,396

 

3,779

 

Accrued overhead cost

 

1,326

 

2,007

 

Other

 

9,554

 

13,534

 

 

 

$

101,881

 

$

76,152

 

 

Note 11—Credit Arrangements

 

Revolving Credit Facility

 

As of September 30, 2013, the Company had a revolving credit facility (the “Credit Agreement”). The Credit Agreement was entered into by and among the Company, The PrivateBank and Trust Company, as administrative agent (the “Administrative Agent”) and co-lead arranger, The Bank of the West, as co-lead arranger, and IBERIABANK Corporation (the “Lenders”). The Credit Agreement is a $75 million revolving credit facility whereby the lenders agree to make loans on a revolving basis from time to time and to issue letters of credit for up to the $75 million committed amount. The Credit Agreement also provides for an incremental facility of up to $50 million. The termination date of the Credit Agreement is December 28, 2017.

 

The principal amount of any loans under the Credit Agreement will bear interest at either: (i) LIBOR plus an applicable margin as specified in the Credit Agreement (based on the Company’s senior debt to EBITDA ratio), or (ii) the Base Rate (which is the greater of (a) the Federal Funds Rate plus 0.5% or (b) the prime rate as announced by the Administrative Agent). Quarterly non-use fees, letter of credit fees and administrative agent fees are payable at rates specified in the Credit Agreement.

 

The principal amount of any loan drawn under the Credit Agreement may be prepaid in whole or in part, with a minimum prepayment of $5 million, at any time, potentially subject to make-whole provisions.

 

The Credit Agreement includes customary restrictive covenants for facilities of this type, as discussed below.

 

Commercial letters of credit were $4,808 at September 30, 2013 and $4,808 at December 31, 2012.  Other than commercial letters of credit, there were no borrowings under this line of credit during the nine months ended September 30, 2013, leaving available borrowing capacity at $70,192 at September 30, 2013.

 

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At the execution of the Credit Agreement, the previous Loan and Security Agreement dated October 29, 2009, as amended, between the Company and The Private Bank and Trust Company (the “PrivateBank Agreement”), was terminated.  There were no borrowings outstanding at the time of the termination and all outstanding letters of credit were transferred to the Credit Agreement.

 

Senior Secured Notes and Shelf Agreement

 

On December 28, 2012, the Company entered into a $50 million Senior Secured Notes purchase (“Senior Notes”) and a $25 million private shelf agreement (the “Notes Agreement”) by and among the Company, The Prudential Investment Management, Inc. and certain Prudential affiliates (the “Noteholders”).

 

The Senior Notes amount was funded on December 28, 2012. The Senior Notes are due December 28, 2022 and bear interest at an annual rate of 3.65%, paid quarterly in arrears. Annual principal payments of $7.1 million are required from December 28, 2016 through December 28, 2021 with a final payment due on December 28, 2022. The principal amount may be prepaid, with a minimum prepayment of $5 million, at any time, subject to make-whole provisions.

 

The Notes Agreement provided for the issuance of notes of up to $25 million, prior to December 28, 2016.  On July 25, 2013, the Company drew the full $25 million available under the Notes Agreement.  The notes are due July 25, 2023 and bear interest at an annual rate of 3.85% paid quarterly in arrears.  Seven annual principal payments of $3.6 million are required from July 25, 2017 with a final payment due on July 25, 2023.

 

All loans made under both the Credit Agreement and the Notes Agreement are secured by our assets, including, among others, our cash, inventory, goods, equipment (excluding equipment subject to permitted liens) and accounts receivable. All of our domestic subsidiaries have issued joint and several guaranties in favor of the Lenders and Noteholders for all amounts under the Credit Agreement and Notes Agreement.

 

Both the Credit Agreement and the Notes Agreement contain various restrictive and financial covenants including among others, minimum tangible net worth, senior debt/EBITDA ratio, debt service coverage requirements and a minimum balance for unencumbered net book value for fixed assets. In addition, the agreements include restrictions on investments, change of control provisions and provisions in the event the Company disposes more than 20% of its total assets.

 

The Company was in compliance with the covenants for the Credit Agreement and Notes Agreement at September 30, 2013.

 

Canadian Credit Facility

 

The Company has a credit facility for $10,000 in Canadian dollars with a Canadian bank for purposes of issuing commercial letters of credit in Canada.  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. At September 30, 2013 and December 31, 2012, letters of credit outstanding totaled $3,410 and $1,364 in Canadian dollars, respectively.  At September 30, 2013, the available borrowing capacity was $6,590 in Canadian dollars.  The credit facility contains a working capital restrictive covenant for our Canadian subsidiary, OnQuest Canada, ULC.  At September 30, 2013, OnQuest Canada, ULC was in compliance with the covenant.

 

Subordinated Promissory Notes

 

Subordinated Promissory Note — Rockford .  In connection with the 2010 acquisition of Rockford, the Company executed an unsecured promissory note with an initial principal amount of $16,712.  In December 2012, the subordinated note was deemed paid.

 

Subordinated Promissory Note — JCG .  In connection with the 2009 acquisition of JCG, the Company executed an unsecured promissory note on December 18, 2009 with an initial principal amount of $53,500.  The JCG note was paid in full on March 12, 2012.

 

Note 12 — Noncontrolling Interests

 

The Company applies the provisions of ASC Topic 810-10-45, which establishes accounting and reporting standards for ownership interests of parties other than the Company in subsidiaries, such as joint ventures and partnerships.

 

The Company determined that the Blythe joint venture was a variable interest entity (“VIE”) and that the Company was the primary beneficiary as a result of its significant influence over the joint venture operations.

 

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Table of Contents

 

The Blythe joint venture operating activities are included in the Company’s consolidated statements of income as follows:

 

 

 

Three months
ended September 30,

 

Nine months
ended September 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

15,468

 

7,750

 

47,371

 

13,164

 

Net income attributable to noncontrolling interests

 

1,348

 

432

 

1,947

 

600

 

 

Since Blythe is a partnership, no tax effect was recognized for the income.   Blythe made a $2.5 million distribution to the noncontrolling interests and $2.5 million distribution to the Company during the nine months ended September 30, 2013.  There were no distributions made in the prior year, and there were no capital contributions made during the nine months ended September 30, 2013.

 

The carrying value of the assets and liabilities associated with the operations of the Blythe joint venture are included in the Company’s consolidated balance sheets as follows:

 

 

 

September 30,
2013

 

December 31,
2012

 

 

 

 

 

 

 

Cash

 

$

1,793

 

$

3,565

 

Accounts receivable

 

8,448

 

8,843

 

Current liabilities

 

8,318

 

9,379

 

 

The net assets of the joint venture are restricted for use by the project and are not available for general operations of the Company.

 

Note 13 — Contingent Earnout Liabilities

 

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  The final contingent earnout  for 2012 was achieved and in April 2013, the Company made a $6,900 cash payment.

 

The Company has recorded additional contingent earnout consideration liabilities related to the acquisitions of FSSI, Sprint, Saxon and Q3C as discussed in Note 8 — Business Combinations.

 

Note 14—Related Party Transactions

 

Primoris has entered into leasing 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, holds a majority interest and is the chairman, president and chief executive officer and a director of SIGI.  John M. Perisich, our Executive Vice President and General Counsel, is secretary of SIGI.

 

Primoris leases properties from SIGI at the following locations:

 

1.         Bakersfield, California (lease expires October 2022)

2.         Pittsburg, California (lease expires April 2023)

3.         San Dimas, California (lease expires March 2019)

4.         Pasadena, Texas (leases expire in July 2019 and 2021)

 

During the nine months ended September 30, 2013 and 2012, the Company paid $688 and $695, respectively, in lease payments to SIGI for the use of these properties.

 

The Company entered into a $6.1 million agreement in 2010 to construct a wastewater facility for Pluris, LLC, a private company in which Brian Pratt holds the majority interest.  The transaction was reviewed and approved by the Audit Committee of the Board of Directors of the Company.  The project was substantially completed in December 2011.  The Company recognized no revenues or profits in 2013 and recognized revenues of $362 for the nine months ended September 30, 2012, at normal margins.

 

Primoris leases a property from Roger Newnham, a former owner and current manager of our subsidiary, OnQuest Canada, ULC. The property is located in Calgary, Canada. During the nine months ended September 30, 2013 and 2012, Primoris paid $223 and $212, respectively, in lease payments.  The current term of the lease is through December 31, 2014.

 

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Table of Contents

 

Primoris leases a property from Lemmie Rockford, one of the Rockford sellers, which commenced November 1, 2011.  The property is located in Toledo, Washington.  During the nine months ended September 30, 2013 and 2012, Primoris paid $68 and $68, respectively, in lease payments.  The lease expires in January 2015.

 

As a result of the November 2012 acquisition of Q3C, the Company became party to leased property from Quality RE Partners, owned by three of the Q3C selling shareholders, of whom two are current employees, including Jay Osborn, President of Q3C.  The property is located in Little Canada, Minnesota.  During the nine months ended September 30, 2013, the Company paid $198, in lease payments to Quality RE Partners for the use of this property.  The lease commenced October 28, 2012 and expires in October 2022.

 

As discussed in Note 7— “ Equity Method Investments ”, the Company owns several non-consolidated investments and has recognized revenues on work performed by the Company for those joint ventures.

 

Note 15—Stock-Based Compensation

 

On May 3, 2013, the Board of Directors granted 100,000 Restricted Stock Units (“Units”) under the 2013 Equity Incentive Plan (the “2013 Plan”).  The Units vest over a service period of four equal installments in 2014 through 2017, subject to earlier acceleration, termination, cancellation or forfeiture as provided in the underlying award agreement.  Each Unit represents the right to receive one share of the Company’s common stock when vested.

 

The fair value of the Units was based on the closing market price of our common stock on the day prior to the date of the grant, or $21.98 per Unit.  Stock compensation expense for the Units is being amortized using the straight-line method over the service vesting period.  For the three and nine months ended September 30, 2013 the Company recognized $138 and $229, respectively, in compensation expense.  At September 30, 2013, approximately $1.97 million of unrecognized compensation expense remains for the Units which will be recognized over a period of 3.6 years.

 

Vested Units accrue “Dividend Equivalents” (as defined in the 2013 Plan) which will be accrued as additional Units.  At September 30, 2013, there were no accrued Dividend Equivalent Units.

 

Note 16—Income Taxes

 

The effective tax rate on income before taxes and noncontrolling interests for the nine months ended September 30, 2013 is 38.13%.  The effective tax rate for income attributable to Primoris is 39.09%. The rate differs from the U.S. federal statutory rate of 35% due primarily to state income taxes, the “Domestic Production Activity Deduction” and nondeductible meals and incidental per diems common in the construction industry.

 

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 operates. 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.

 

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 of enactment date.

 

In September 2012, the Internal Revenue Service (“IRS”) concluded an examination of our federal income tax returns for 2008 and 2009, which did not have a material impact on our financial statements.  In the third quarter of 2013, the IRS initiated an examination of our federal income tax return for 2011.  The tax years 2010 through 2012 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 2008 through 2012 generally remain open to examination by the other major taxing jurisdictions in which the Company operates.

 

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Table of Contents

 

Note 17—Dividends and Earnings Per Share

 

The Company has paid or declared cash dividends during 2013 as follows:

 

·                                     On March 5, 2013, the Company declared a cash dividend of $0.03 per common share, payable to stockholders of record on March 29, 2013.  The dividend, totaling $1,547, was paid on April 15, 2013.

·                                     On May 3, 2013, the Company declared a cash dividend of $0.035 per common share, payable to stockholders of record on June 28, 2013.  The dividend, totaling $1,805, was paid on July 15, 2013.

·                                     On August 2, 2013, the Company declared a cash dividend of $0.035 per common share, payable to stockholders of record on September 30, 2013.  The dividend, totaling $1,805, was paid on October 15, 2013.

 

The table below presents the computation of basic and diluted earnings per share for the three and nine months ended September 30, 2013 and 2012:

 

 

 

Three months
ended September 30,

 

Nine months
ended September 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

Numerator:

 

 

 

 

 

 

 

 

 

Net income attributable to Primoris

 

$

21,845

 

$

17,516

 

$

47,179

 

$

39,735

 

Denominator (shares in thousands):

 

 

 

 

 

 

 

 

 

Weighted average shares for computation of basic earnings per share

 

51,568

 

51,398

 

51,529

 

51,387

 

Dilutive effect of shares issued to independent directors

 

3

 

6

 

10

 

15

 

Dilutive effect of shares issued as part of Q3C acquisition

 

 

 

1

 

 

Dilutive effect of unvested restricted stock units

 

100

 

 

55

 

 

Weighted average shares for computation of diluted earnings per share

 

51,671

 

51,404

 

51,595

 

51,402

 

 

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

$

0.42

 

$

0.34

 

$

0.92

 

$

0.77

 

Diluted earnings per share

 

$

0.42

 

$

0.34

 

$

0.91

 

$

0.77

 

 

Note 18—Stockholders’ Equity

 

Common stock — In March 2013, the Company received $1,455 for 131,989 shares of common stock issued, under a purchase arrangement within the Company’s Long-Term Incentive Plan (“LTI Plan”) for managers and executives. The LTI Plan allows participants to use a portion of their annual bonus amount to purchase Company common stock at a discount from the market price. The shares purchased in March 2013 were for bonus amounts earned in 2012 and were calculated at 75% of the average market closing price of December 2012.  In March 2012, the Company received $1,240 for 111,790 shares of common stock issued under the LTI Plan for bonus amounts earned in the prior year.

 

In March 2013 and in August 2013, the Company issued 12,480 shares and 9,110 shares, respectively, of common stock as part of the quarterly compensation of the non-employee members of the Board of Directors.

 

As part of the acquisition of Q3C, the Company issued 29,273 unregistered shares of stock on January 7, 2013.  The shares were issued based on the average December 2012 closing prices, or $14.69 per share for a total value of $430.

 

Note 19—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, 2013 was $3,566 and $11,111, respectively, compared to $2,629 and $7,388 for the same periods in 2012.  The amounts for the three and nine months ended September 30, 2013 included lease payments made to related parties of $379 and $1,176, respectively, and $327 and $975 for the three and nine months ended September 30, 2012, respectively.

 

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Table of Contents

 

Letters of credit At September 30, 2013, the Company had letters of credit outstanding of $8,123 and at December 31, 2012, the Company had letters of credit outstanding of $6,168.  The outstanding amounts include the U.S. dollar equivalents for letters of credit issued in Canadian dollars.

 

Litigation — On February 7, 2012, the Company was sued in an action entitled North Texas Tollway Authority, Plaintiff v. James Construction Group, LLC, and KBR, Inc., Defendants, v. Reinforced Earth Company, Third-Party Defendant (the “Lawsuit”). The Lawsuit was brought in the District Court of Collin County, Texas, 401 st  Judicial District, Cause No. 401-01747-2012.  In the Lawsuit, the North Texas Tollway Authority (“NTTA”) is alleging damages to a road and retaining wall that were constructed in 1999 on the George Bush Turnpike near Dallas, Texas, due to negligent construction by JCG.  The Lawsuit claims that the cost to repair the retaining wall was approximately $5.4 million.  The NTTA also alleges that six other walls constructed on the project by JCG could have the same potential exposure to failure.  The Company has denied any liability, but has tendered the claim to its insurance carriers and has cross-complained against its engineering subcontractor for potential design liability.  The extent of insurance coverage by the carriers of the Company and its subcontractor are undetermined at this time.  The Company has investigated all potential causes of the alleged loss, including design liabilities of the owner, owner’s engineers and/or the Company’s subcontractor.   To date, mediation efforts have not been successful, and a jury trial is likely to be scheduled for 2014.  While the Company will vigorously defend the claims, after discussion with its legal counsel, the Company recorded an accrual amount for this issue.

 

The Company is subject to other 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 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, 2013 and December 31, 2012, the Company had bid and completion bonds issued and outstanding totaling approximately $1,449,158 and $1,298,589, respectively.

 

Withdrawal liability for multiemployer pension plan In November 2011, Rockford and ARB, along with other members of the Pipe Line Contractors Association (“PLCA”), withdrew from the Central States Southeast and Southwest Areas Pension Fund multiemployer pension plan (the “Plan”).  The Company withdrew from the Plan in order to mitigate its liability in connection with the Plan, which is significantly underfunded.   The Company recorded a liability of $7,500 based on information provided by the Plan. However, the Plan has asserted that the PLCA members did not affect a proper withdrawal in 2011. The Company believes that a legally effective withdrawal occurred in November 2011 and has recorded the withdrawal liability on that basis. If the Plan were to prevail in its assertion and the withdrawal of the Company were deemed to occur after 2011, the amount of any withdrawal liability could increase.

 

Prior to its acquisition, Q3C had also withdrawn from the Plan.  In November 2012, Q3C estimated a withdrawal liability of $85.  In the first quarter of 2013, the Plan asserted that the liability was $119.  Without agreeing to the amount, Q3C is making payments toward the liability amount.

 

Contingent Consideration Earnouts related to acquisitions are discussed in Note 8 — Business Combinations and Note 13 — Contingent Earnout Liabilities.

 

Note 20—Reportable Operating Segments

 

The Company segregates its business into three operating segments: the East Construction Services (“East”) segment, the West Construction Services (“West”) segment and the Engineering segment.

 

The East segment includes the JCG construction business, located primarily in the southeastern United States and the businesses located in the Gulf Coast region of the United States, including Cardinal Contractors, Inc.  The segment also includes the operating results relating to the acquisitions of Sprint, Silva and Saxon in 2012 and FSSI in 2013.

 

The West segment includes the construction services performed by ARB, ARB Structures, Inc., Rockford, Alaska Continental Pipeline, Inc., All Day Electric Company, Inc., Primoris Renewables, Inc., Juniper Rock, Inc. and Stellaris, LLC.  This segment also includes the operating results of Q3C acquired in November 2012.  While most of the entities perform work primarily in California, Rockford operates throughout the United States and Q3C operates in the upper Midwest United States.  The Blythe joint venture is also included as a part of the segment.

 

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

 

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

 

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Table of Contents

 

Segment Revenues

 

Revenue by segment for the three months ended September 30, 2013 and 2012 were as follows:

 

 

 

For the three months ended September 30,

 

 

 

2013

 

2012

 

Segment

 

Revenue

 

% of
Segment
Revenue

 

Revenue

 

% of
Segment
Revenue

 

 

 

 

 

 

 

 

 

 

 

East

 

$

178,716

 

32.4

%

$

181,260

 

42.0

%

West

 

362,362

 

65.7

%

242,033

 

56.0

%

Engineering

 

10,255

 

1.9

%

8,549

 

2.0

%

Total

 

$

551,333

 

100.0

%

$

431,842

 

100.0

%

 

Revenue by segment for the nine months ended September 30, 2013 and 2012 were as follows:

 

 

 

For the nine months ended September 30,

 

 

 

2013

 

2012

 

Segment

 

Revenue

 

% of
Segment
Revenue

 

Revenue

 

% of
Segment
Revenue

 

 

 

 

 

 

 

 

 

 

 

East

 

$

544,325

 

38.7

%

$

459,167

 

43.3

%

West

 

828,242

 

58.9

%

567,351

 

53.5

%

Engineering

 

33,774

 

2.4

%

34,333

 

3.2

%

Total

 

$

1,406,341

 

100.0

%

$

1,060,851

 

100.0

%

 

Segment Gross Profit

 

Gross profit by segment for the three months ended September 30, 2013 and 2012 were as follows:

 

 

 

For the three months ended September 30,

 

 

 

2013

 

2012

 

Segment

 

Gross
Profit

 

% of
Segment
Revenue

 

Gross
Profit

 

% of
Segment
Revenue

 

 

 

 

 

 

 

 

 

 

 

East

 

$

10,600

 

5.9

%

$

18,664

 

10.3

%

West

 

62,520

 

17.3

%

35,602

 

14.7

%

Engineering

 

2,345

 

22.9

%

2,025

 

23.7

%

Total

 

$

75,465

 

13.7

%

$

56,291

 

13.0

%

 

Gross profit by segment for the nine months ended September 30, 2013 and 2012 were as follows:

 

 

 

For the nine months ended September 30,

 

 

 

2013

 

2012

 

Segment

 

Gross
Profit

 

% of
Segment
Revenue

 

Gross
Profit

 

% of
Segment
Revenue

 

 

 

 

 

 

 

 

 

 

 

East 

 

$

40,810

 

7.5

%

$

47,442

 

10.3

%

West

 

133,195

 

16.1

%

84,297

 

14.9

%

Engineering

 

7,093

 

21.0

%

6,152

 

17.9

%

Total

 

$

181,098

 

12.9

%

$

137,891

 

13.0

%

 

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Table of Contents

 

Segment Goodwill

 

The following presents the amount of goodwill recorded by segment at September 30, 2013 and at December 31, 2012.

 

Segment

 

September 30,
2013

 

December 31,
2012

 

 

 

 

 

 

 

East

 

$

70,946

 

$

69,859

 

West

 

45,239

 

44,641

 

Engineering

 

2,441

 

2,441

 

Total

 

$

118,626

 

$

116,941

 

 

Geographic Region — Revenues and Total Assets

 

Revenue and total assets by geographic area for the nine months ended September 30, 2013 and 2012 were as follows:

 

 

 

Revenues

 

 

 

 

 

 

 

For the nine months ended September 30,

 

 

 

 

 

 

 

2013

 

2012

 

Total Assets

 

Country:

 

Revenue

 

% of
Revenue

 

Revenue

 

% of
Revenue

 

September 30,
2013

 

December 31,
2012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

United States

 

$

1,393,837

 

99.1

%

$

1,053,547

 

99.3

%

$

1,007,980

 

$

920,872

 

Non-United States

 

12,504

 

0.9

 

7,304

 

0.7

 

11,097

 

10,335

 

Total

 

$

1,406,341

 

100.0

%

$

1,060,851

 

100.0

%

$

1,019,077

 

$

931,207

 

 

All non-United States revenue were generated in the Engineering segment.  For the table above, revenues generated by OnQuest 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, 2013 (“Third Quarter 2013 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, 2012 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 2013 Report. You should read this Third Quarter 2013 Report, our Annual Report on Form 10-K for the year ended December 31, 2012 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 2013 Report and our Annual Report on Form 10-K for the year ended December 31, 2012.

 

Introduction

 

Primoris Services Corporation (“Primoris”, the “Company”, “we”, “us” or “our”) is a holding company of various subsidiaries, which form one of the largest publicly traded specialty contractor 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, state departments of transportation and other customers. 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 and parking structures. In addition, we provide maintenance services, including inspection, overhaul and emergency repair services, to cogeneration plants, refineries and similar mechanical facilities. One of our subsidiaries provides engineering and design services for fired heaters and furnaces primarily used in refinery applications.

 

Including our predecessor companies, we have been in business for more than 65 years.  We became a publicly traded company in 2008.  At that time, our operations were focused primarily on the West Coast through our subsidiaries ARB, Inc. (“ARB”) and ARB Structures, Inc.  We also provided product engineering services through a subsidiary, OnQuest, Inc. and its wholly owned subsidiary, OnQuest Canada, ULC (formerly Born Heaters Canada, ULC) to international customers and water and waste water construction services in Florida through Cardinal Contractors, Inc.  ARB and ARB Structures, Inc. are headquartered in Lake Forest, CA, OnQuest is headquartered in San Dimas, CA, OnQuest Canada, ULC is headquartered in Calgary, Canada and Cardinal Contractors is headquartered in Sarasota, FL.

 

Since July 2008, we have continued to strategically expand both our capabilities and our geographic presence.  This expansion has resulted in significant increases in revenues and profitability.  The following is a discussion of the major acquisitions.

 

·                   On December 18, 2009, we acquired James Construction Group, LLC, a privately-held Florida limited liability company (“JCG”).  JCG is one of the largest general contractors based in the Gulf Coast states and is engaged in highway, industrial and environmental construction, primarily in Louisiana, Texas and Florida.  JCG is the successor company to T. L. James and Company, Inc., a Louisiana company that has been in business for over 80 years.  Headquartered in Baton Rouge, Louisiana, JCG serves government and private clients in a broad geographical region that includes the entire Gulf Coast region of the United States.

 

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·                   On November 8, 2010, we acquired privately-held Rockford Corporation (“Rockford).  Based in Hillsboro (outside Portland), Oregon, Rockford specializes in construction of large diameter natural gas and liquid pipeline projects and related facilities throughout most of North America.

 

·                   In 2012, we made four acquisitions:

 

·                   On March 12, 2012, we purchased certain assets of Sprint Pipeline Services, L.P. (“Sprint”), headquartered in Pearland (outside Houston), Texas.  Sprint provides a comprehensive range of pipeline construction, maintenance, upgrade, fabrication and specialty services primarily in Texas and the southeastern United States.

 

·                   On May 30, 2012, we purchased certain assets of Silva Contracting Company, Inc., Tarmac Materials, LLC and C3 Interest, LLC (collectively, “Silva”).  Based outside of Houston, Texas, Silva provides transportation infrastructure maintenance, asphalt paving, and material sales in the Gulf Coast region of the United States.  Following this acquisition, Silva was merged with the operations of JCG.

 

·                   On September 28, 2012, we purchased certain assets of The Saxon Group, Inc. (“Saxon”).  Based in Suwannee, Georgia (outside Atlanta), Saxon is a full service industrial construction enterprise with special expertise in the industrial gas processing and power plant sectors.

 

·                   On November 17, 2012, we purchased all of the stock of Q3 Contracting, Inc., a privately-held Minnesota corporation (“Q3C”).  Based in Little Canada, Minnesota, north of St. Paul, Minnesota, Q3C specializes in small diameter pipeline and gas distribution construction, restoration and other services, primarily for utilities in the upper Midwest region of the United States.

 

·                   In March 2013, the Company’s subsidiary, Primoris Energy Services Inc. (PES) purchased the assets of Force Specialty Services, Inc. (“FSSI”) which specializes in turn-around work at refineries and chemical plants in the Gulf Coast area.

 

The Company is a party to the Blythe Power Constructors (“Blythe”) joint venture for the installation of a parabolic trough solar field and steam generation system in California.

 

During the past five years, we have also created legal entities to consolidate or focus our efforts.  For example, in 2009 we created Primoris Renewables, Inc. to focus on alternative energy projects, and in 2012, we created PES which is the legal entity that owns Sprint, Saxon and FSSI.  Additionally, some of our subsidiaries have increased their focus on certain industries or geographies.  For example, during the past year, Cardinal Contractors has opened a facility near Dallas to better serve water and wastewater construction opportunities in Texas.

 

Historically, we have longstanding relationships with major utility, refining, petrochemical, power and engineering companies.  We have completed major underground and industrial projects for a number of large natural gas transmission and petrochemical companies.  With our acquisitions of JCG and Q3C we have expanded our ability to provide services to our historical customers in additional geographies.  Our diversified customer base includes many of the leading pipeline, power generation and utility companies in the United States.  We often provide services under multi-year master service agreements (“MSA”).

 

In the second quarter of 2013, we made the decision to close two of our small subsidiaries, Calidus and All Day Electric Company, Inc.  Operations should cease by year end.  For the nine months ended September 30, 2013 and for the year of 2012, their combined revenue was less than 0.5% and 0.3% of total consolidated Primoris revenues, respectively.  The costs of closure are not expected to be material.

 

Additional information about us can be found in our press releases and other public filings.  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 website, 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 website address is www.prim.com . The information on our Internet website is neither part of nor incorporated by reference into this Third Quarter 2013 Report.

 

End-Markets

 

We are a diversified specialty construction company, and our strategy is to serve customers in different end markets.  Our primary focus is on the following end markets:

 

·                   Underground construction.  This market consists of two types of projects.  The first is the construction of major capital projects primarily underground infrastructure for the oil and gas, telecommunication and water and wastewater industries.  The second is installation, repair and maintenance of underground services, typically for utility customers.  Our subsidiaries ARB and Sprint serve both end markets while our subsidiary Rockford provides construction services primarily to the major capital projects market and Q3C provides services primarily to utility customers.

 

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·                   Industrial construction.  In this market we provide construction services in such facilities as power plants, refineries and industrial gas and petrochemical facilities.  Our subsidiaries ARB, JCG and Saxon are providers of services in this market.

 

·                   Heavy civil construction.  We provide construction for highways and bridges, primarily to state agencies.  We also sell aggregates and asphalt.  Our subsidiary JCG is focused on this market, primarily in the states of Louisiana, Texas and Mississippi.

 

·                   Water and wastewater construction.  Our subsidiary Cardinal Contractors provides construction services to the water and wastewater industry, primarily in Florida and Texas.

 

·                   Engineering services.  We provide product engineering services primarily for the energy industry.  Our 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. It furnishes turnkey project management with technical expertise and the ability to deliver custom engineering solutions worldwide.

 

·                   Other construction services.  Our subsidiary ARB Structures, Inc. builds poured-in-place parking structures in Southern California and our subsidiary FSSI provides turnaround services in the Houston market at refineries and chemical plants.

 

As opportunities change in our end markets and as we have grown the company, the amount of work we do in any of our end markets fluctuates.  The following table shows the approximate percentage of revenues derived from the major end markets for the twelve-month periods listed:

 

 

 

Twelve Months Ended
September 2013

 

Twelve Months Ended
December 2012

 

Twelve Months Ended
September 2012

 

 

 

 

 

 

 

 

 

Underground capital projects

 

22

%

14

%

11

%

Utility services

 

31

%

28

%

27

%

Industrial

 

21

%

25

%

25

%

Heavy Civil

 

16

%

21

%

24

%

Engineering

 

2

%

2

%

3

%

Other

 

8

%

10

%

10

%

Total

 

100.0

%

100.0

%

100.0

%

 

Reportable Segments

 

We present our operations in three reportable segments:  West Construction Services (“West”), East Construction Services (“East”) and Engineering.  Our segment structure has been determined in accordance with ASC 280, Segment Reporting.  All of our segments derive their revenues primarily from construction and product engineering in the United States.

 

Our East and West segments provide the following:

 

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

 

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

 

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

 

·                   construction of highways and industrial and environmental construction.

 

The East segment consists of businesses located primarily in the southeastern United States and along the Gulf Coast.  The West segment consists of businesses located primarily in the western United States.  The West segment also includes the operations of the Blythe joint venture.  The Engineering segment includes both domestic and international project work.

 

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The following table lists the Company’s primary operating subsidiaries and their reportable operating segment:

 

Subsidiary

 

Operating Segment

ARB, Inc. (“ARB”)

 

West Construction Services

ARB Structures, Inc.

 

West Construction Services

Q3 Contracting, Inc. (“Q3C”); acquired 2012

 

West Construction Services

Rockford Corporation (“Rockford”)

 

West Construction Services

Stellaris, LLC.

 

West Construction Services

OnQuest, Inc.

 

Engineering

OnQuest, Canada, ULC (Born Heaters Canada, ULC prior to 2013)

 

Engineering

Cardinal Contractors, Inc.

 

East Construction Services

Force Specialty Services, Inc. (“FSSI”); acquired 2013

 

East Construction Services

James Construction Group, LLC (“JCG”)

 

East Construction Services

Sprint Pipeline Services, L.P. (“Sprint”); acquired 2012

 

East Construction Services

Silva Group (“Silva”); acquired 2012

 

East Construction Services

The Saxon Group (“Saxon”); acquired 2012

 

East Construction Services

 

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; however, each of these industries and the government agencies periodically are adversely affected by macroeconomic conditions.  Economic factors outside of our control 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 on-going economic uncertainty, fluctuations in capital markets and potential regulatory changes and uncertainties.  We are closely monitoring our customers and the effect that changes in economic and market conditions and regulatory environment may have on them. We have experienced delays in project awards and the start of awarded projects as customers carefully consider their overall environment prior to investing in new infrastructure.  However, we believe that most of our customers, some of whom are regulated utilities, remain financially stable and will be able to continue with their business plans in the long-term without substantial constraints.

 

Within these trends for the economy in general, we believe that there are positive opportunities within our end markets over the next five-year horizon.  The development of shale oil and gas has a positive impact on the capital projects in our underground market both in large diameter pipeline projects and the well fields.  The increased emphasis on pipeline integrity by utility companies provides growth potential in our utility underground markets.  The apparent long-term nature of reduced natural gas prices should lead to increased opportunities for our industrial markets in the Gulf Coast region, and the impact of regulatory rules in California provides an opportunity for continuing upgrades to power plants.  At present, the heavy civil market growth is moderate as state funding is restrained and the timing of any federal funding growth is uncertain. Finally, the continuing drought in the western United States may lead to future opportunities in the water and wastewater market.

 

The opportunities in our end markets may lead to both increases in unit labor costs and shortages in availability of qualified personnel, especially in the Gulf Coast region.  Depending on contractual terms, cost increases or reductions in efficiency, could reduce our margins.  Furthermore, the uncertain impact of the Affordable Care Act on our current and future employees could also increase our cost structure.

 

We believe that we will be able to take advantage of the opportunities in our end market segments; however, these opportunities may not occur in a linear fashion.  As a contractor, we are dependent on the owners for project development, project funding and project timing.  Owners’ decisions and market opportunities tend to cause significant fluctuations in revenues, profits and cash flows.

 

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.  The weather also limits our ability to bid for and perform pipeline integrity testing and routine maintenance for our utility customers’ underground systems since the systems are used for heating.  The acquisitions of Sprint and Q3C have added to the seasonality of our business.  Q3C’s primary operations are in the Midwest United States, an area usually affected by inclement weather during the first quarter.  Similarly, a significant portion of Sprint’s revenue is derived from utility customers.  In most years, utility owners obtain bids and award contracts for major maintenance, integrity and replacement work after the heating season, and the work must be completed by the following winter.  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, we usually experience 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 can fluctuate from year to year based on general economic conditions. Because of the cyclical nature of our business, the financial results for any period may fluctuate from prior periods, and our financial condition and operating results may vary from quarter-to-quarter.

 

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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 period may not be indicative of the results that can be expected for any other period.

 

Critical Accounting Policies and Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the financial statements and also affect the amounts of revenues and expenses reported for each period. These estimates and assumptions must be made because certain information that is used in the preparation of our financial statements cannot be calculated with a high degree of precision from data available, is dependent on future events, or is not capable of being readily calculated based on generally accepted methodologies. Often, these estimates are particularly difficult to determine, and we must exercise significant judgment. We use estimates in our assessments of revenue recognition under percentage-of-completion accounting, the allowance for doubtful accounts, useful lives of property and equipment, fair value assumptions in analyzing goodwill and long-lived asset impairments, self-insured claims liabilities and deferred income taxes.  Actual results could differ significantly from our estimates, and our estimates could change if there were made under different assumptions or conditions.

 

Our critical accounting policies, as described in our Annual Report on Form 10-K for the year ended December 31, 2012, relate primarily to revenue recognition for fixed price contracts, income taxes, goodwill, long-lived assets, reserves for uninsured risks and litigation and contingencies.  There have been no material changes to our critical accounting policies since December 31, 2012.

 

Results of operations

 

In the discussion of our results of operations, we provide separate information for the results of the companies that we have acquired since September 2012.  Saxon, Q3C and FSSI are identified as “Acquired Companies.”  For the business units that were part of Primoris at the end of September 2012, results of operations are identified as “Comparable Companies.”

 

Revenues, gross profit, operating income and net income for the three months ended September 30, 2013 and 2012 were as follows:

 

 

 

Three Months Ended September 30,

 

 

 

2013

 

2012

 

 

 

(Thousands)

 

% of
Revenue

 

(Thousands)

 

% of
Revenue

 

Revenues

 

$

551,333

 

100.0

%

$

431,842

 

100.0

%

Gross profit

 

75,465

 

13.7

%

56,291

 

13.0

%

Selling, general and administrative expense

 

36,478

 

6.6

%

26,014

 

6.0

%

Operating income

 

38,987

 

7.1

%

30,277

 

7.0

%

Other income (expense)

 

(1,719

)

(0.3

)%

(1,364

)

(0.3

)%

Income before income taxes

 

37,268

 

6.8

%

28,913

 

6.7

%

Income tax provision

 

(14,075

)

(2.6

)%

(10,965

)

(2.5

)%

Net income

 

$

23,193

 

4.2

%

$

17,948

 

4.2

%

Net income attributable to noncontrolling interests

 

(1,348

)

(0.2

)%

(432

)

(0.1

)%

Net income attributable to Primoris

 

$

21,845

 

4.0

%

$

17,516

 

4.1

%

 

Revenues, gross profit, operating income and net income for the nine months ended September 30, 2013 and 2012 were as follows:

 

 

 

Nine months Ended September 30,

 

 

 

2013

 

2012

 

 

 

(Thousands)

 

% of
Revenue

 

(Thousands)

 

% of
Revenue

 

Revenues

 

$

1,406,341

 

100.0

%

$

1,060,851

 

100.0

%

Gross profit

 

181,098