Primoris Services Corporation
Primoris Services Corp (Form: 10-K, Received: 03/03/2014 06:10:13)

Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 


 

FORM 10-K

 

(Mark One)

 

x

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

 

For the fiscal year ended December 31, 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)

 

(214) 740-5600

(Registrant’s telephone number, including area code)

 

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

 

Title of each class

 

Name of exchange on which registered

Common Stock, $0.0001 par value

 

The NASDAQ Stock Market LLC

 

Securities registered pursuant to Section 12(g) of the Act: None

 

Indicate by check mark if the registrant is a well-know seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes  x   No  o

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes  o   No  x

 

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 (§ 229.405 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III in this Form 10-K or any amendment to this Form 10-K.  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 (as defined in Rule 12b-2 of the Exchange Act).

 

Large accelerated filer  x

 

Accelerated filer  o

Non-accelerated filer  o

 

Smaller Reporting Company  o

 

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

 

The aggregate market value of the voting common equity held by non-affiliates of the registrant was approximately $758.2 million based upon the closing price of such common equity as of June 28, 2013 (the last business day of the Registrant’s most recently completed second fiscal quarter). On March 3, 2014, there were 51,577,769 shares of common stock, par value $0.0001, outstanding. For purposes of this Annual Report on Form 10-K, in addition to those stockholders which fall within the definition of “affiliates” under Rule 405 of the Securities Act of 1933, holders of ten percent or more of the Registrant’s common stock are deemed to be affiliates.

 

 

 



Table of Contents

 

TABLE OF CONTENTS

 

 

 

Page

Part I

 

 

Item 1.

Business

2

Item 1A.

Risk Factors

10

Item 1B.

Unresolved Staff Comments

21

Item 2.

Properties

21

Item 3.

Legal Proceedings

22

Item 4.

Mine Safety Disclosures

22

 

 

 

Part II

 

 

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

23

Item 6.

Selected Financial Data

27

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

29

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

48

Item 8.

Financial Statements and Supplementary Data

48

Item 9.

Changes In and Disagreements With Accountants on Accounting and Financial Disclosure

48

Item 9A.

Controls and Procedures

48

Item 9B.

Other Information

49

 

 

 

Part III

 

 

Item 10.

Directors, Executive Officers and Corporate Governance

49

Item 11.

Executive Compensation

50

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

50

Item 13.

Certain Relationships and Related Transactions, and Director Independence

50

Item 14.

Principal Accounting Fees and Services

50

 

 

 

Part IV

 

 

Item 15.

Exhibits and Financial Statement Schedules

51

 

 

 

Signatures

 

57

 

 

 

Index to Consolidated Financial Statements

F-1

 

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Table of Contents

 

FORWARD-LOOKING STATEMENTS

 

This Annual Report on Form 10-K 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 usually 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 “Item 1A. Risk Factors”.  You should read this Annual Report on Form 10-K 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 forward-looking statements.  Forward-looking statements represent our management’s beliefs and assumptions only as of the date of this Annual Report on Form 10-K.  We assume no obligation to update 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.

 

PART I

 

ITEM 1.  BUSINESS

 

Business Overview

 

Primoris Services Corporation (“Primoris”, the “Company”, “we”, “us” or “our”) is a holding company of various subsidiaries, which form one of the larger publicly traded specialty contractors and infrastructure companies in the United States.  Serving diverse end-markets, Primoris provides a wide range of construction, fabrication, maintenance, replacement, water and wastewater, and engineering services to major public utilities, petrochemical companies, energy companies, municipalities, state departments of transportation and other customers.  Growing both organically and through acquisitions, Primoris has more than tripled its revenues since 2009.  The Company’s national footprint now extends nearly nationwide and in to Canada.

 

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

 

The Company’s common stock trades on the NASDAQ Select Global Market under the symbol “PRIM”.  Founded as ARB, Inc. in 1946, we became organized as Primoris in Nevada in 2003, and we became a Delaware public company in July 2008 when we merged with a special purpose acquisition company (a non-operating shell).

 

Our service capabilities and geographic footprint have expanded primarily through the following four acquisitions.

 

In 2009, we acquired James Construction Group, LLC, a privately-held Florida limited liability company (“JCG”).  Headquartered in Baton Rouge, Louisiana, 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, Mississippi 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.

 

In 2010, we acquired privately-held Rockford Corporation (“Rockford”).  While it is based in Hillsboro (Portland), Oregon, Rockford specializes in construction of large diameter natural gas and liquid pipeline projects and related facilities throughout the United States.

 

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

 

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

 

In addition to these primary acquisitions, we have also entered into several smaller agreements to purchase a business, business assets or start a business as we continue to seek opportunities to expand our skill sets or operating locations.  In 2012, we acquired The Saxon Group (“Saxon”) and The Silva Group (“Silva”) (merged with JCG), and in 2013, we acquired Force Specialty Services, Inc. (“FSSI”).  We continue to evaluate potential acquisition candidates especially those with strong management teams with good reputations.

 

Reportable Segments

 

The Company segregates the business into three operating segments:  the East Construction Services segment (“East”), the West Construction Services segment (“West”) and the Engineering segment (“Engineering”).  While all of our segments derive their revenue from the engineering, building and maintenance of infrastructure projects, we remain a group of specialty contractors and not all of our services are necessarily provided to customers in each segment.

 

Range of Services — East and West Construction Services

 

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

 

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

 

·                   Providing maintenance services to utilities for installation and repair of gas distribution lines;

 

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

 

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

 

·                   Providing construction of highways and bridges; and

 

·                   Providing industrial and environmental construction.

 

East Construction Services

 

The East Construction Services segment consists of business located primarily in the southeastern United States and along the Gulf Coast.  The segment includes the JCG heavy civil, industrial and infrastructure and maintenance operations; the water and wastewater construction operations of Cardinal, the pipeline construction and maintenance operations of Sprint, the gas plant construction capabilities of Saxon, and the turn-around capabilities of FSSI.

 

West Construction Services

 

The West Construction Services segment consists of businesses headquartered primarily in the western United States.  The segment includes the underground and industrial operations of ARB, Inc. (“ARB”); the  pipeline construction operations of Rockford; the gas distribution operations of Q3C; the cast-in-place parking structures operations of ARB Structures, Inc. (“ARB structures”).  The segment also includes the operations of the Blythe Power Constructors joint venture.

 

Engineering

 

The Engineering segment includes the results of OnQuest, Inc. (“OnQuest”) and OnQuest Canada, ULC (“OnQuest Canada”).  The Engineering segment 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.

 

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A discussion regarding the revenues and operating results for each segment is found in in Item 7. “ Management’s Discussion and Analysis of Financial Condition and Results of Operations ” of this Annual Report on Form 10-K.

 

Trends

 

We continue to operate in an uncertain business environment with increasing regulatory requirements and only gradual recovery in the economy from the recessionary levels of the past few years.  Economic and regulatory issues have adversely affected our customers and have affected demand for our services.  For some of our customers, the additional uncertainty associated with state and federal budget pressures adds to the difficulty in predicting the timing or magnitude that industry trends may have on our business, particularly in the near-term.

 

For our underground services, we expect that the opportunities for natural gas pipeline construction will continue to increase over the next few years.   Development of gas shale formations throughout North America has resulted in a significant increase in the natural gas supply, leading to an apparent long-term reduction in natural gas prices.   As one of the cleanest-burning fossil fuels, low-cost natural gas supports the U.S. goals of energy independence from foreign energy sources, which may be achieved in the next two decades, and a cleaner environment.  The existing pipeline infrastructure appears to be insufficient to meet the growing natural gas demand which could lead to opportunities for new pipeline construction.  The potential severity of accidents associated with moving crude oil by railcar may increase pipeline construction opportunities.  In addition, the recently passed Pipeline Safety, Regulatory Certainty, and Job Creation Act of 2011, authorized the Pipeline and Hazardous Materials and Safety Administration to promulgate new rules for pipeline integrity.  These rules are in addition to various state regulations.  We believe that these integrity testing requirements will increase the demand for our underground services.  We have the ability to offer construction and maintenance of large diameter pipeline, mid-stream pipeline and gathering lines in both our West and East segments.

 

The U.S. Energy Information Administration has stated that the number of natural gas-fired power plants built will increase significantly over the next two decades. While renewable energy generation continues to increase and become a larger percentage of the overall power generation mix, natural gas facilities, especially the conversion of current facilities to more efficient sources of power, will provide a significant contribution to the revenue and profitability of the West segment.  Regulations limiting the discharge of cooling water into the ocean will require construction of alternative cooling systems and may lead to repowering at current sites over the next four to six years.

 

As many states institute renewable power standards mandating renewable energy generation as a part of the total power usage, large, utility-scale projects will provide construction opportunities over the next few years.  In many locations, the development and construction of solar and wind facilities will result in a need for “peaker” plants to meet demand when the renewable resources are not available.  In addition, alternative energy sources such as “waste-to-power” facilities provide long-term construction opportunities.  The low long-term natural gas prices and the increased emission regulations of the Environmental Protection Agency may result in the construction of gas-fired power plants as an alternative to coal-fired plants.  We believe that our gas-fired plant experience and industry knowledge will provide opportunities for us.

 

The continuing long-term low cost of natural gas is leading to industrial opportunities as chemical plants that use natural gas as a feedstock initiate new projects or expand current facilities.  Construction for many of these projects is expected in the Louisiana and Texas Gulf coast region which requires significant site preparation work as part of the project.  JCG has provided services to many of the companies planning facility additions.

 

The low price and abundance of natural gas may also lead to the development and construction of liquid natural gas (LNG) export facilities since natural gas prices in many international markets are greater than those in the United States.  Future export LNG facilities could also provide opportunity for construction of additional pipelines.  In addition, the development of small LNG facilities could provide opportunity for both our engineering and construction segments.

 

Our highway construction services continue to operate in a challenging market in the near-term.  Declining tax revenues, budget deficits, financing constraints and competing priorities have resulted in cutbacks in new infrastructure projects in the public sector.  Some funding sources that have been specifically earmarked for infrastructure spending, such as diesel and gasoline taxes, have generated less revenue for government agencies as actual consumption is reduced.  Additionally, high fuel prices can have a dampening effect on consumption, resulting in overall lower tax revenue.  Offsetting these challenges is the need for continuing improvements and additions in highway infrastructure and the perception of federal and state funding of transportation projects as an investment in infrastructure.  Our highway construction operation is focused on the states of Louisiana, Texas and Mississippi.  Of these states, Texas continues to increase its highway construction budget while the other two states have cut back in the current environment.

 

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Over the past few years, several areas of the United States have suffered significant drought-like conditions.  In these areas, state and municipal officials are considering using alternative sources for potable water, including using water pipelines to transport water from distant aquifers or building complex water treatment facilities to treat non-potable water.  In some areas such as West Texas, state agencies are contemplating significant investment to improve the quantity of water.  These investments may provide an opportunity for our construction services.

 

Strategy

 

Our strategy emphasizes the following key elements:

 

·                   Diversification Through Controlled Expansion.  We continue to emphasize the expansion of our scope of services beyond our traditional focus by increasing the scope of services offered to current customers and by adding new customers.  We intend to continue to evaluate acquisitions that offer growth opportunities and the ability to leverage our resources as a leading service provider to the oil and gas, power, refining and water industries. Our strategy also considers potential selective expansion to new geographic regions.

 

·                   Emphasis on Retention of Existing Customers and Recurring Revenue.  In order to fully leverage our relationships with our existing customer base, we believe it is important to maintain strong customer relationships and to expand our base of recurring revenue sources and recurring customers.

 

·                   Ownership of Equipment.  Many of our services are equipment intensive. The cost of construction equipment, and in some cases the availability of construction equipment, provides a significant barrier to entry into several of our businesses. We believe that our ownership of a large and varied construction fleet and our maintenance facilities enhances our access to reliable equipment at a favorable cost.

 

·                   Stable Work Force.  In each of our separate segments, we maintain a stable work force of skilled, experienced laborers, many of whom are cross-trained in projects such as pipeline and facility construction, refinery maintenance, and piping systems.

 

 

·       Selective Bidding.  We selectively bid on projects that we believe offer an opportunity to meet our profitability objectives, or that offer the opportunity to enter promising new markets. In addition, we review our bidding opportunities to attempt to minimize concentration of work with any one customer, in any one industry, or in stressed labor markets.  We believe that by carefully positioning ourselves in market segments that have meaningful barriers of entry, we can position ourselves so that we compete with other strong, experienced bidders.

 

·                   Maintain a conservative capital structure and strong balance sheet. We have maintained a capital structure that provides access to debt financing as needed while relying on tangible net worth to provide the primary support for our operations.  We believe this structure provides both our customers and banks and bonding companies assurance of our financial capabilities.  We maintain a revolving credit facility to provide letter of credit capability; however, we have not had any outstanding bank borrowing against this facility while we have been a public company.

 

Backlog

 

Backlog is discussed in Item 7. “ Management’s Discussion and Analysis of Financial Condition and Results of Operations ” of this Annual Report on Form 10-K.

 

Customers

 

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 in the western United States, as well as significant projects for our engineering customers.  Through JCG, we expanded our customer base to include a significant presence in the Gulf Coast region of the United States, with Q3C, expanded into the upper Midwest United States and with Rockford we are expanding throughout the United States.  The various acquisitions have also changed the composition of our customer base with significant increases in public state agency projects. We enter into a large number of contracts each year and the projects can vary in length — from several weeks, to as long as 48 months for completion on larger projects. Although we have not been dependent upon any one customer in any year, a small number of customers tend to constitute a substantial portion of our total revenues.

 

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Our customers have included many of the leading energy and utility companies in the United States, including, among others, Enterprise Liquids Pipeline, Xcel Energy, Pacific Gas & Electric, Sempra Energy, Williams, NRG, Chevron, Calpine, and Kinder Morgan.

 

The following customers accounted for more than 5% of our revenues in the periods indicated:

 

Description of customer’s business

 

2013

 

2012

 

2011

 

Texas DOT

 

7.2

%

5.8

%

*

 

Public gas and electric utility

 

7.9

%

14.6

%

11.3

%

Gas utility

 

7.4

%

5.6

%

*

 

Private gas and electric utility

 

*

 

6.9

%

*

 

Gas utility

 

7.7

%

*

 

*

 

Private gas and electric utility

 

5.1

%

*

 

*

 

Louisiana DOT

 

*

 

11.1

%

16.4

%

Gas utility (Ruby Pipeline Project)

 

*

 

0.8

%

18.8

%

Totals

 

35.3

%

44.8

%

46.5

%

 


(*)                Indicates a customer with less than 5% of revenues during such period.

 

As shown in the table, the customers accounting for revenues in excess of 5% each year varies from year to year due to the nature of our business.  A large construction project for a customer may result in significant revenues in that particular year, with significantly less revenues in subsequent years after project completion.

 

For the years ended December 31, 2013, 2012 and 2011, approximately 50.0%, 55.9% and 68.5%, respectively, of total revenues were generated from the top ten customers of the Company in each year.  In each of the years, a different group of customers comprised the top ten customers by revenue.

 

Management at each of our operating units is responsible for developing and maintaining successful long-term relationships with customers. Our operating unit management teams build existing customer relationships to secure additional projects and increase revenue from our current customer base.  Operating unit managers are also responsible for pursuing growth opportunities with prospective new customers.

 

We believe that our strategic relationships with customers will result in future opportunities. Some of our strategic relationships are in the form of strategic alliance or long-term maintenance agreements.  However, we realize that future opportunities also require cost effective bids as pricing is a key element for most construction projects.

 

Ongoing Projects

 

The following is a summary of significant ongoing construction projects demonstrating our capabilities in different markets at December 31, 2013:

 

Segment

 

Project

 

Location

 

Approximate
Contract
Amount

 

Estimated
Completion
Date

 

Remaining
Backlog at
December 31,
2013

 

 

 

 

 

 

 

(Millions)

 

 

 

(Millions)

 

West Construction Services

 

Industrial facility

 

Taft, CA

 

$

26

 

09/2014

 

$

26

 

West Construction Services

 

Solar Energy Project

 

Hinkley, CA

 

$

87

 

05/2014

 

56

 

West Construction Services

 

99 mile 30” crude oil pipeline

 

Corsicana, TX

 

$

90

 

04/2014

 

47

 

West Construction Services

 

Waste water collection system

 

Las Osos, CA

 

$

35

 

08/2014

 

4

 

East Construction Services

 

IH 35 from S.363 to N.363

 

Temple, LA

 

$

243

 

06/2017

 

237

 

East Construction Services

 

IH 35 Salado to Belton

 

Salado, TX

 

$

113

 

10/2015

 

44

 

East Construction Services

 

NW Loop 363

 

Temple, LA

 

$

40

 

12/2014

 

23

 

Engineering

 

100,000 GPD LNG plant

 

George West, TX

 

$

21

 

12/2014

 

21

 

 

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Competition

 

We face substantial competition on large construction projects from both regional and national contractors. Competitors on small construction projects range from a few large construction companies to a variety of smaller contractors. We compete with many local and regional firms for construction services and with a number of large firms on select projects. Each business segment faces varied competition depending on the type of project and services offered.

 

We compete with different companies in different end markets.  Large competitors in our underground markets include Quanta Services, Inc., MasTec Inc. and Willbros Group; competitors in our industrial end markets include Kiewit Corporation; and competitors in our highway services include Sterling Construction Company, and privately-held Boh Brothers and Zachary Construction Company

 

We believe that the primary factors influencing competition in our industry are price, reputation for quality, delivery and safety, relevant experience, availability of skilled labor, machinery and equipment, financial strength, knowledge of local markets and conditions, and estimating abilities. We believe that we compete favorably in all of the foregoing factors.

 

Geographic Areas — Financial Information

 

The following table sets forth our revenues from external customers attributable to our operations in the countries identified below for the years ended December 31, 2013, 2012 and 2011, and the total assets located in those countries for the years ended December 31, 2013 and 2012.  Our revenue from operations in the United States is related to projects primarily in the geographic United States. Our revenue from operations in Canada is primarily derived from our Engineering segment’s office in Calgary, Canada, but relates to specific projects in other countries, especially in the Far East and Australia.  The amounts shown are in millions of dollars.

 

 

 

Year Ended December 31,

 

Total Assets at

 

 

 

2013

 

2012

 

2011

 

December 31,

 

Country

 

Revenue

 

%

 

Revenue

 

%

 

Revenue

 

%

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

United States

 

$

1,928

 

99.2

 

$

1,531

 

99.3

 

$

1,448

 

99.2

 

$

1,040

 

$

921

 

Non-United States

 

16

 

0.8

 

11

 

0.7

 

12

 

0.8

 

11

 

10

 

TOTAL

 

$

1,944

 

100.0

 

$

1,542

 

100.0

 

$

1,460

 

100.0

 

$

1,051

 

$

931

 

 

All non-United States revenue was generated in the Engineering Segment.  For the table above, we use revenues from OnQuest’s Canadian subsidiary, OnQuest Canada, ULC, to estimate non-United States revenues.  Traditionally, most of OnQuest Canada’s work has been done in the Far East and Australia.

 

Risks Attendant to Foreign Operations

 

In 2013, as set forth in the table above, approximately 0.8% of our revenue was attributable to external customers in foreign countries. The current expectation is that a similar portion of revenue will continue to come from international projects for the foreseeable future.  Though a small portion of our revenues, international operations are subject to foreign economic and political uncertainties and risks as disclosed more fully in Item 1A “ Risk Factors ” of this Annual Report.  Unexpected and adverse changes in the foreign countries in which we operate could result in project disruptions, increased costs and potential losses. Our business is subject to fluctuations in demand and to changing domestic and international economic and political conditions which are beyond our control.

 

Contract Provisions and Subcontracting

 

We typically structure contracts as unit-price, time and material, fixed-price or cost plus fixed fee.  A substantial portion of our revenue is derived from contracts that are fixed price or fixed unit price contracts. Under a fixed price contract, we undertake to provide labor, equipment and services required by a project for a competitively bid or negotiated fixed price. The materials required under a fixed price contract, such as pipe, turbines, boilers and vessels are often supplied by the party retaining us. Under a fixed unit price contract, we are committed to providing materials or services required by a project at fixed unit prices. While the fixed unit price contract shifts the risk of estimating the quantity of units required for a particular project to the party retaining us, any increase in our unit cost over the unit price bid, whether due to inflation, inefficiency, faulty estimates or other factors, is borne by us.

 

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Construction contracts are primarily obtained through competitive bidding or through negotiations with long-standing customers. We are typically invited to bid on projects undertaken by recurring customers who maintain pre-qualified contractor lists. Contractors are selected for the pre-approved contractor lists by virtue of their prior performance for such customers, as well as their experience, reputation for quality, safety record, financial strength and bonding capacity.

 

In evaluating bid opportunities, we consider such factors as the customer, the geographic location of the work, the availability of labor, our competitive advantage or disadvantage relative to other likely contractors, our current and projected workload, the likelihood of additional work, and the project’s cost and profitability estimates. We use computer-based estimating systems and our estimating staff has significant experience in the construction industry. The project estimates form the basis of a project budget against which performance is tracked through a project cost system, thereby enabling management to monitor a project. Project costs are accumulated and monitored weekly against billings and payments to assure proper control of cash flow on the project.

 

Most contracts provide for termination of the contract for the convenience of the owner. In addition, many contracts are subject to certain completion schedule requirements with liquidated damages in the event schedules are not met. To date, these provisions have not materially adversely affected us.

 

We act as prime contractor on a majority of the construction projects we undertake. In the construction industry, the prime contractor is normally responsible for the performance of the entire contract, including subcontract work. Thus, we are potentially subject to increased costs associated with the failure of one or more subcontractors to perform as anticipated. While we subcontract specialized activities such as blasting, hazardous waste removal and electrical work, we perform most of the work on our projects with our own resources, including labor and equipment.

 

Our gas distribution services are typically provided pursuant to renewable contracts on a “unit-cost” basis. Fees on unit-cost contracts are negotiated and are earned based on units completed. Historically, substantially all of the gas distribution customers have renewed their maintenance contracts. Facilities maintenance services, such as regularly scheduled and emergency repair work, are provided on an ongoing basis at predetermined rates.

 

Risk Management, Insurance and Bonding

 

We maintain general liability and excess liability insurance, covering our construction equipment, and workers’ compensation insurance, in amounts consistent with industry practices. In the States of California, Texas and Louisiana, we self-insure our workers’ compensation claims in an amount of up to $250,000 per occurrence, and we maintain insurance covering larger claims. In addition, we maintain umbrella coverage.  We believe that our insurance programs are adequate.

 

We maintain a diligent safety and risk management program that has resulted in a favorable loss experience factor. Through our safety director and the employment of a large staff of regional and site specific safety managers, we have been able to effectively assess and control potential losses and liabilities in both the pre-construction and performance phases of our projects. Though we strongly focus on safety in the workplace, we cannot give assurances that we can prevent or reduce all injuries or claims in our workplace.

 

In connection with our business, we generally are required to provide various types of surety bonds guaranteeing our performance under certain public and private sector contracts. Our ability to obtain surety bonds depends upon our capitalization, working capital, backlog, past performance, management expertise and other factors and the surety company’s current underwriting standards.  To date, we have obtained the level of surety bonds necessary for the needs of our business.

 

Regulation

 

Our operations are subject to various federal, state, local and international laws and regulations including:

 

·                   Licensing, permitting and inspection requirements;

·                   Regulations relating to worker safety, including those established by the Occupational Safety and Health Administration;

·                   Permitting and inspection requirements applicable to construction projects; and

·                   Contractor licensing requirements.

 

We believe that we have all the licenses required to conduct our operations and that we are in substantial compliance with applicable regulatory requirements.

 

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Environmental Matters and Climate Change Impacts

 

We are subject to numerous federal, state, local and international environmental laws and regulations governing our operations, including the handling, transportation and disposal of non-hazardous and hazardous substances and wastes, as well as emissions and discharges into the environment, including discharges to air, surface water, groundwater and soil. We also are subject to laws and regulations that impose liability and cleanup responsibility for releases of hazardous substances into the environment. Under some of these laws and regulations, liability can be imposed for cleanup of previously owned or operated properties, or properties to which hazardous substances or wastes were sent by current or former operations at our facilities, regardless of whether we directly caused the contamination or violated any law at the time of discharge or disposal. The presence of contamination from such substances or wastes could interfere with ongoing operations or adversely affect our ability to sell, lease or use our properties as collateral for financing.

 

In addition, we could be held liable for significant penalties and damages under certain environmental laws and regulations and also could be subject to a revocation of our licenses or permits, which could materially and adversely affect our business and results of operations. Our contracts with our customers may also impose liabilities on us regarding environmental issues that arise through the performance of our services.  From time to time, we may incur costs and obligations for correcting environmental noncompliance matters and for remediation at or relating to certain of our properties. We believe that we are in substantial compliance with our environmental obligations to date and that any such obligations will not have a material adverse effect on our business or financial performance.

 

The potential physical impacts of climate change on our operations are highly uncertain. Climate change may result in, among other things, changes in rainfall patterns, storm patterns and intensities and temperature levels. As discussed elsewhere in this Annual Report on Form 10-K, including in Item 1A. Risk Factors” , our operating results are significantly influenced by weather. Therefore, major changes in historical weather patterns could significantly impact our future operating results. For example, if climate change results in significantly more adverse weather conditions in a given period, we could experience reduced productivity, which could negatively impact our revenues and gross margins.

 

Climate change could also affect our customers and the types of projects that they award.  Demand for power projects, underground pipelines or highway projects could be affected by significant changes in weather.  Reductions in project awards could adversely affect our operations and financial performance.

 

Employees

 

We believe that our employees are our most valuable resource in successfully completing construction work. Our ability to maintain sufficient continuous work for approximately 5,000 hourly employees helps us to instill in our employees loyalty to and understanding of our policies and contributes to our strong production, safety and quality record.

 

As of December 31, 2013, we employed approximately 1,279 salaried employees and approximately 5,800 hourly employees.  The total number of hourly personnel employed is subject to the volume of construction in progress. During the calendar year 2013, the aggregate number of employees ranged from approximately 5,400 to 8,300.

 

The following is a summary of employees by function and geography as of December 31, 2013:

 

 

 

CA

 

LA

 

TX

 

CO

 

PA

 

MN

 

Other
US

 

Canada

 

Total

 

Salaried

 

298

 

267

 

414

 

48

 

1

 

76

 

149

 

26

 

1,279

 

Hourly

 

1,433

 

1,026

 

1,272

 

292

 

890

 

182

 

705

 

0

 

5,800

 

Total

 

1,731

 

1,293

 

1,686

 

340

 

891

 

258

 

854

 

26

 

7,079

 

 

Several of our subsidiaries have operations that are unionized through the negotiation and execution of collective bargaining agreements. These collective bargaining agreements have varying terms and are subject to renegotiation upon expiration. We have not experienced recent work stoppages and believe our employee and union relations are good.

 

Website Access and Other Information

 

Our website address is www.prim.com. You may obtain free electronic copies of our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and any amendments to these reports through our website under the “Investor Relations” tab or through the website of the Securities and Exchange Commission (the “SEC”) at www.sec.gov. These reports are available on our website as soon as reasonably practicable after we electronically file them with, or furnish them to, the

 

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SEC. In addition, our Corporate Governance Guidelines, Code of Ethics and Business Conduct (including a separate code which applies to our CEO, CFO and senior financial executives) and the charters of our Audit Committee, Compensation Committee and Governance and Nominating Committee are posted on our website under the “Investor Relations/Corporate Governance” tab.  We intend to disclose on our website any amendments or waivers to our Code of Ethics and Business Conduct that are required to be disclosed pursuant to Item 5.05 of Form 8-K. You may obtain copies of these items from our website.

 

We will make available to any stockholder, without charge, copies of our Annual Report on Form 10-K as filed with the SEC. For copies of this or any other information, stockholders should submit a request in writing to Primoris Services, Inc., Attn: Corporate Secretary, 2100 McKinney Avenue, Suite 1500, Dallas, TX 75201.

 

This Annual Report on Form 10-K and our website may contain information provided by other sources that we believe are reliable. However, we cannot assure you that the information obtained from other sources is accurate or complete. No information on our website is incorporated by reference herein and should not be considered part of this Annual Report.

 

ITEM 1A.  RISK FACTORS

 

Our business is subject to a variety of risks and uncertainties, many of which are described below. The following list is not all-inclusive, and there can be no assurance that we have correctly identified and appropriately assessed all factors affecting our business or that the publicly available and other information with respect to these matters is complete and correct. Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial also may have a material adverse effects on our business, financial condition and results of operations in the future.

 

Risks Related Primarily to Operating our Business

 

Our financial and operating results may vary significantly from quarter-to-quarter and year-to-year.

 

Our business is subject to seasonal and annual fluctuations.  Some of the quarterly variation is the result of weather, particularly rain and snow, which create difficult operating conditions.  Similarly, demand for routine repair and maintenance services for gas utilities is lower during their peak customer needs in the winter.  Some of the annual variation is the result of large construction projects which fluctuate based on general economic conditions and customer needs.  Annual and quarterly results may also be adversely affected by:

 

·                   Changes in our mix of customers, projects, contracts and business;

·                   Regional and/or general economic conditions;

·                   Variations and changes in the margins of projects performed during any particular quarter;

·                   Increases in the costs to perform services caused by changing weather conditions;

·                   The termination of existing agreements or contracts;

·                   The budgetary spending patterns of customers;

·                   Increases in construction costs that we may be unable to pass through to our customers;

·                   Cost or schedule overruns on fixed-price contracts;

·                   Availability of qualified labor for specific projects;

·                   Changes in bonding requirements and bonding availability for existing and new agreements;

·                   Costs we incur to support growth whether organic or through acquisitions;

·                   The timing and volume of work under contract; and

·                   Losses experienced in our operations.

 

As a result, our operating results in any particular quarter may not be indicative of the operating results expected for any other quarter or for an entire year.

 

Demand for our services may decrease during economic recessions or volatile economic cycles, and the reduction in demand may adversely affect our business.

 

A substantial portion of our revenues and profits is generated from construction projects the awarding of which we do not directly control.  The engineering and construction industry historically has experienced cyclical fluctuations in financial results due to economic recessions, downturns in business cycles of our customers, material shortages, price increases by subcontractors, interest rate fluctuations and other economic factors beyond our control. When the general level of economic activity deteriorates, our customers may delay or cancel upgrades, expansions, and/or maintenance and repairs to their systems. Many factors, including the financial condition of the industry, could adversely affect our customers and their willingness to fund capital expenditures in the future.

 

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Traditionally, the construction industry has lagged recoveries in the general economy.  At the end of 2013, the economy was still slowly recovering from the recent recession.  The economic conditions have adversely impacted the demand for our services and resulted in the delay, reduction or cancellation of certain projects and may continue to adversely affect us in the future.

 

Much of the work that we perform in the highway markets involves funding by federal, state and local governments.  In the current budgetary and political environment, funding for these projects could be reduced significantly, which could have a material adverse effect on our operations and financial results.

 

We are also dependent on the amount of work our customers outsource. In a slower economy, our customers may decide to outsource less infrastructure services reducing demand for our services. In addition, consolidation, competition or capital constraints in the industries we serve may result in reduced spending by our customers.

 

Industry trends and government regulations could reduce demand for our pipeline construction services.

 

The demand for our pipeline construction services is dependent on the level of capital project spending by companies in the oil and gas industry.  This level of spending is subject to large fluctuations depending primarily on the current and expectations of future prices of oil and natural gas.  The price is a function of many factors, including levels of supply and demand, government policies and regulations, oil industry refining capacity and the potential development of alternative fuels.

 

Specific government decisions could affect demand for our construction services.  For example, a limitation on the use of “fracking” technology, or a decision to not build a major pipeline, such as occurred in 2012, could significantly affect the revenues and profitability of our operations.

 

Many of our customers are regulated by federal and state government agencies and the addition of new regulations or changes to existing regulations may adversely impact demand for our services and the profitability of those services.

 

Many of our energy customers are regulated by FERC, and our utility customers are regulated by state public utility commissions. These agencies could change the way in which they interpret current regulations and may impose additional regulations. These changes could have an adverse effect on our customers and the profitability of the services they provide which could reduce demand for our services, adversely affect our results of operations, cash flows and liquidity.

 

Our business may be materially adversely impacted by regional, national and/or global requirements to significantly limit or reduce greenhouse gas emissions in the future.

 

Greenhouse gases that result from human activities, including burning of fossil fuels, are the focus of increased scientific and political scrutiny and may be subjected to various legal requirements. International agreements, federal laws, state laws and various regulatory schemes limit or otherwise regulate emissions of greenhouse gases, and additional restrictions are under consideration by different governmental entities. We derive a significant amount of revenues and contract profits from engineering and construction services to clients that own and/or operate a wide range of process plants and own and/or operate electric power generating plants that generate electricity from burning natural gas or various types of solid fuels. These plants may emit greenhouse gases as part of the process to generate electricity or other products. Compliance with the existing greenhouse gas regulation may prove costly or difficult. It is possible that owners and operators of existing or future process plants and electric generating plants could be subject to new or changed environmental regulations that result in significantly limiting or reducing the amounts of greenhouse gas emissions, increasing the cost of emitting such gases or requiring emissions allowances. The costs of controlling such emissions or obtaining required emissions allowances could be significant. It also is possible that necessary controls or allowances may not be available. Such regulations could negatively impact client investments in capital projects in our markets, which could negatively impact the market for our products and/or services. This could materially adversely affect our business, financial condition, results of operations and cash flows.

 

In addition, the establishment of rules limiting greenhouse gas emissions could impact our ability to perform construction services or to perform these services with current levels of profitability.  New regulations may require us to acquire different equipment or change processes.  The new equipment may not be available or may not be purchased or rented in a cost effective manner.  Project deferrals, delays or cancellations resulting from the potential regulations could adversely impact our business.

 

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Changes to renewable portfolio standards and decreased demand for renewable energy projects could negatively impact our future results of operations, cash flows and liquidity.

 

A significant portion of our future business may be focused on providing construction and/or installation services to owners and operators of solar power and other renewable energy facilities. Currently, the development of solar and other renewable energy facilities is highly dependent on tax credits, the existence of renewable portfolio standards and other state incentives. Renewable portfolio standards are state-specific statutory provisions requiring that electric utilities generate a certain amount of electricity from renewable energy sources.  These standards have initiated significant growth in the renewable energy industry and a potential demand for renewable energy infrastructure construction services. Since renewable energy is generally more expensive to produce, elimination of, or changes to, existing renewable portfolio standards, tax credits or similar environmental policies may negatively affect future demand for our services.

 

We may lose business to competitors through the competitive bidding processes, which could have an adverse effect on our financial condition, results of operations and cash flows.

 

We are engaged in highly competitive businesses in which most customer contracts are awarded through bidding processes based on price and the acceptance of certain risks. We compete with other general and specialty contractors, both foreign and domestic, including large international contractors and small local contractors. The strong competition in our markets requires maintaining skilled personnel and investing in technology, and it also puts pressure on profit margins.  We do not obtain contracts from all of our bids and our inability to win bids at acceptable profit margins would adversely affect our financial condition and results of operations.

 

We may be unsuccessful at generating internal growth, which may affect our ability to expand our operations or grow our business, which may cause an adverse effect on our financial condition, results of operations and cash flows.

 

Our ability to generate internal growth may be affected by, among other factors, our ability to:

 

·                   Attract new customers;

·                   Increase the number of projects performed for existing customers;

·                   Hire and retain qualified personnel;

·                   Successfully bid for new projects; and

·                   Adapt the range of services we offer to address our customers’ evolving construction needs.

 

In addition, our customers may reduce the number or size of projects available to us due to their inability to obtain capital.  Our customers may also reduce projects in response to economic conditions.

 

Many of the factors affecting our ability to generate internal growth may be beyond our control, and we cannot be certain that our strategies will be successful or that we will be able to generate cash flow sufficient to fund our operations and to support internal growth. If we are unsuccessful, we may not be able to achieve internal growth, expand our operations or grow our business and the failure to do so could have an adverse effect on our financial condition, results of operation and cash flows.

 

The timing of new contracts may result in unpredictable fluctuations in our cash flow and profitability, which could adversely affect our business.

 

Substantial portions of our revenues are derived from project-based work that is awarded through a competitive bid process. The portion of revenue generated from the competitive bid process for 2013, 2012 and 2011 was approximately 66%, 69%, and 73%, respectively. It is generally very difficult to predict the timing and geographic distribution of the projects that we will be awarded. The selection of, timing of or failure to obtain projects, delays in award of projects, the re-bidding or termination of projects due to budget overruns, cancellations of projects or delays in completion of contracts could result in the under-utilization of our assets and reduce our cash flows. Even if we are awarded contracts, we face additional risks that could affect whether, or when, work will begin. For example, some of our contracts are subject to financing, permitting and other contingencies that may delay or result in termination of projects. We may have difficulty in matching workforce size and equipment location with contract needs. In some cases, we may be required to bear the cost of a ready workforce and equipment that is larger than necessary, resulting in unpredictability in our cash flow, expenses and profitability. If any expected contract award or the related work release is delayed or not received, we could incur substantial costs without receipt of any corresponding revenues. Moreover, construction projects for which our services are contracted may require significant expenditures by us prior to receipt of relevant payments by a customer and may expose us to potential credit risk if the customer encounters financial difficulties. Finally, the winding down or completion of work on significant projects that were active in previous periods will reduce our revenue and earning if the significant projects have not been replaced in the current period.

 

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We derive a significant portion of our revenues from a few customers, and the loss of one or more of these customers could have significant effects on our revenues, resulting in adverse effects on our financial condition, results of operations and cash flows.

 

Our customer base is highly concentrated, with our top ten customers accounting for approximately 50% of our revenue in 2013, 56% of our revenue in 2012 and 69% of our revenue in 2011. However, the customers included in our top ten customer list generally varies from year to year.  Our revenue is dependent both on performance of larger construction projects and relatively smaller MSA contracts.  For the large construction projects, the completion of the project does not represent the loss of a customer.

 

We also generate ongoing revenues from our MSA customers, generally regulated gas utilities.  If we were to lose one of these customers, our revenue could significantly decline.  Reduced demand for our services by larger construction customers or a loss of a significant MSA customer could have an adverse effect on our financial condition, results of operations and cash flows.

 

Our international operations expose us to legal, political and economic risks in different countries as well as currency exchange rate fluctuations that could harm our business and financial results.  We could be adversely affected by our failure to comply with laws applicable to our foreign activities, such as the U.S. Foreign Corrupt Practices Act.

 

During 2013, 2012 and 2011, revenue attributable to our services outside of the United States was 0.8%, 0.7% and 0.8% of our total revenue, respectively.  While much of this revenue is derived from the operations of our Canadian subsidiary, OnQuest Canada, ULC, actual construction operations have occurred in the several far eastern countries and in Australia. There are risks inherent in doing business internationally, including:

 

·                   Imposition of governmental controls and changes in laws, regulations, policies, practices, tariffs and taxes;

·                   Political and economic instability;

·                   Changes in United States and other national government trade policies affecting the market for our services;

·                   Potential non-compliance with a wide variety of laws and regulations, including the United States Foreign Corrupt Practices Act (FCPA) and similar non-United States laws and regulations;

·                   Currency exchange rate fluctuations, devaluations and other conversion restrictions;

·                   Restrictions on repatriating foreign profits back to the United States; and

·                   Difficulties in staffing and managing international operations.

 

The FCPA and similar anti-bribery laws in other jurisdictions prohibit U.S.-based companies and their intermediaries from making improper payments to non-U.S. officials for the purpose of obtaining or retaining business. We pursue opportunities in certain parts of the world that experience government corruption, and in certain circumstances, compliance with anti-bribery laws may conflict with local customs and practices. Our internal policies mandate compliance with all applicable anti-bribery laws. We require our partners, subcontractors, agents and others who work for us or on our behalf to comply with the FCPA and other anti-bribery laws. There is no assurance that our policies or procedures will protect us against liability under the FCPA or other laws for actions taken by our agents, employees and intermediaries. If we are found to be liable for FCPA violations (either due to our own acts or our inadvertence, or due to the acts or inadvertence of others), we could suffer from severe criminal or civil penalties or other sanctions, which could have a material adverse effect on our reputation, business, results of operations or cash flows. In addition, detecting, investigating and resolving actual or alleged FCPA violations is expensive and could consume significant time and attention of our senior management.

 

In spite of the minimal revenue amounts, any of these factors could have a material adverse effect on our business, financial condition, results of operations and cash flows.

 

Backlog may not be realized or may not result in revenues or profits.

 

Backlog is measured and defined differently by companies within our industry. We refer to “backlog” as our estimated revenue on uncompleted contracts, including the amount of revenue on contracts on which work has not begun, less the revenue we have recognized under such contracts plus an estimated level of MSA revenues for the next four quarters.  Backlog is not a comprehensive indicator of future revenues.  Most contracts may be terminated by our customers on short notice. Reductions in backlog due to cancellation by a customer, or for other reasons, could significantly reduce the revenue and profit we actually receive from contracts in backlog. In the event of a project cancellation, we may be reimbursed for certain costs, but we typically have no contractual right to the total revenues reflected in our backlog. Projects may remain in backlog for extended periods of time.  While backlog includes estimated MSA revenues, customers are not contractually obligated to purchase an amount of services under the MSA.

 

Given these factors, our backlog at any point in time may not accurately represent the revenue that we expect to realize during any period, and our backlog as of the end of a fiscal year may not be indicative of the revenue we expect to earn in the following fiscal year. Inability to realize revenue from our backlog could have an adverse effect on our financial condition, results of operations and cash flows.

 

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Backlog is an indicator of future revenues; however, recognition of revenues from backlog does not necessarily insure that the projects will be profitable.  Poor project or contract performance could reduce profits from contracts included in backlog.

 

Our actual cost may be greater than expected in performing our fixed-price and unit-price contracts, causing us to realize significantly lower profits or losses on our projects, which would have an adverse effect on our financial condition, results of operations and cash flows.

 

We currently generate, and expect to continue to generate, a portion of our revenue and profits under fixed-price and unit-price contracts. The approximate portion of revenue generated from fixed-price contracts for the years 2013, 2012 and 2011 was 48%, 51% and 38%, respectively.  The approximate portion of revenue generated from unit-price contracts for the years 2013, 2012 and 2011 was 39%, 30% and 28%, respectively.  In general, we must estimate the costs of completing a specific project to bid these types of contracts. The actual cost of labor and materials may vary from the costs we originally estimated, and we may not be successful in recouping additional costs from our customers. These variations, may cause gross profits for a project to differ from those we originally estimated.  Reduced profitability or losses on projects could occur due to changes in a variety of factors such as:

 

·                   Failure to properly estimate costs of engineering, materials, equipment or labor;

·                   Unanticipated technical problems with the structures, materials or services being supplied by us, which may require that we spend our own money to remedy the problem;

·                   Project modifications not reimbursed by the client creating unanticipated costs;

·                   Changes in the costs of equipment, materials, labor or subcontractors;

·                   Our suppliers or subcontractors failure to perform;

·                   Changes in local laws and regulations, and;

·                   Delays caused by local weather conditions.

 

As projects grow in size and complexity, these factors may combine, and depending on the size of the particular project, variations from the estimated contract costs could have a material adverse effect on our financial condition, results of operations and cash flows.

 

We require subcontractors and suppliers to assist us in providing certain services, and we may be unable to retain the necessary subcontractors or obtain supplies to complete certain projects adversely affecting our business.

 

We use subcontractors to perform portions of our contracts and to manage workflow, particularly for design, engineering, procurement and some foundation work. We are not dependent on any single subcontractor. However, general market conditions may limit the availability of subcontractors to perform portions of our contracts causing delays and increases in our costs, which could have an adverse effect on our financial condition, results of operations and cash flows.

 

We also use suppliers to provide the materials and some equipment used for projects.  If a supplier fails to provide supplies and equipment at a price we estimated or fails to provide supplies and equipment that is not of acceptable quantity, we may be required to source the supplies or equipment at a higher price or may be required to delay performance of the project.  The additional cost or project delays could negatively impact project profitability.

 

Failure of a subcontractor or supplier to comply with laws, rules or regulations could negatively affect our business.

 

We may enter into joint ventures which require satisfactory performance by our venture partners of their obligations.  The failure of our joint venture partners to perform their joint venture obligations could impose additional financial and performance obligations on us that could result in reduced profits or losses for us with respect to the joint venture.

 

As is typical in our industry, we may enter into various joint ventures and teaming arrangements where control may be shared with unaffiliated third parties.  At times, we also participate in joint ventures where we are not a controlling party. In such instances, we may have limited control over joint venture decisions and actions, including internal controls and financial reporting which may have an impact on our business.  If our joint venture partners fail to satisfactorily perform their joint venture obligations, the joint venture may be unable to adequately perform or deliver its contracted services. Under these circumstances, we may be required to make additional investments or provide additional services to ensure the adequate performance and delivery of the contracted services.  These additional obligations could result in reduced profits for us with respect to the joint venture.

 

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We may experience delays and defaults in client payments and we may pay our suppliers and subcontractors before receiving payment from our customers for the related services; we could experience an adverse effect on our financial condition, results of operations and cash flows.

 

We use subcontractors and material suppliers for portions of certain work, and our customers pay us for those related services. If we pay our suppliers and subcontractors for materials purchased and work performed for customers who fail to pay, or such customers delay in paying us for the related work or materials, we could experience a material adverse effect on our financial condition, results of operations and cash flows.

 

Our inability to recover on claims against project owners or subcontractors for payment or performance could negatively affect our financial results and liquidity.

 

We occasionally present claims or change orders to our clients and subcontractors for additional costs exceeding a contract price or for costs not included in the original contract price.  If we do not properly document the nature of our claims and change orders, or are otherwise not successful in negotiating a reasonable settlement, we could incur reduced profitability or a loss on a project.  Claims often occur from owner-caused delays or changes in scope from the original project.  Claims may be subject to lengthy and costly arbitration or litigation and may require a lengthy process.  The timing of a settlement and the ability to reach an acceptable settlement may adversely impact our financial results and cash flow.

 

For some projects we may guarantee a timely completion or provide a performance guarantee which could result in additional costs to cover our obligations.

 

In many of our fixed-price contracts we provide a project completion date, and in some of our projects we commit that the project will achieve specific performance standards.  If we do not complete the project as scheduled, or if the project does not meet the contracted performance standards, we may be held responsible for the impact to the client resulting from the delay or the inability to meet the standards.  Generally, the impact to the client is in the form of liquidated damages in the contract.  To the extent that we incur these additional costs, the project profitability and our financial performance could be adversely affected.

 

A significant portion of our business depends on our ability to provide surety bonds, and we may be unable to compete for or work on certain projects if we are not able to obtain the necessary surety bonds adversely affecting on financial condition, results of operations and cash flows.

 

Our contracts frequently require that we provide payment and performance bonds to our customers. Under standard terms in the surety market, sureties issue or continue bonds on a project-by-project basis and can decline to issue bonds at any time or require the posting of additional collateral as a condition to issuing or renewing bonds.

 

Current or future market conditions, as well as changes in our surety providers’ assessments of our operating and financial risk, could cause our surety providers to decline to issue or renew, or to substantially reduce, the availability of bonds for our work and could increase our bonding costs. These actions could be taken on short notice. If our surety providers were to limit or eliminate our access to bonding, our alternatives would include seeking bonding capacity from other sureties, finding more business that does not require bonds and posting other forms of collateral for project performance, such as letters of credit or cash. We may be unable to secure these alternatives in a timely manner, on acceptable terms, or at all. Accordingly, if we were to experience an interruption or reduction in the availability of bonding capacity, we may be unable to compete for or work on certain projects and such interruption or reduction could have an adverse effect on our financial condition, results of operations and cash flows.

 

Our bonding requirements may limit our ability to incur indebtedness, which would limit our ability to refinance our existing credit facilities or to execute our business plan, and potentially result in an adverse effect on our business.

 

Our ability to obtain surety bonds depends upon various factors including our capitalization, working capital, tangible net worth and amount of our indebtedness. In order to help ensure that we can obtain required bonds, we may be limited in our ability to incur additional indebtedness that may be needed to refinance our existing credit facilities upon maturity and to execute our business plan. Our inability to incur additional indebtedness could have an adverse effect on our business, operating results and financial condition.

 

We may be unable to win some new contracts if we cannot provide clients with letter of credit.

 

For many of our clients, surety bonds provide an adequate form of security, but for some clients, additional security in the form of a letter of credit may be required.  While we have capacity for letters of credit under our credit facility, the amount required by a client may be in excess of our credit limit.  Any such amount would be issued at the sole discretion of our lenders.  Failure to provide a letter of credit when required by a client may result in our inability to compete for or win a project.

 

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During the ordinary course of our business, we may become subject to lawsuits or indemnity claims, which could materially and adversely affect our business and results of operations.

 

We have in the past been, and may in the future be, named as a defendant in lawsuits, claims and other legal proceedings during the ordinary course of our business. These actions may seek, among other things, compensation for alleged personal injury, workers’ compensation, employment discrimination, breach of contract, property damage, punitive damages, and civil penalties or other losses or injunctive or declaratory relief. In addition, we generally indemnify our customers for claims related to the services we provide and actions we take under our contracts with them, and, in some instances, we may be allocated risk through our contract terms for actions by our customers or other third parties. Because our services in certain instances may be integral to the operation and performance of our customers’ infrastructure, we may become subject to lawsuits or claims for any failure of the systems that we work on, even if our services are not the cause of such failures, and we could be subject to civil and criminal liabilities to the extent that our services contributed to any property damage, personal injury or system failure. The outcome of any of these lawsuits, claims or legal proceedings could result in significant costs and diversion of management’s attention to the business. Payments of significant amounts, even if reserved, could adversely affect our reputation, liquidity and results of operations.

 

We are self-insured against potential liabilities.

 

Although we maintain insurance policies with respect to employer’s liability, general liability, auto and workers compensation claims, those policies are subject to deductibles or self-insured retention amounts of up to $250,000 per occurrence. We are primarily self-insured for all claims that do not exceed the amount of the applicable deductible/self-insured retention. In addition, for our employees not part of a collective bargaining agreement, we provide employee health care benefit plans.  Our primary health insurance plan is subject to a deductible of $200,000 per individual claim per year.

 

Our insurance policies include various coverage requirements, including the requirement to give appropriate notice. If we fail to comply with these requirements, our coverage could be denied.

 

Losses under our insurance programs are accrued based upon our estimates of the ultimate liability for claims reported and an estimate of claims incurred but not reported.  Insurance liabilities are difficult to assess and estimate due to unknown factors, including the severity of an injury, the extent of damage, the determination of our liability in proportion to other parties and the number of incidents not reported. The accruals are based upon known facts and historical trends, and management believes the accruals are adequate. If we were to experience insurance claims or costs significantly above our estimates, our results of operations could be adversely affected in a given period.

 

Our business is labor intensive.   If we are unable to attract and retain qualified managers and skilled employees, our operating costs may increase which could reduce our profitability and liquidity .

 

Our business is labor intensive and our ability to maintain our productivity and profitability may be limited by our ability to employ, train and retain skilled personnel necessary to meet our requirements. We may not be able to maintain an adequately skilled labor force necessary to operate efficiently and to support our growth strategy. We have from time-to-time experienced, and may in the future experience, shortages of certain types of qualified personnel. For example, periodically there are shortages of engineers, project managers, field supervisors, and other skilled workers capable of working on and supervising the construction of underground, heavy civil and industrial facilities, as well as providing engineering services. The supply of experienced engineers, project managers, field supervisors and other skilled workers may not be sufficient to meet current or expected demand. At the end of 2013, we are receiving evidence of a shortage of qualified welders in the United States.  The beginning of new, large-scale infrastructure projects or increased competition for workers currently available to us, could affect our business, even if we are not awarded such projects. Labor shortages or increased labor costs could impair our ability to maintain our business or grow our revenues. If we are unable to hire employees with the requisite skills, we may also be forced to incur significant training expenses. The occurrence of any of the foregoing could have an adverse effect on our business, operating results, financial condition and value of our common stock.

 

Our unionized workforce may commence work stoppages, which could adversely affect our operations.

 

As of December 31, 2013, approximately 55% of our hourly employees, primarily consisting of field laborers, were covered by collective bargaining agreements. Of the 73 collective bargaining agreements to which we are a party, twenty six expire during 2014 and require renegotiation.  Although the majority of these agreements prohibit strikes and work stoppages, we cannot be certain that strikes or work stoppages will not occur in the future. Strikes or work stoppages would adversely impact our relationships with our customers and could have an adverse effect on our financial condition, results of operations and cash flows.

 

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Our ability to complete future acquisitions could be adversely affected because of our union status for a variety of reasons. For instance, in certain geographic areas, our union agreements may be incompatible with the union agreements of a business we want to acquire and some businesses may not want to become affiliated with a union company.  In addition, if we acquire a union affiliated company, we may increase our future exposure to withdrawal liabilities for any underfunded pension plans.

 

The current Federal administration has expressed strong support for legislation and regulation that would create more flexibility and opportunity for labor unions to organize non-union workers. This legislation or regulation could result in a greater percentage of our workforce being subject to collective bargaining agreements .

 

Withdrawal from multiemployer pension plans associated with our unionized workforce could adversely affect our financial condition and results of operations.

 

Our collective bargaining agreements generally require that we participate with other companies in multiemployer pension plans. To the extent those plans are underfunded, the Employee Retirement Income Security Act of 1974 (“ERISA”), as amended by the Multiemployer Pension Plan Amendments Act of 1980 (“MEPA”), may subject us to substantial liabilities under those plans if we withdraw from them or they are terminated. In addition, the Pension Protection Act of 2006 added new funding rules generally applicable to plan years beginning after 2007 for multiemployer plans that are classified as endangered, seriously endangered or critical status.  For a plan in critical status, additional required contributions and benefit reductions may apply if a plan is determined to be underfunded, which could adversely affect our financial condition or results of operations.  For plans in critical status, we may be required to make additional contributions, generally in the form of surcharges on contributions otherwise required.  Participation in those plans with high funding levels could adversely affect our results of operations, financial condition or cash flows if we are not able to adequately mitigate these costs.

 

The amount of the withdrawal liability legislated by ERISA and MEPA varies for every pension plan to which we contribute.  For each plan, our liability is the total unfunded vested benefits of the plan multiplied by a fraction:  the numerator of the fraction is the sum of our contributions to the plan for the past ten years and the denominator is the sum of all contributions made by all employers for the past ten years.  For some pension plans to which we contribute, the unfunded vested benefits are in the billions of dollars.  If we cannot reduce the liability through exemptions or negotiations, the withdrawal from a plan could have a material adverse impact on our financial condition, results of operations and cash flows.

 

We depend on key personnel and we may not be able to operate and grow our business effectively if we lose the services of any of our key personnel or are unable to attract qualified and skilled personnel in the future. This could lead to a decrease in our overall competitiveness, resulting in an adverse effect on our business, operating results, financial condition and value of your common stock.

 

We are dependent upon the efforts of our key personnel, and our ability to retain them and hire other qualified employees. The loss of our executive officers or other key personnel could affect our ability to run our business effectively. Competition for senior management personnel is intense, and we may not be able to retain our personnel even though we have entered into employment agreements with certain of them. The loss of any key person requires the remaining key personnel to divert immediate and substantial attention to seeking a replacement. In addition, as some of our key persons approach retirement age, we need to provide for smooth transitions.  An inability to find a suitable replacement for any departing executive or senior officer on a timely basis could adversely affect our ability to operate and grow our business.

 

If we fail to integrate acquisitions successfully, we may experience operational challenges and risks which may have an adverse effect on our business and results of operations.

 

As part of our growth strategy, we intend to acquire companies that expand, complement or diversify our business.  Acquisitions may expose us to operational challenges and risks, including, among others:

 

·                   The diversion of management’s attention from the day-to-day operations of the combined company;

·                   Managing a significantly larger company than before completion of an acquisition;

·                   The assimilation of new employees and the integration of business cultures;

·                   Retaining key personnel;

·                   The integration of information, accounting, finance, sales, billing, payroll and regulatory compliance systems;

·                   Challenges in keeping existing customers and obtaining new customers;

·                   Challenges in combining service offerings and sales and marketing activities;

·                   The assumption of unknown liabilities of the acquired business for which there are inadequate reserves;

 

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·                   The potential impairment of acquired goodwill and intangible assets; and

·                   The inability to enforce covenants not to compete.

 

If we cannot effectively manage the integration process or if any significant business activities are interrupted as a result of the integration process of any acquisition, our business could suffer and our results of operations and financial condition may be negatively affected.

 

Our business growth could outpace the capability of our internal infrastructure and may prohibit us from expanding our operations or execute our business plan, which failures may adversely affect the value of our common stock.

 

Our internal infrastructure may not be adequate to support our operations as they expand. To the extent that we are unable to buy or build equipment necessary for a project, either due to a lack of available funding or equipment shortages in the marketplace, we may be forced to rent equipment on a short-term basis or to find alternative ways to perform the work without the benefit of equipment ideally suited for the job, which could increase the costs of completing the project. We often bid for work knowing that we will have to rent equipment on a short-term basis, and we include our assumptions of market equipment rental rates in our bid. If market rates for rental equipment increase between the time of bid submission and project execution, our margins for the project may be reduced. In addition, our equipment requires continuous maintenance, which we generally provide through our own repair facilities. If we are unable to continue to maintain the equipment in our fleet, we may be forced to obtain additional third-party repair services at a higher cost or be unable to bid on contracts.

 

Our business may be affected by difficult work sites and environments, which may adversely affect our ability to procure materials and labor, which may adversely affect our overall business.

 

We perform our work under a variety of conditions, including, but not limited to, difficult and hard to reach terrain, difficult site conditions and busy urban centers where delivery of materials and availability of labor may be impacted. Performing work under these conditions can slow our progress, potentially causing us to incur contractual liability to our customers. These difficult conditions may also cause us to incur additional, unanticipated costs that we might not be able to pass on to our customers.

 

We may incur liabilities or suffer negative financial or reputational impacts relating to health and safety matters.

 

Our operations are subject to extensive laws and regulations relating to the maintenance of safe conditions in the workplace. While we have invested, and will continue to invest, substantial resources in our occupational health and safety programs, our industry involves a high degree of operational risk and there can be no assurance that we will avoid significant liability exposure. Although we have taken what we believe are appropriate precautions, we have suffered fatalities in the past and may suffer additional fatalities in the future. Serious accidents, including fatalities, may subject us to substantial penalties, civil litigation or criminal prosecution. Claims for damages to persons, including claims for bodily injury or loss of life, could result in substantial costs and liabilities, which could materially and adversely affect our financial condition, results of operations or cash flows. In addition, if our safety record were to substantially deteriorate over time or we were to suffer substantial penalties or criminal prosecution for violation of health and safety regulations, our customers could cancel our contracts and not award us future business.

 

We may incur additional healthcare costs arising from federal healthcare reform legislation.

 

In March 2010, the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 were signed into law in the U.S. This legislation expands health care coverage to many uninsured individuals and expands coverage to those already insured. The changes required by this legislation could cause us to incur additional healthcare and other costs.  The employee insurance requirements are expected to impact our expenses beginning in 2015.  At the end of 2013, we estimated that our insurance costs could increase by $2 million to $6 million annually.  While we anticipate increases in our customer billing rates to reflect the increased expense, there can be no guarantee that we will be able to pass these costs to our customers or that our competition will increase their bids to reflect the increased healthcare costs.  For our multi-year highway projects, we may not be able to anticipate further increases in healthcare costs associated with the healthcare reform legislation.

 

Interruptions in information technology or breaches in data security could adversely impact our operations, our ability to report financial results and our business and results of operations.

 

We rely on computer, information and communication technology and related systems to operate our business.  As we continue to grow our business, we need to add software and hardware and effectively upgrade our systems and network infrastructure in order to improve the efficiency and protection of our systems and information.  Our computer and communications systems, and consequently our operations, could be damaged or interrupted by natural disasters, loss of power, telecommunications failures, acts of war, acts of terrorism, computer viruses, physical or electronic break-ins and actions by hackers and cyber-terrorists.  Any of these, or

 

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similar, events could cause system disruptions, delays and loss of critical information, delays in processing transactions and delays in the reporting of financial information.  While we have implemented network security and internal control measures, there can be no assurance that a system or network failure or data security breach would not adversely affect our financial condition and results of operations.

 

As a holding company, we are dependent on our subsidiaries for cash distributions to fund debt payments, dividend payments and other liabilities.

 

We are a holding company with no operations or significant assets other than the stock that we own of our subsidiaries. 
We depend on dividends, loans and distributions from these subsidiaries to service our indebtedness, pay dividends, fund share repurchases and satisfy other financial obligations.  If contractual limitations or legal regulations were to restrict the ability of our subsidiaries to make cash distributions to us, we may not have sufficient funds to cover our financial obligations.

 

We may need additional capital in the future for working capital, capital expenditures or acquisitions, and we may not be able to do so on favorable terms, or at all, which would impair our ability to operate our business or achieve our growth objectives.

 

Our ability to generate cash is essential for the funding of our operations and the servicing of our debt.  If existing cash balances together with the borrowing capacity under our credit facilities are not sufficient to make future investments, make acquisitions or provide needed working capital, we may require financing from other sources.  Our ability to obtain such additional financing in the future will depend on a number of factors including prevailing capital market conditions; conditions in our industry; and our operating results.  These factors may affect our ability to arrange additional financing on terms that are acceptable to us.  If additional funds were not available on acceptable terms, we may not be able to make future investments, take advantage of acquisitions or other opportunities or respond to competitive challenges.

 

Risks Related Primarily to the Financial Accounting of our Business

 

Our financial results are based upon estimates and assumptions that may differ from actual results and such differences between the estimates and actual results may have an adverse effect on our financial condition, results of operations and cash flows.

 

In preparing our consolidated annual and quarterly financial statements in conformity with generally accepted accounting principles, many estimates and assumptions are used by management in determining the reported revenues and expenses recognized during the periods presented, and disclosures of contingent assets and liabilities known to exist as of the date of the financial statements. 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 times, these estimates are particularly difficult to determine, and we must exercise significant judgment. Estimates may be used in our assessments of 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, revenue recognition under percentage-of-completion accounting and provisions for income taxes. Actual results for estimates could differ materially from the estimates and assumptions that we use, which could have an adverse effect on our financial condition, results of operations and cash flows.

 

Our use of percentage-of-completion accounting could result in a reduction or elimination of previously reported profits, which may result in an adverse effect on our financial condition and results of operations.

 

We recognize revenue using the percentage-of-completion method of accounting, using the cost-to-cost method, where revenues are estimated based on the percentage of costs incurred to date to total estimated costs. This method is used because management considers expended costs to be the best available measure of progress on these contracts. The earnings or losses recognized on individual contracts are based on estimates of total contract revenues, total costs and profitability. Contract losses are recognized in full when determined, and contract profit estimates are adjusted based upon ongoing reviews of contract profitability.

 

Penalties are recorded when known or finalized, which generally is during the latter stages of the contract. In addition, we record adjustments to estimated costs of contracts when we believe the change in the estimate is probable and the amounts can be reasonably estimated. These adjustments could result in both increases and decreases in profit margins. Actual results could differ from estimated amounts and could result in a reduction or elimination of previously recognized earnings. In certain circumstances, it is possible that such adjustments could be significant and could have an adverse effect on our financial condition, results of operations and cash flows, especially when comparing the results of several periods.

 

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Our reported results of operations and financial condition could be adversely affected as a result of changes in accounting standards.

 

The Financial Accounting Standards Board has announced that it expects to finalize standards in the near future affecting revenue recognition and accounting for leases.  Significant changes in either of these accounting standards could result in changes in the way we report our financial results.  For example, if the lease accounting standard changes the accounting for operating leases, we may need to negotiate changes to our credit agreements to meet certain financial covenants.  If we were unable to successfully negotiate these changes, we could negatively impact our ability to maintain or obtain future credit for growth opportunities.

 

Our reported results of operations could be adversely affected as a result of impairments of goodwill, other intangible assets or investments.

 

When we acquire a business, we record an asset called “goodwill” for the excess amount we pay for the business over the net fair value of the tangible and intangible assets of the business we acquire. At December 31, 2013, our balance sheet included a goodwill amount of $119 million and intangible assets of $45 million resulting from acquisitions made since 2008.  Fair value is determined using a combination of the discounted cash flow, market multiple and market capitalization valuation approaches.  Under current accounting rules, goodwill and other intangible assets that have indefinite useful lives cannot be amortized, but instead must be tested at least annually for impairment, while intangible assets that have finite useful lives are amortized over their useful lives.  Any impairment of the goodwill or intangible assets recorded in connection with the various acquisitions, or for any future acquisitions, would negatively impact our results of operations.

 

In addition, we may enter into various types of investment arrangements, such as an equity interest we hold in a business entity.  Our equity method investments are carried at original cost and are included in other assets, net in our consolidated balance sheet and are adjusted for our proportionate s hare of the investees’ income, losses and distributions.   Equity investments are reviewed for impairment by assessing whether any decline in the fair value of the investment below its carrying value is other than temporary. In making this determination, factors such as the ability to recover the carrying amount of the investment and the inability of the investee to sustain future earnings capacity are evaluated in determining whether an impairment should be recognized. Any future impairments, including impairments of goodwill, intangible assets or investments, could have a material adverse effect on our results of operations.

 

We may not be successful in continuing to meet the internal control requirements of the Sarbanes-Oxley Act of 2002.

 

The Sarbanes-Oxley Act of 2002 has many requirements applicable to us regarding corporate governance and financial reporting, including the requirements for management to report on internal controls over financial reporting and for our independent registered public accounting firm to express an opinion over the operating effectiveness of our internal control over financial reporting. At December 31, 2013, our internal control over financial reporting was effective using the internal control standards applicable at that date.  In 2013, a new set of internal control standards, COSO 2013, was published.  At this time, the Securities and Exchange Commission has not ruled as to a requirement for adopting the COSO 2013 standards; however, there can be no assurance that our internal control over financial reporting will be effective in future years. Failure to maintain effective internal controls or the identification of significant internal control deficiencies in acquisitions already made or made in the future could result in a decrease in the market value of our common stock, the reduced ability to obtain financing, the loss of customers, penalties and additional expenditures to meet the requirements in the future.

 

Risks Related to our Common Stock

 

Our common stock is subject to potential dilution to our stockholders.

 

As part of our acquisition strategy, we have issued shares of common stock and used shares of common stock as a part of contingent earn-out consideration.  Our Articles of Incorporation permit us to issue up to 90 million shares of common stock of which 51.57 million were outstanding at December 31, 2013.  While NASDAQ rules require that we obtain stockholder approval to issue more than 20% additional shares, stockholder approval is not required below that level. In addition, we can issue shares of preferred stock which could cause further dilution to the stockholder, resulting in reduced net income and cash flow available to common stockholders.

 

In 2013, our stockholders adopted our 2013 Equity Incentive Plan (“Equity Plan”).  The Equity Plan replaced a previous plan.  The Equity Plan authorized the Board of Directors to issue equity awards totaling 2,526,275 shares of our common stock.  Our current director compensation plan, our management long-term incentive plan and any additional equity awards made will have the effect of diluting our earnings per share and stockholders’ percentage of ownership.

 

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Some of our directors and officers are significant stockholders, which may make it possible for them to have significant influence over the outcome of matters submitted to our stockholders for approval and their interests may differ from the interests of our other stockholders.

 

As of December 31, 2013, four of our directors and officers beneficially owned an aggregate in excess of approximately 24.5% of the outstanding shares of our common stock. Our chairman and chief executive officer beneficially owned and had the power to vote approximately 23.3% of the outstanding shares of our common stock at December 31, 2013. These stockholders may have significant influence over the outcome of all matters submitted to our stockholders for approval, including the election of our directors and other corporate actions. Such influence could have the effect of discouraging others from attempting to purchase us or take us over and could reduce the market price offered for our common stock.

 

Delaware law and our charter documents may impede or discourage a takeover or change in control.

 

As a Delaware corporation, anti-takeover provisions may impose an impediment to the ability of others to acquire control of us, even if a change of control would be of benefit to our stockholders.  In addition, certain provisions of our Articles of Incorporation and Bylaws also may impose an impediment or discourage others from a takeover.  These provisions include:

 

·                   Our Board of Directors is classified;

·                   Stockholders may not act by written consent;

·                   There are restrictions on the ability of a stockholder to call a special meeting or nominate a director for election; and

·                   Our Board of Directors can authorize the issuance of preferred shares.

 

These types of provisions may limit the ability of stockholders to obtain a premium for their shares.

 

ITEM 1B.                UNRESOLVED STAFF COMMENTS

 

None.

 

ITEM 2.                         PROPERTIES

 

Facilities

 

Our executive offices are located at 2100 McKinney Avenue, Suite 1500, Dallas, Texas 75201. The telephone number of our executive office is (214) 740-5600. The East Construction Services segment of our business has regional offices located in Baton Rouge, Louisiana, in Houston, Conroe, Fort Worth and Pasadena, Texas, Suwanee, Georgia and in Sarasota and Fort Lauderdale, Florida. The West Construction Services segment has regional offices located in Lake Forest, Pittsburg, San Francisco, Bakersfield and San Diego, California and offices located in Hillsboro, Oregon, Toledo, Washington, Montrose, Pennsylvania and Little Canada, Minnesota.  The Engineering segment of our business has offices located in San Dimas, California and in Calgary, Canada.

 

We lease most of the facilities used in our operations. The leases are generally for 10 to 12-year terms, expiring through 2022.  The aggregate lease payments made for our facilities in 2013 were $5.5 million. We believe that our facilities are adequate to meet our current and foreseeable requirements for the next several years.

 

We lease some of our facilities, employees and certain construction and transportation equipment from Stockdale Investment Group, Inc. (“SIGI”).  We believe that these leases were entered into on similar terms as negotiated with an independent third party. Brian Pratt, our largest stockholder and our Chief Executive Officer, President and Chairman of the Board of Directors, holds a majority interest in SIGI and is the chairman and chief executive officer and a director of SIGI.  John M. Perisich, our Executive Vice President and General Counsel, is secretary of SIGI.

 

Property, Plant and Equipment

 

We own and maintain both construction and transportation equipment. In 2013, 2012 and 2011, we spent approximately $85.8 million, $40.3 million and $29.1 million, respectively, in cash for property and equipment. Additionally, we acquired property and equipment through the use of capital leases of approximately $2.6 million in 2013, $2.9 million in 2012 and $5.3 million in 2011.  We estimate that our capital equipment includes the following:

 

·                   Heavy construction and specialized equipment—1,252 units; and

·                   Transportation equipment—2,074 units.

 

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We believe the ownership of equipment is preferable to leasing to ensure the equipment is available as needed. In addition, ownership has historically resulted in lower overall equipment costs. We attempt to obtain projects that will keep our equipment fully utilized in order to increase profit. All equipment is subject to scheduled maintenance to insure reliability. Maintenance facilities exist at most of our regional offices as well as on-site on major jobs to properly service and repair equipment. Major equipment not currently utilized is rented to third parties whenever possible to supplement equipment income.

 

The following summarizes total property, plant and equipment, net of accumulated depreciation, as of December 31, 2013 and 2012:

 

 

 

2013

 

2012

 

Useful Life

 

 

 

(In Thousands)

 

(In Thousands)

 

 

 

Land and buildings

 

$

36,883

 

$

29,914

 

30 years

 

Leasehold improvements

 

7,958

 

11,974

 

Lease life

 

Office equipment

 

3,171

 

2,092

 

3 - 5 years

 

Construction equipment

 

247,997

 

197,200

 

3 - 7 years

 

Transportation equipment

 

67,550

 

48,649

 

3 - 18 years

 

 

 

363,559

 

289,829

 

 

 

Less: accumulated depreciation and amortization

 

(137,047

)

(104,989

)

 

 

Net property, plant and equipment

 

$

226,512

 

$

184,840

 

 

 

 

ITEM 3.                         LEGAL PROCEEDINGS

 

Legal Proceedings

 

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, 401st 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, 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 is investigating all potential causes of the alleged loss, including design liabilities of the owner, owner’s engineers and/or the Company’s subcontractor. The Company will vigorously defend the claims. After discussion with our legal counsel, we recorded a loss contingency, which was not material to the financial statements, to reflect the best estimate of the Company’s portion of the NTTA claim. At this time, management does not believe that it is possible to make a reasonably probable estimate of additional loss or a range of loss.

 

The Company is subject to other claims and legal proceedings arising out of its business. The Company provides for costs related to contingencies when a loss from such claims is probable and the amount is reasonably determinable. In determining whether it is possible to provide an estimate of loss, or range of possible loss, the Company reviews and evaluates its litigation and regulatory matters on a quarterly basis in light of potentially relevant factual and legal developments. If we determine an unfavorable outcome is not probable or reasonably estimable, we do not accrue for a potential litigation loss. Management is unable to ascertain the ultimate outcome of other claims and legal proceedings; however, after review and consultation with counsel and taking into consideration relevant insurance coverage and related deductibles/self-insurance retention, management believes that it has meritorious defense to the claims and believes that the reasonably possible outcome of such claims will not, individually or in the aggregate, have a materially adverse effect on the consolidated results of operations, financial condition or cash flows of the Company.

 

Government Regulations

 

Our operations are subject to compliance with regulatory requirements of federal, state, and municipal agencies and authorities, including regulations concerning labor relations, affirmative action and the protection of the environment. While compliance with applicable regulatory requirements has not adversely affected operations in the past, there can be no assurance that these requirements will not change and that compliance with such requirements will not adversely affect operations.

 

ITEM 4.                         MINE SAFETY DISCLOSURES

 

Not applicable.

 

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PART II

 

ITEM 5.                              MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

Market Information

 

On July 31, 2008, our common stock began trading on the NASDAQ Global Market under the symbol “PRIM”. Previously, our common stock traded on the OTC Bulletin Board under the ticker symbol “RPSD”. Prior to their expiration on October 2, 2010, the Company had certain warrants and unit purchase options outstanding that were traded under the NASDAQ Global Market under the symbols “PRIMW” and “PRIMU”, respectively.

 

We had outstanding 51,571,394 shares of common stock and 336 stockholders of record as of December 31, 2013. These holders of record include depositories that hold shares of stock for brokerage firms, which in turn, hold shares of stock for numerous beneficial owners.

 

The following table shows the range of market prices of our common stock during 2013 and 2012.

 

 

 

Market price per
Share

 

 

 

High

 

Low

 

Year ended December 31, 2013

 

 

 

 

 

First quarter

 

$

22.25

 

$

15.64

 

Second quarter

 

$

23.12

 

$

19.12

 

Third quarter

 

$

25.71

 

$

19.79

 

Fourth quarter

 

$

31.13

 

$

23.50

 

 

 

 

 

 

 

Year ended December 31, 2012

 

 

 

 

 

First quarter

 

$

16.94

 

$

14.94

 

Second quarter

 

$

16.33

 

$

11.01

 

Third quarter

 

$

13.63

 

$

11.90

 

Fourth quarter

 

$

15.04

 

$

13.25

 

 

Dividends

 

The following table shows cash dividends to our common stockholders declared by the Company during the three years ended December 31, 2013:

 

Declaration Date

 

Payable Date

 

Record Date

 

Type

 

March 3, 2011

 

April 15, 2011

 

March 31, 2011

 

$

0.025 per share

 

May 6, 2011

 

July 15, 2011

 

June 30, 2011

 

$

0.025 per share

 

August 4, 2011

 

October 14, 2011

 

September 30, 2011

 

$

0.030 per share

 

November 3, 2011

 

January 16, 2012

 

December 31, 2011

 

$

0.030 per share

 

 

 

 

 

 

 

 

 

February 24, 2012

 

April 16, 2012

 

March 30, 2012

 

$

0.030 per share

 

May 4, 2012

 

July 16, 2012

 

June 29, 2012

 

$

0.030 per share

 

August 3, 2012

 

October 15, 2012

 

October 1, 2012

 

$

0.030 per share

 

November 1, 2012

 

December 26, 2012

 

December 18, 2012

 

$

0.030 per share

 

 

 

 

 

 

 

 

 

March 5, 2013

 

April 15, 2013

 

March 29, 2013

 

$

0.030 per share

 

May 3, 2013

 

July 15, 2013

 

June 28, 2013

 

$

0.035 per share

 

August 2, 2013

 

October 15, 2013

 

September 30, 2013

 

$

0.035 per share

 

October 30, 2013

 

January 15, 2014

 

December 31, 2013

 

$

0.035 per share

 

 

The payment of future dividends is contingent upon our revenues and earnings, capital requirements and general financial condition of the company, as well as contractual restrictions and other considerations deemed relevant by the Board of Directors.

 

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Equity Compensation Plan Information

 

In July 2008, the shareholders approved and the Company adopted the Primoris Services Corporation 2008 Long-term Incentive Equity Plan, which was replaced by the Primoris Services Corporation 2013 Long-term Incentive Equity Plan (“2013 Equity Plan”), as approved by the shareholders and adopted by the Company on May 3, 2013.

 

In March 2013, our employees purchased 131,989 shares of stock as part of a management incentive compensation program.  As part of the quarterly compensation of the non-employee members of the Board of Directors, the Company issued 12,480 shares of common stock in March 2013 and 9,110 shares in August 2013.  The issuance of the employee shares and the director shares were under the terms of the 2013 Equity Plan.

 

The following table gives information about our common stock that may be issued upon the exercise of options, warrants and rights under all of our existing equity compensation plans as of December 31, 2013.

 

Plan category

 

Number of securities
to be issued upon
exercise of
outstanding options,
warrants and rights
(a)

 

Weighted-average
exercise price of
outstanding options,
warrants and rights
(b)

 

Number of securities
remaining available
for future issuance
under equity
compensation plans
(excluding securities
reflected in column (a))
(c)

 

Equity compensation plans approved by security holders

 

100,000

 

0

 

2,417,165

 

Equity compensation plans not approved by security holders

 

0

 

0

 

0

 

Total

 

100,000

 

0

 

2,417,165

 

 

These securities represent shares of common stock available for issuance under our 2013 Equity Plan.  The 2013 Equity Plan is discussed in Note 2 to our consolidated financial statements for the year ended December 31, 2013 included in Part II, Item 8 “ Financial Statements and Supplementary Data ”.

 

Repurchases of Securities

 

In May 2012, the Company’s Board of Directors authorized a share repurchase program under which the Company could, from time to time and depending on market conditions, share price and other factors, acquire shares of its common stock on the open market or in privately negotiated transactions up to an aggregate purchase price of $20 million. During the period from May 2012 through June 2012, the Company purchased and cancelled 89,600 shares of stock for $1.0 million at an average cost of $11.17 per share. The share repurchase program expired on December 31, 2012.

 

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Unregistered Sales of Securities during 2011 through 2013

 

The Company issued 62,052 unregistered shares of our common stock as part of the consideration for the March 2012 acquisition of Sprint and 29,273 shares were issued in February 2013 as part of the consideration for the acquisition of Q3C.

 

As part of the attainment of contingent consideration targets for the November 2010 acquisition of Rockford, the Company issued 494,095 shares of unregistered common stock to the sellers in the first quarter 2011 and 232,637 unregistered shares in April 2012.

 

A total of 1,095,646 shares of the Company’s common stock was issued to JCG’s former members in the first quarter of 2011 as a result of JCG meeting a defined performance target for 2010.

 

All securities listed on the following table are issued unregistered shares of our common stock. At December 31, 2013, there was no remaining obligation to issue shares of common stock under contingent consideration arrangements. We relied on Section 4(2) of the Securities Act, as the basis for exemption from registration. For all issuances, we believe the shares were issued to “accredited investors” as defined in Rule 501 of the Securities Act.  All issuances were as a result of privately negotiated transactions, and not pursuant to public solicitations.

 

Period

 

Number of
Shares

 

Purchaser

 

Consideration

 

 

 

 

 

 

 

March 1, 2011 through December 31, 2011

 

1,589,741 common shares

 

Stockholders of acquired companies

 

Achievement of financial targets as contingent consideration in sale of acquired companies

 

 

 

 

 

 

 

January 1, 2012 through December 31, 2012

 

232,637 common shares

 

Stockholders of acquired companies

 

Achievement of financial target as contingent consideration in sale of acquired company

 

 

 

 

 

 

 

January 1, 2012 through December 31, 2012

 

62,052 common shares

 

Stockholders of acquired companies

 

Part of consideration in sale of acquired company

 

 

 

 

 

 

 

January 1, 2013 through February 28, 2013

 

29,273 common shares

 

Employees and Stockholders of acquired companies

 

Part of consideration in sale of acquired company

 

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Performance Graph

 

The following Performance Graph and related information shall not be deemed to be filed with the Securities and Exchange Commission, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933 or Securities Exchange Act of 1934, each as amended, except to the extent that we specifically incorporate it by reference into such filing.

 

The following graph compares the cumulative total return to holders of the Company’s common stock during the five-year period from December 31, 2008, and in each quarter up to December 31, 2013. The return is compared to the cumulative total return during the same period achieved on the Standard & Poor’s 500 Stock Index (the “S&P 500”) and a peer group index selected by our management that includes five public companies within our industry (the “Peer Group”). The Peer Group is composed of MasTec, Inc., Matrix Service Company, Quanta Services, Inc., Sterling Construction Company, Inc. and Willbros Group, Inc.  The companies in the Peer Group were selected because they comprise a broad group of publicly held corporations, each of which has some operations similar to ours. When taken as a whole, management believes the Peer Group more closely resembles our total business than any individual company in the group.

 

The returns are calculated assuming that an investment with a value of $100 was made in the Company’s common stock and in each stock as of December 31, 2008.  All dividends were reinvested in additional shares of common stock, although the comparable companies did not pay dividends during the periods shown. The Peer Group investment is calculated based on a weighted average of the five company share prices. The graph lines merely connect the measuring dates and do not reflect fluctuations between those dates. The stock performance shown on the graph is not intended to be indicative of future stock performance.

 

COMPARISON OF DECEMBER 31, 2008 THROUGH DECEMBER 31, 2013

CUMULATIVE TOTAL RETURN

Among Primoris Services Corporation (“PRIM”), the S&P 500 and the Peer Group

 

GRAPHIC

 

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ITEM 6.                                                 SELECTED FINANCIAL DATA

 

The following selected financial data should be read in conjunction with Item 7, “ Management’s Discussion and Analysis of Financial Condition and Results of Operations ” and our audited financial statements and the accompanying notes included elsewhere in this Annual Report on Form 10-K.  During December 2009, a plan was put in place to sell the stock ownership of the Company in Ecuador and to discontinue all operations in Ecuador.  The results of operations and cash flows for these operations are reflected as discontinued operations for all periods presented.

 

 

 

Year Ended December 31,

 

 

 

2013

 

2012

 

2011

 

2010

 

2009

 

 

 

(In millions except share and per share data)

 

Statement of Operations Data:

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

1,944

 

$

1,542

 

$

1,460

 

$

942

 

$

467

 

Cost of revenues

 

1,688

 

1,349

 

1,275

 

819

 

391

 

Gross profit

 

256

 

193

 

185

 

123

 

76

 

Selling, general and administrative expense

 

131

 

96

 

86

 

65

 

36

 

Operating income

 

125

 

97

 

99

 

58

 

40

 

Other income (expense)

 

(5

)

(4

)

(2

)

(2

)

8

 

Income from continuing operations, before income taxes

 

120

 

93

 

97

 

56

 

48

 

Income tax provision

 

(45

)

(34

)

(38

)

(22

)

(18

)

Income from continuing operations

 

$

75

 

$

59

 

$

59

 

$

34

 

$

30

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss from discontinued operations, net of tax

 

 

 

 

 

(4

)

Net income

 

$

75

 

$

59

 

$

59

 

$

34

 

$

26

 

 

 

 

 

 

 

 

 

 

 

 

 

Less net income attributable to noncontrolling interests

 

(5

)

(2

)

 

 

 

Net income attributable to Primoris

 

$

70

 

$

57

 

$

59

 

$

34

 

$

26

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends per common share

 

$

0.135

 

$

0.12

 

$

0.11

 

$

0.10

 

$

0.10

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

Basic:

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

1.45

 

$

1.12

 

$

1.15

 

$

0.79

 

$

0.93

 

Income (loss) from discontinued operations

 

$

 

$

 

$

 

$

 

$

(0.12

)

Net income

 

$

1.45

 

$

1.12

 

$

1.15

 

$

0.79

 

$

0.81

 

Net income attributable to noncontrolling interests

 

$

(0.10

)

$

(0.02

)

$

 

$

 

$

 

Net income attributable to Primoris

 

$

1.35

 

$

1.10

 

$

1.15

 

$

0.79

 

$

0.81

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted:

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

1.45

 

$

1.12

 

$

1.14

 

$

0.72

 

$

0.86

 

Income (loss) from discontinued operations

 

$

 

$

 

$

 

$

 

$

(0.11

)

Net income

 

$

1.45

 

$

1.12

 

$

1.14

 

$

0.72

 

$

0.75

 

Net income attributable to noncontrolling interests

 

$

(0.10

)

$

(0.02

)

$

 

$

 

$

 

Net income attributable to Primoris

 

$

1.35

 

$

1.10

 

$

1.14

 

$

0.72

 

$

0.75

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding (in thousands):

 

 

 

 

 

 

 

 

 

 

 

Basic

 

51,540

 

51,391

 

50,707

 

42,694

 

31,937

 

Diluted

 

51,610

 

51,406

 

51,153

 

46,878

 

34,418

 

 

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Table of Contents

 

 

 

As of December 31,

 

 

 

2013

 

2011

 

2011

 

2010

 

2009

 

Balance Sheet Data:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

196

 

$

158

 

$

120

 

$

115

 

$

90

 

Short term investments

 

$

19

 

$

3

 

$

23

 

$

26

 

$

30

 

Accounts receivable, net

 

$

305

 

$

268

 

$

187

 

$

208

 

$

108

 

Total assets

 

$

1,051

 

$

931

 

$

728

 

$

704

 

$

476

 

Total current liabilities

 

$

430

 

$

421

 

$

345

 

$

382

 

$

242

 

Long-term debt/capital leases, net of current portion

 

$

193

 

$

132

 

$

67

 

$

73

 

$

78

 

Stockholders’ equity

 

$

398

 

$

333

 

$

275

 

$

208

 

$

144

 

 

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ITEM 7.                         MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

You should read the following discussion of our financial condition and results of operations in conjunction with the financial statements and the notes to those statements included as item 8 in this Annual Report on Form 10-K. This discussion includes forward-looking statements that are based on current expectations and are subject to uncertainties and unknown or changed circumstances. For a further discussion, please see “Forward Looking Statements” at the beginning of this Annual Report on Form 10-K. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those risks inherent with our business as discussed in “Item 1A Risk Factors”.

 

The following discussion starts with an overview of our business and a discussion of trends, including seasonality, that affect our industry.  That is followed by an overview of the critical accounting policies and estimates that we use to prepare our financial statements.  Next we discuss our results of operations and liquidity and capital resources, including our off-balance sheet transactions and contractual obligations.  We conclude with a discussion of our outlook and backlog.

 

Introduction

 

Primoris is a holding company of various subsidiaries, which form one of the larger publicly traded specialty contractors and infrastructure companies in the United States.  Serving diverse end-markets, we provide 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; and heavy civil projects, earthwork and site development. We also construct mechanical facilities and other structures, including power plants, petrochemical facilities, refineries, water and wastewater treatment facilities and parking structures. Finally, we provide specialized process and product engineering services.

 

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 in the western United States, as well as significant projects for our engineering customers.  We enter into a large number of contracts each year and the projects can vary in length — from several weeks, to as long as 48 months for completion on larger projects. Although we have not been dependent upon any one customer in any year, a small number of customers tend to constitute a substantial portion of our total revenues.

 

We recognize revenues and profitability on our contracts depending on the type of contract.  For our fixed price, or lump sum, contracts, we record revenue as the work progresses on a percentage-of-completion basis which means that we recognize revenue based on the percentage of costs incurred to date in proportion to the total estimated costs expected to complete the contract.  Fixed price contracts may include retainage provisions under which customers withhold a percentage of the contract price until the project is complete.  For our unit price and cost-plus contracts, we recognize revenue as units are completed or services are performed.

 

We report our results in three reporting segments:  East Construction Services (“East”), West Construction Services (“West”) and Engineering.  This reporting structure is focused on the location of the entities performing the work For some end markets we perform the same services in both the East and West segments, while for other end markets, such as poured-in-place parking structures or turn-around services, only one of our segments currently serves the market.  The following table shows the approximate percentage of revenues derived from our major end-markets for the years listed:

 

 

 

Twelve Months Ended
December 2013

 

Twelve Months Ended
December 2012

 

Twelve Months Ended
December 2011

 

 

 

 

 

 

 

 

 

Underground capital projects

 

23

%

14

%

23

%

Utility services

 

29

%

28

%

21

%

Industrial

 

22

%

22

%

18

%

Heavy Civil

 

16

%

23

%

25

%

Engineering

 

2

%

2

%

3

%

Other

 

8

%

11

%

10

%

Total

 

100.0

%

100.0

%

100.0

%

 

The East segment provides highway and bridge construction services to public agencies in Texas, Louisiana and Mississippi, and provides services for the construction of energy and petrochemical processing facilities and mine and maintenance services for potash mines.  The segment also provides underground pipeline services to utilities and energy companies in Texas and Louisiana and water and wastewater facility and pipeline construction services primarily in Florida and Texas.  The segment includes construction capabilities for gas plants and the ability to provide turn-around services to refineries.

 

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The West segment provides underground construction and maintenance services to utilities and construction services for underground pipeline capital projects.  The segment also constructs gas fired power plants and alternative energy facilities as well as other industrial construction, including poured-in-place parking structures.

 

The Engineering segment 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.

 

The following table shows our major operating subsidiaries and their reporting 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, the gas utility industry, as well as 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 may affect the amount and size of contracts we are awarded in any particular period.

 

We closely monitor our customers to assess the effect that changes in economic, market and regulatory conditions may have on them. We have experienced reduced spending by some of our customers over the last several years, which we attribute to negative economic and market conditions, and we anticipate that these negative conditions may continue to affect demand for our services in the near-term.  Fluctuations in market prices of oil, gas and other fuel sources can affect demand for our services.  The continuing changes in the regulatory environment also can affect the demand for our services, either by increasing our work or delaying projects.  We believe that most of our customers, some of whom are regulated utilities, remain financially stable in general and will be able to continue with their business plans over the long-term period.

 

Seasonality and cyclicality

 

Our results of operations are subject to quarterly variations. Some of the variation is the result of weather, particularly rain and snow, which can impact our ability to perform construction services. While the majority of the Company’s work is in the southern half of the United States, these seasonal impacts affect revenues and profitability since gas and other utilities defer routine replacement and repair during their period of peak demand.  Any quarter can be affected either negatively or positively by atypical weather patterns in any part of the country.  In addition, demand for new projects tends to be lower during the early part of the year due to clients’ internal budget cycles.  As a result, the Company usually experiences higher revenues and earnings in the third and fourth quarters of the year as compared to the first two quarters.

 

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The Company is also dependent on large construction projects which tend not to be seasonal, but can fluctuate from year to year based on general economic conditions.  Our business may be affected by declines or delays in new projects or by client project schedules.  Because of the cyclical nature of our business, the financial results for any period may fluctuate from prior periods, and the Company’s financial condition and operating results may vary from quarter-to-quarter.  Results from one quarter may not be indicative of its financial condition or operating results for any other quarter or for an entire year.

 

Critical Accounting Policies and Estimates

 

General —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, estimates are particularly difficult to determine, and we must exercise significant judgment. Estimates may be used 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 from those that result from using the estimates under different assumptions or conditions.

 

An accounting policy is deemed to be critical if it requires an accounting estimate to be based on assumptions about matters that are highly uncertain at the time the estimate is made, and different estimates that reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact our consolidated financial statements.

 

The following accounting policies are based on, among other things, judgments and assumptions made by management that include inherent risks and uncertainties. Management’s estimates are based on the relevant information available at the end of each period.

 

We periodically review these accounting policies with the Audit Committee of the Board of Directors.

 

Revenue recognition Historically, substantial portions of the Company’s revenues have been generated under fixed-price contracts. Fixed-price contracts carry certain inherent risks, including underestimation of costs, problems with new technologies and economic and other changes that may occur over the contract period. The Company recognizes revenues using the percentage-of-completion method for fixed-price contracts, which may result in uneven and irregular results. Unforeseen events and circumstances can alter the estimate of the costs and potential profit associated with a particular contract. 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.

 

Revenue is recognized on the cost-to-total-cost percentage-of-completion method for fixed price contracts.  In the percentage-of-completion method, estimated revenues and resulting contract income is calculated based on the total costs incurred to date as a percentage of total estimated costs. Total estimated costs, and thus contract revenues and income, can be impacted by changes in any of the following:  productivity, scheduling, the unit cost of labor, subcontracts, materials and equipment. Additionally, external factors such as weather, client needs, client delays in providing permits and approvals, labor availability, governmental regulation and politics may affect the progress of a project’s completion and thus the timing of revenue recognition. If an estimate of total contract cost indicates a loss on a contract, the projected loss is recognized in full at the time of the estimate.

 

In addition, t he 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 accomplishment of specific units at a specified unit price.

 

For all of its contracts, the Company includes the provision for estimated losses on uncompleted contracts in accrued expenses. The provision for estimated losses on uncompleted contracts was $1,392,000 and $764,000 for the years ended December 31, 2013 and 2012, respectively. 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. Claims are included in revenues when realization is probable and amounts can be reliably determined. Revenues in excess of contract costs incurred on claims are recognized only when the amounts have been paid.

 

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The caption “ Costs and estimated earnings in excess of billings ” on our balance sheets represents unbilled receivables which arise when revenues have been recorded but the amount cannot be billed under the terms of the contract until a later date.  Balances may represent:  (a) unbilled amounts arising from the use of the percentage-of-completion method of accounting, (b) incurred costs to be billed under cost reimbursement type contracts, (c) amounts arising from routine lags in billing, or (d) the revenue associated with unapproved change orders or claims when realization is probable and amounts can be reliably determined.  For those contracts in which billings exceed contract revenues recognized to date, excesses 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 Primoris has customer approval for a change of scope but a price change associated with the scope change has not yet been agreed upon.  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 Primoris 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. Revenue 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 construction contracts, certain retainage amounts may be withheld by customers until completion and acceptance of the project.  Final payments of the majority of retainage may not be made until the following operating cycle.

 

Valuation of acquired businesses —We use the fair value of the consideration paid and the fair value of the assets acquired and liabilities assumed to account for the purchase price of businesses.  The determination of fair value requires estimates and judgments of future cash flow expectations for the assignment of the fair values to the identifiable tangible and intangible assets.

 

Identifiable Tangible Assets.   Significant identifiable tangible assets acquired would include accounts receivable, costs and earnings in excess of billings for projects, inventory and fixed assets, generally consisting of construction equipment, for each acquisition. We determine the fair value of these assets on the acquisition date.  For current assets and current liabilities of an acquisition, the Company will evaluate whether the book value is equivalent to fair value due to their short term nature.  We estimate the fair value of fixed assets using a market approach, based on comparable market values for similar equipment of similar condition and age.

 

Identifiable Intangible Assets.   When necessary, we use the assistance of an independent third party valuation specialist to determine the fair value of the intangible assets acquired for the acquisitions.

 

A liability for contingent consideration based on future earnings is estimated at its fair value at the date of acquisition, with subsequent changes in fair value recorded in earnings as a gain or loss.  Fair value is estimated as of the acquisition date using estimated earnout payments based on management’s best estimate.

 

Accounting principles generally accepted in the United States provide a “measurement period” of up to one year in which to finalize all fair value estimates associated with the acquisition of a business.  Most estimates are preliminary until the end of the measurement period.  During the measurement period, adjustments to initial valuations and estimates that reflect newly discovered information that existed at the acquisition date are recorded.  After the measurement date, any adjustments would be recorded as a current period gain or loss.

 

Goodwill and Indefinite-Lived intangible Assets —Goodwill and certain intangible assets acquired in a business combination and determined to have indefinite useful lives are not amortized but are assessed for impairment annually and more frequently if triggering events occur. In performing these assessments, management relies on various factors, including operating results, business plans, economic projections, anticipated future cash flows, comparable transactions and other market data. There are inherent uncertainties related to these factors and judgment in applying them to the analysis of goodwill for impairment. Since judgment is involved in performing fair value measurements used in goodwill impairment analyses, there is risk that the carrying values of our goodwill may not be properly stated.

 

We account for goodwill, including evaluation of any goodwill impairment under ASC Topic 350 “ Intangibles — Goodwill and Other ”, performed at the reporting unit level for those units with recorded goodwill on October 1 of each year, unless there are indications requiring a more frequent impairment test.

 

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To date, goodwill has arisen from acquisitions and is recorded at our reporting units as follows (in thousands):

 

Reporting Unit

 

Segment

 

December 31,
2013

 

Rockford

 

West

 

$

32,079

 

Q3C

 

West

 

13,160

 

JCG

 

East

 

59,259

 

Sprint

 

East

 

9,389

 

FSSI

 

East

 

1,087

 

Saxon

 

East

 

810

 

Cardinal Contractors, Inc.

 

East

 

401

 

OnQuest Canada, ULC

 

Engineering

 

2,441

 

Total Goodwill

 

 

 

$

118,626

 

 

Under ASU 2012-02 -  Intangibles — Goodwill and Other (Topic 350):  Testing Indefinite-Lived Intangible Assets for Impairment , the Company can assess qualitative factors to determine if a quantitative impairment test of intangible assets is necessary.  Typically however, the Company uses the two-step impairment test outlined in ASC Topic 350.  The company tests for goodwill impairment on October 1 each year.  First, we compare the fair value of a reporting unit with its carrying amount. Fair value for the goodwill impairment test is determined utilizing a discounted cash flow analysis based on our budgets discounted using our weighted average cost of capital and market indicators of terminal year cash flows. Other valuation methods may be used to corroborate the discounted cash flow method. If the carrying amount of a reporting unit is in excess of its fair value, goodwill is considered potentially impaired and further tests are performed to measure the amount of impairment loss. In the second step of the goodwill impairment test, we compare the implied fair value of reporting unit goodwill with the carrying amount of the reporting unit’s goodwill. If the carrying amount of the reporting unit’s goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to the carrying amount of goodwill over its implied fair value. The implied fair value of goodwill is determined in the same manner that the amount of goodwill recognized in a business combination is determined. We allocate the fair value of a reporting unit to all of the assets and liabilities of that unit, including intangible assets, as if the reporting unit had been acquired in a business combination. Any excess of the fair value of a reporting unit over the amounts assigned to its assets and liabilities represents the implied fair value of goodwill.

 

Disruptions to our business, such as end market conditions, protracted economic weakness, unexpected significant declines in operating results of reporting units and the divestiture of a significant component of a reporting unit may result in our having to perform a goodwill impairment first step valuation analysis for some or all of our reporting units prior to the required annual assessment. These types of events and the resulting analysis could result in goodwill impairment charges in any periods in the future.

 

Reserve for uninsured risks —Estimates are inherent in the assessment of our exposure to uninsured risks. Significant judgments by us and where possible, third-party experts are needed in determining probable and/or reasonably estimable amounts that should be recorded or disclosed in the financial statements. The results of any changes in accounting estimates are reflected in the financial statements of the period in which we determine we need to record a change.

 

We self-insure worker’s compensation claims up to $250,000 per claim.  We maintained a self-insurance reserve totaling approximately $20.6 million at December 31, 2013 and approximately $16.5 million at December 31, 2012. Claims administration expenses were charged to current operations as incurred.  Our accruals are based on judgment, the probability of losses, and where applicable, the consideration of opinions of internal and/or external legal counsel. The amount is included in “ accrued expenses and other current liabilities ” on our balance sheets. Actual payments that may be made in the future could materially differ from such reserves.

 

Income taxes We account for income taxes under the asset and liability method as set forth in ASC Topic 740 “ Income Taxes ”, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined based on the temporary differences between the financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.

 

Deferred income tax assets may be reduced by a valuation allowance if, in the judgment of our management, it is more likely than not that all or a portion of a deferred tax asset will not be realized. In making such determination, we consider all available evidence, including recent financial operations, projected future taxable income, scheduled reversals of deferred tax liabilities, tax planning strategies, and the length of tax asset carryforward periods. The realization of deferred tax assets is primarily dependent upon

 

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Table of Contents

 

our ability to generate sufficient future taxable earnings in certain jurisdictions. If we subsequently determine that the carrying value of these assets, which had been written down, would be realized in the future, the value of the deferred tax assets would be increased, thereby increasing net income in the period when that determination was made.

 

A tax position is recognized as a benefit only if it is more likely than not that the tax position would be sustained based on its technical merits in a tax examination, using the presumption the tax authority has fully knowledge of all relevant facts regarding the position.  The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on ultimate settlement with the tax authority.  For tax position not meeting the more likely than not test, no tax benefit is recorded.

 

Long-Lived Assets —Assets held and used by the Company, primarily property, plant and equipment, are reviewed for impairment whenever events or changes in business circumstances indicate that the carrying amount of the asset may not be fully recoverable. We perform an undiscounted operation cash flow analysis to determine if impairment exists. For purposes of recognition and measurement of an impairment for assets held for use, we group assets and liabilities at the lowest level for which cash flows are separately identified. If an impairment is determined to exist, any related impairment loss is calculated based on fair value. The calculation of the fair value of long-lived assets is based on assumptions concerning the amount and timing of estimated future cash flows and assumed discount rates, reflecting varying degrees of perceived risk. Since judgment is involved in determining the fair value and useful lives of long-lived assets, there is a risk that the carrying value of our long-lived assets may be overstated or understated.

 

Multiemployer plans Various subsidiaries in the West 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. To the extent that any plans are underfunded, the Employee Retirement Income Security Act of 1974, as amended by the Multi-Employer Pension Plan Amendments Act of 1980, requires that if the Company were to withdraw from an agreement or if a plan is terminated, we may incur a withdrawal obligation. Since the withdrawal liability is based on estimates of our proportional share of the plan’s unfunded vested liability, as calculated by the plan’s actuaries, the potential withdrawal obligation may be significant.  In November 2011, the Company withdrew from the Central States Southeast and Southwest Areas Pension Fund multiemployer pension plan for which we have recorded a liability of $7.5 million which represents our best estimate of the liability at the time it was recorded.  Any changes in the estimated withdrawal liability could materially affect our results of operations, cash flow and financial position in the period such a change occurs.  See Note 14 — “ Commitments and Contingencies ” in the Notes to Consolidated Financial Statements included in Item 8 of this Form 10-K for further information.

 

Litigation and contingencies Litigation and contingencies are included in our consolidated financial statements based on our assessment of the expected outcome of litigation proceedings or the expected resolution of the contingency.  The Company provides for costs related to contingencies when a loss from such claims is probable and the amount is reasonably determinable. In determining whether it is possible to provide an estimate of loss, or range of possible loss, the Company reviews and evaluates its litigation, regulatory or other contingency matters on a quarterly basis in light of potentially relevant factual and legal developments, taking into consideration relevant insurance coverage and related deductibles. If we determine an unfavorable outcome is not probable or reasonably estimable, we do not accrue for a potential litigation or contingency loss.  Significant judgment is required to make these estimates and due to uncertainties related to these matters, accruals are based on the information available at that time.  As additional information becomes available, we may revise our estimates.  These revisions could have a material impact on our results of operations and financial condition.

 

Recently Issued Accounting Pronouncements

 

See Note 2 — “ Summary of Significant Accounting Policies - Recently Issued Accounting Pronouncements” of the Notes to Consolidated Financial Statements included in Item 8 of this Form 10-K for a description of recently issued accounting pronouncements, including the expected dates of adoption and estimated effects on our results of operations, financial position and cash flows.

 

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Table of Contents

 

Results of Operations

 

Revenue, gross profit, operating income and net income for the years ended December 31, 2013, 2012 and 2011 were as follows:

 

 

 

2013

 

2012

 

2011

 

 

 

(Thousands)

 

% of
Revenue

 

(Thousands)

 

% of
Revenue

 

(Thousands)

 

% of
Revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

1,944,220

 

100.0

%

$

1,541,734

 

100.0

%

$

1,460,150

 

100.0

%

Gross profit

 

256,015

 

13.2

%

192,710

 

12.5

%

185,203

 

12.7

%

Selling, general and administrative expense

 

130,778

 

6.8

%

96,424

 

6.3

%

86,204

 

5.9

%

Operating income

 

125,237

 

6.4

%

96,286

 

6.2

%

98,999

 

6.8

%

Other income (expense)

 

(5,661

)

(0.2

)%

(4,182

)

(0.3

)%

(2,266

)

(0.2

)%

Income before income taxes

 

119,576

 

6.2

%

92,104

 

6.0

%

96,733

 

6.6

%

Provision for income taxes

 

(44,896

)

(2.3

)%

(33,837

)

(2.2

)%

(38,174

)

(2.6

)%

Net income

 

74,680

 

3.9

%

58,267

 

3.8

%

58,559

 

4.0

%

Net income attributable to noncontrolling interests

 

(5,020

)

(0.3

)%

(1,511

)

(0.1

)%

 

 

Net income to Primoris

 

$

69,660

 

3.6

%

$

56,756

 

3.7

%

$

58,559

 

4.0

%

 

Consolidated Results

 

In 2012, we acquired Sprint, Silva, Saxon and Q3C, and in 2013, we acquired FSSI.  Combined, these companies are referred to as “Acquired companies” in the following discussion.

 

Revenues

 

2013 and 2012

 

Revenue increased by $402.5 million, or 26.1%, in 2013 compared to 2012 as a result of both acquisitive and organic growth.  Revenues from the Acquired Companies were $344.8 million in 2013, an increase of $152.4, or 79.2%, from the $192.4 million in 2012.  The increase reflects the full year results for Q3C, Sprint, Silva and Saxon which were acquired at different times in 2012 and a partial year for FSSI acquired in 2013.  Organically, revenues at the West segment increased by $163.2 million, or 19.6%, revenues at the East segment increased by $45.0 million, or 6.8%, and revenues decreased at the Engineering segment by $1.6 million, or 3.5%, all compared to 2012.  In 2013, the East segment represented 38.5% of total revenues, the West segment represented 59.2% of total revenues and the Engineering segment represented 2.3% of total revenues.  In 2012, the East segment represented 43.0% of total revenues, the West segment represented 54.0% of total revenues and the Engineering segment represented 3.0% of total revenues.

 

2012 and 2011

 

Revenue in 2012 grew to $1.5 billion, an increase of $81 million, or 5.6% from the prior year. The Acquired Companies contributed $113 million, or 7.3% of the total 2012 revenues.  The decline in organic revenues of $32 million reflects the impact of the El Paso Ruby contract (“Ruby”) on 2011 revenues.  With the substantial completion of that pipeline in 2011, revenues associated with the project decreased $262 million from 2011 to 2012.  Excluding the impact of Ruby, organic revenues grew by $230 million reflecting growth at ARB, JCG and Rockford’s non-Ruby business.

 

Gross Profit

 

2013 and 2012

 

Gross profit increased by $63.3 million, or 32.9%, in 2013 compared with 2012.  Of this increase, the Acquired Companies contributed $30.1 million or 15.6%, and organic growth accounted for $33.2 million or 17.3%.  Gross profit at the West segment increased by $71.4 million or 60.0% with Q3C contributing $29.4 million of this increase. The balance of $42.0 million was due to organic growth, including the impact of the close-out of a major power plant project. Gross profit at the East segment decreased by $7.8 million, or 12.2%, and profit at the Engineering segment decreased by $0.3 million, or 3.6%, all compared to 2012.  In 2013, the East segment gross profit represented 21.9% of total gross profit, the West segment gross profit represented 74.5% of the gross profit, and the Engineering segment represented 3.6% of gross profit.  In 2012, the East segment gross profit represented 33.1% of total gross profit, the West segment gross profit represented 61.9% of the gross profit, and the Engineering segment represented 5.0% of gross profit.

 

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Table of Contents

 

Gross profit as a percentage of revenues increased from 12.5% in 2012 to 13.2% in 2013.  The gross profit margin percentage for the East segment declined to 7.5% in 2013 compared to 9.6% in 2012, the gross profit margin percentage for the West segment increased from 14.3% in 2012 to 16.6 % in 2013, and the gross profit margin percentage for the Engineering segment for both years was 20.5%.

 

2012 and 2011

 

Gross profit for 2012 increased by $7.5 million, or 4.1%, from 2011.  The Acquired Companies contributed gross profit of $17 million.  Excluding the impact of the Ruby project, gross profit from organic operations, increased by $28 million compared to the previous year.  As a percentage of revenue, gross profit decreased to 12.5% from 12.7%, reflecting the impact of the end of the Ruby project.

 

Selling, general and administrative expenses

 

2013 and 2012

 

Selling, general and administrative expenses (“SG&A”) consist primarily of compensation and benefits to management, administrative salaries and benefits, marketing and communications, professional fees, office rent and utilities and acquisition costs.  SG&A expenses increased $34.4 million, or 35.6%, for 2013 compared to 2012.  The primary reasons for the change are as follows:

 

·                   $15.9 million as a result of the March 11, 2013 acquisition of FSSI and the full year impact of acquisitions made in 2012.

·                   $8.2 million increase in 2013 from the following one-time items:

·                   $1.7 million for the impairment of an intangible asset and expensing of a prepaid asset at FSSI;

·                   $4.0 million from an other than temporary impairment of WesPac and Alvah’s basis differences (See Note 8 — “ Equity Method Investments ” of the Notes to Consolidated Financial Statements included in Item 8 of this Form 10-K); and

·                   $2.5 million impact of a favorable settlement of litigation in 2012.

·                   $10.3 million from an increase in compensation and compensation related expenses.

 

2012 and 2011

 

An overall increase in SG&A of $10.2 million, was due primarily to additional expenses at the Acquired Companies.

 

SG&A as a percentage of revenue

 

SG&A expenses as a percentage of revenue increased to 6.7% for 2013, from 6.3% for 2012 and 5.9% for 2011.  The increase in the percentage of revenue was due to the impact of the $8.2 million one-time charges without which the percentage would have been 6.3%, the same in 2012.

 

Other income and expense

 

Non-operating income and expense items for the years ended December 31, 2013, 2012 and 2011 were as follows:

 

 

 

2013

 

2012

 

2011

 

 

 

(Thousands)

 

(Thousands)

 

(Thousands)

 

Other income (expense)

 

 

 

 

 

 

 

Income (loss) from non-consolidated investments

 

$

(4,836

)

$

186

 

$

4,018

 

Foreign exchange gain (loss)

 

153

 

(36

)

(96

)

Other income (expense)

 

4,804

 

(870

)

(1,088

)

Interest income

 

110

 

157

 

331

 

Interest expense

 

(5,892

)

(3,619

)

(5,431

)

Total other income (expense)

 

$

(5,661

)

$

(4,182

)

$

(2,266

)

 

The loss from non-consolidated joint ventures for 2013 included an impairment expense of $4.9 million for the WesPac-energy joint venture and a loss of $0.6 million from WesPac operations, partially offset by a $0.7 million profit from the Alvah investment.

 

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Table of Contents

 

Income from non-consolidated joint ventures for 2012 included $1.1 million from the St.-Bernard Levee Partners joint venture, reduced by $0.9 million expense for the WesPac-Energy joint venture.

 

Income from non-consolidated joint ventures for 2011 included a profit of $9.4 million from the St.-Bernard Levee Partners joint venture and a profit of $0.1 million from the OMPP joint venture.  These earnings were offset by losses of $5.5 million for the WesPac Energy joint venture, including the impact for the non-reimbursed project costs for the termination of development projects and reserves for assets not recoverable and an adjustment of $1.7 million to recognize an other than temporary decrease in the value of the Company’s basis difference between the Company’s original investment and its pro-rata share of the WesPac equity.

 

The foreign exchange loss for 2013 and gains for 2012 and 2011 reflect currency exchange fluctuations of the United States dollar compared to the Canadian dollar. Our contracts in Calgary, Canada are sold based on United States dollars, but a portion of the work is paid for with Canadian dollars creating a currency exchange difference.

 

Net other income for 2013 was $4.8 million.  The major components include $6.5 million as reductions in the liability for contingent consideration since the Sprint, Saxon and FSSI acquisitions did not meet the performance targets outlined in their purchase agreements.  The income was partially offset by increases of $2.5 million in the fair value of the liabilities for contingent consideration recorded throughout 2013 for acquisitions, including Q3C.

 

In 2012, net other expense was $0.9 million and $1.1 million in 2011.  For 2012, net other expense consisted of (a) the increase in the estimated fair value of the contingent earn-out liabilities for the Rockford, Sprint, Saxon and Q3C acquisitions, and (b) income of $0.6 million for final settlement in December 2012 of a previously discontinued operation in Ecuador.  For 2011, net other expense consisted primarily of the increase in the estimated fair value of the contingent earnout liabilities for the Rockford acquisition.

 

Interest income decreased in 2013 compared to both 2012 and 2011 as a result of declining interest rates and our decision to invest our excess cash balances primarily in certificate of deposits (“CD’s”) and CDs purchased through the CDARS (Certificate of Deposit Account Registry Service) and in short term U.S. Treasury bills with various financial institutions that are backed by the federal government. These relatively risk-free investments provide minimal income. The rate decrease was partially offset by higher average cash balances in the 2013 period.

 

Interest expense in 2013 increased by $2.3 million, due to higher borrowing levels, including the $50 million long-term note executed at the end of 2012, the $25 million long-term note drawn-down in July 2013, coupled with an increase in our equipment debt financing.

 

Interest expense in 2012 decreased by $1.8 million compared to 2011.  The $1.8 million decrease was due to paid down of all subordinated debt during 2012, and the re-financing of existing debt at lower interest rates, due the lower interest rate environment.

 

The weighted average interest rate on total debt outstanding at December 31, 2013, 2012 and 2011 was 3.3%, 2.7% and 5.6%, respectively.

 

Provision for income taxes

 

Our provision for income tax increased $11.1 million to $44.9 million for 2013 compared to 2012 as a result of increased pretax profits the years and an increase in our effective tax rate.  The effective tax rate on income before provision for income taxes and noncontrolling interests was 37.54% and 36.74% for the years 2013 and 2012, respectively.  The effective tax rate excluding income attributable to noncontrolling interests was 39.19% for the year 2013 and 37.35% for 2012.  The two primary reasons for the increase were the impact of the true-up of the 2012 state income tax estimates and the impact of a permanent book-tax difference for the 2012 settlement of the Rockford litigation.

 

Our provision for income tax decreased $4.3 million to $33.8 million for 2012 compared to 2011 as a result of decreased pretax profits between the years.  The effective tax rate on income before provision for income taxes and noncontrolling interests for the year 2012 was 36.74%.  The effective tax rate excluding income attributable to noncontrolling interests is 37.35%.

 

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Table of Contents

 

Segment Results

 

The following discussion describes the significant factors contributing to the results of our three operating segments.

 

East Segment

 

Revenue and gross profit for the East segment for the years ending December 31, 2013, 2012 and 2011 were as follows:

 

 

 

2013

 

2012

 

2011

 

 

 

(Thousands)

 

% of
Revenue

 

(Thousands)

 

% of
Revenue

 

(Thousands)

 

% of
Revenue

 

East Construction Services

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

747,782

 

 

 

$

662,248

 

 

 

$

528,745

 

 

 

Gross profit

 

$

56,040

 

7.5

%

$

63,811

 

9.6

%

$

57,118

 

10.8

%

 

2013 and 2012

 

Revenue for the East segment increased by $85.5 million, or 12.9% from 2012.  Of the increase the Acquired Companies added $76.8 million: $40.5 million from Saxon and FSSI and $36.3 million from Sprint.  JCG’s industrial division revenue increased by $48.3 million primarily from work activity at petrochemical facilities in south Louisiana, and Cardinal Construction revenues increased by $14.6 million reflecting improved opportunities in the wastewater facility market in both Texas and Florida.  These revenue increases were partially offset by a $54.8 million decrease at JCG’s heavy civil and infrastructure and maintenance divisions.  The primary reason for the decrease was a reduction in $106.2 million in Louisiana DOT revenue only partially replaced by an increase of $51.7 million in Texas DOT revenue.  While JCG had received the final notices to proceed for the I-35 projects near Belton, Texas, the Louisiana work is projected to remain at 2013 levels.

 

Gross profit for the segment decreased by $7.8 million, or 12.2%, compared to 2012.  The gross profit at the JCG heavy civil division decreased by $16.9 million primarily reflecting the impact of the revenue decrease and increased weather related costs for LADOT projects.  The decrease was offset by increases of $6.5 million at JCG’s industrial division and $2.1 million at Cardinal Contractors as a result of their increased revenue.  The gross profit contribution from the Acquired Companies was $0.5 million with project delays affecting Sprint’s ability to improve its margin from last year and project execution issues impacting Saxon.

 

Gross profit as a percent of revenues decreased to 7.5% in 2013 compared to 9.6% in 2012 primarily as a result of the decreased profitability at JCG and the reduced margin at the Acquired Companies.

 

2012 and 2011

 

East segment revenue in 2012 increased by $133.5 million, or 25.2%, from 2011.  Of the revenue increase, $100.7 million was due to the contribution of the three acquired companies, Sprint, Silva and Saxon.  JCG revenues increased by $29.0 million compared to 2011, as revenue increased at our industrial, infrastructure and maintenance and deep tunneling divisions.  Revenues at the heavy civil division were impacted by a decrease of $62.3 million in work for LADOT and was offset by increases in work for TXDOT.

 

Gross profit increased by $6.7 million, or 11.7%, compared to 2011.  Gross profit contribution from the 2012 acquisitions was $15.7 million.  JCG gross profit decreased by $6.7 million with increases at the industrial, infrastructure and maintenance and deep tunneling divisions partially offsetting a $6.6 million decrease at the heavy civil division.  The heavy civil division decrease was primarily attributable to the reduction in LADOT revenues and the lower profit margins associated with the startup projects in Belton, Texas area.  Over time, we expect the Texas gross profit to increase to historical heavy civil levels.

 

The reduction of gross profit percentage from 10.8% of revenues to 9.6% of revenues was primarily as a result of the reduced revenues and gross profit for the JCG heavy civil division.

 

West Segment

 

Revenue and gross profit for the West segment for the years ending December 31, 2013, 2012 and 2011 were as follows:

 

 

 

2013

 

2012

 

2011

 

 

 

(Thousands)

 

% of
Revenue

 

(Thousands)

 

% of
Revenue

 

(Thousands)

 

% of
Revenue

 

West Construction Services

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

1,151,433

 

 

 

$

832,860

 

 

 

$

881,733

 

 

 

Gross profit

 

$

190,747

 

16.6

%

$

119,328

 

14.3

%

$

118,385

 

13.4

%

 

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Table of Contents

 

2013 and 2012

 

West segment revenue increased by $318.6 million, or 38.3%, for 2013 compared to 2012 primarily from increases of $207.4 million at Rockford and $155.4 million at Q3C, which was acquired in November 2012.  Revenue at the ARB Underground division decreased by $44.9 million led by decreases from its two largest California utility customers of $57.3 million and $23.5 million, respectively.  For the year, revenues in the West from West’s largest customer decreased from $224.8 million to $156.3 million.  The decline was partially due to completion of one large program without the start of a new program.  We expect that revenue for this customer will increase in 2014.

 

Gross profit for the West segment increased by $71.4 million, or 59.9%, compared to 2012.  The primary driver of the gross profit increase was the successful substantial completion of a major power plant project in Southern California on time which allowed us to recognize profitability related to potential liquidated damages.  The contribution of this project and of the Blythe joint venture project increased our West Industrial gross profit by $41.6 million.  Q3C full year operations increased gross profit by $29.4 million, and in spite of the impact of very unusual and negative weather conditions, Rockford added $1.0 million.  The revenue reduction at the ARB Underground division reduced gross profit by $0.6 million.

 

Gross profit as a percent of revenues increased to 16.6% in 2013 compared to 14.3% in 2012 primarily from the substantial completion of the power plant project by the ARB Industrial division.  This percentage is higher than historical percentages, and we expect that the gross profit percent will return to more historical levels of 13% to 15% of revenue in 2014.

 

2012 and 2011

 

West segment revenues decreased by $48.9 million, or 5.5% for 2012 compared to 2011 primarily due to a decline in revenue at Rockford from the completion of the Ruby project in 2011.  The decline in revenues was partially offset by revenue increases as follows:  At ARB underground division of $78.4 million, ARB industrial division of $29.6 million and Rockford (excluding Ruby) of $73.7 million.  In addition, the Blythe Power Constructors joint venture contributed revenues of $25.7 million and the acquisition of Q3C added $12.8 million.  Revenues for the West segment’s largest customer increased to $224.8 million from $165.4 million for the previous year.

 

Gross profit for the West segment increased by $0.9 million, or 0.8%, for 2012 compared to 2011.  The small increase was primarily the result of a combination of a reduction due to the completion of the Ruby project and the Long Beach airport parking facility, totaling $45.4 million, offset by increases in gross profit as follows:  ARB’s underground division of $17.3 million, ARB’s industrial division of $7.7 million, Rockford excluding Ruby of $18.0 million, Blythe Power Constructors of $3.0 million and Q3C of $1.4 million.  The gross profit at ARB’s industrial division primarily reflects final completion of two power projects, while the ARB underground division reflects primarily the increased gross profit from its largest customer.

 

Gross profit as a percent of revenues increased to 14.3% in 2012 compared to 13.4% in 2011 primarily as a result of increases in revenues and gross profit at the two ARB divisions in 2012, compared to 2011.

 

Engineering Segment

 

Revenue and gross profit for the Engineering segment for the years ended December 31, 2013, 2012 and 2011 were as follows:

 

 

 

2013

 

2012

 

2011

 

 

 

(Thousands)

 

% of
Revenue

 

(Thousands)

 

% of
Revenue

 

(Thousands)

 

% of
Revenue

 

Engineering Segment

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

45,005

 

 

 

$

46,626

 

 

 

$

49,672

 

 

 

Gross profit

 

$

9,228

 

20.5

%

$

9,571

 

20.5

%

$

9,700

 

19.5

%

 

2013 and 2012

 

Engineering segment revenue in 2013 decreased by $1.6 million, or 3.5%, compared to 2012 due primarily to the impact of completing a $16 million revenue project in 2012.

 

Gross profit for the Engineering segment for 2013 decreased to $9.2 million from $9.6 million for the same period in 2012, a decrease of $0.3 million, primarily due to the lower revenue, with gross profit as a percent of revenues remaining the same as in 2012.

 

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Table of Contents

 

2012 and 2011

 

Engineering segment revenue in 2012 decreased by $3.0, or 6.1%, compared to the previous year, due to lower contract order activity across the operation.

 

Gross profit for the Engineering segment for 2012 decreased to $9.6 million, or a decrease of 1.3%, from $9.7 million for the same period in 2011, primarily due to the lower revenue volume.

 

Liquidity and Capital Resources

 

Cash Needs

 

Liquidity represents our ability to pay our liabilities when they become due, fund business operations and meet our contractual obligations and execute our business plan.  Our primary sources of liquidity are our cash balances at the beginning of each period and our net cash flow.  If needed, we have availability under our lines of credit to augment liquidity needs.  In order to maintain sufficient liquidity, we evaluate our working capital requirements on a regular basis.  We may elect to raise additional capital by issuing common stock, convertible notes, term debt or increasing our credit facility as necessary to fund our operations or to fund the acquisition of new businesses.

 

Our cash and cash equivalents totaled $214.8 million at December 31, 2013 compared to $161.0 million at December 31, 2012.  We anticipate that our cash and investments on hand, existing borrowing capacity under our credit facility and our future cash flows from operations will provide sufficient funds to enable us to meet our operating needs, our planned capital expenditures and our ability to grow for at least the next twelve months.

 

The construction industry is capital intensive, and we expect to continue to make capital expenditures to meet anticipated needs for our services.  Historically, we have invested an amount that approximated the sum of depreciation and amortization expenses plus proceeds from equipment sales.  In 2013, capital expenditures were approximately $87 million, which exceeded our historical levels by approximately $29 million as we made a significant investment to grow Q3C.  Capital expenses are expected to total $55 million to $65 million for 2014.

 

Cash Flows

 

Cash flows during the years ended December 31, 2013, 2012 and 2011 are summarized as follows:

 

 

 

2013

 

2012

 

2011

 

 

 

(Thousands)

 

(Thousands)

 

(Thousands)

 

Change in cash

 

 

 

 

 

 

 

Net cash provided by operating activities

 

$

77,753

 

$

98,393

 

$

39,500

 

Net cash used in investing activities

 

(97,120

)

(95,008

)

(22,609

)

Net cash provided (used) in financing activities

 

57,893

 

33,860

 

(12,022

)

Net change in cash

 

$

38,526

 

$

37,245

 

$

4,869

 

 

Operating Activities

 

The source of our cash flow from operating activities and the use of a portion of that cash in our operations for the years ended December 31, 2013, 2012 and 2011 were as follows:

 

 

 

2013

 

2012

 

2011

 

 

 

(Thousands)

 

(Thousands)

 

(Thousands)

 

Operating Activities

 

 

 

 

 

 

 

Operating income

 

$

125,237

 

$

96,286

 

$

98,999

 

Depreciation and amortization

 

49,888

 

35,623

 

33,803

 

Loss (gain) on sale of property and equipment

 

(1,406

)

(2,752

)

335

 

Stock-based compensation expense

 

367

 

 

 

Distributions received from non-consolidated entities

 

2,821

 

1,358

 

10,136

 

Other than temporary impairment expense for non-consolidated entities

 

3,975

 

 

 

Intangible asset impairment

 

808

 

 

 

Net deferred taxes

 

(12,582

)

(879

)

7,453

 

Changes in assets and liabilities

 

(45,633

)

6,962

 

(66,768

)

Foreign exchange gain (loss)

 

153

 

(36

)

(96

)

Interest income

 

110

 

157

 

331

 

Interest expense

 

(5,892

)

(3,619

)

(5,431

)

Other income (expense)

 

4,803

 

(870

)

(1,088

)

Provision for income taxes

 

(44,896

)

(33,837

)

(38,174

)

Net cash provided by operating activities

 

$

77,753

 

$

98,393

 

$

39,500

 

 

40



Table of Contents

 

Net cash provided by operating activities for 2013 of $77.8 million decreased by $20.6 million compared to 2012.  There were no specific transactions or events that caused the change; however the largest element from the table above is the change in assets and liabilities of $45.6 million, which accounted for a reduction in cash from operations of $52.6 million compared to 2012.   The components of the change in assets and liabilities for the twelve months ended December 31, 2013 are summarized as follows:

 

·                   a decrease of $30.1 million in customer retention deposits representing both normal retention payments and release of the $5 million escrow associated with the Rockford acquisition;

 

·                   an increase of $36.9 million in accounts receivable as a result of the increase in revenues during 2013.  At December 31, 2013, accounts receivable represented 29.0% of our total assets compared to 28.8% at the end of 2012.  We continue to maintain an excellent collection history, and we have certain lien rights that can provide additional security for collections;

 

·                   an increase of $15.4 million in costs and estimated earnings in excess of billings. Increases associated with the time lag from when revenues were earned until the customer can be billed were approximately $3.7 million for the ARB Underground division, 2.6 million for Q3C and $11.2 million for JCG;

 

·                   an increase in inventory and other current assets of $14.8 million primarily as a result of an increase in customer held inventory and prepaid expenses;

 

·                   accounts payable decreased by $25.1 million as a result of increased operating activity at the end of the 2012 year, an unusually high level of the accounts payable balances were accrued.  Accounts payable aging at the end of December 2013 reflect more historical aging of accounts payable;

 

·                   a net increase of $14.5 million in billings in excess of costs and estimated earnings reflecting the timing of work progression and billings;

 

·                   a decrease of $14.9 million in contingent earn-out liabilities, primarily as a result of payments of $10.9 million made in April 2013 and a $6.5 million reduction as certain operations did not meet the required operational targets; and

 

·                   a net increase of $15.8 million in accrued expenses, mainly due to an increase in the insurance reserve and premiums payable, and payroll and related employee benefits, reflecting our increased operating levels for the year.

 

During the twelve months of 2013, we paid $48.1 million for income taxes compared to $31.4 million in the same period of the previous year, as a result of taxes on increased income for the year ended December 31, 2013, compared to the same period in 2012.

 

Investing activities

 

 

 

2013

 

2012

 

2011

 

 

 

(Thousands)

 

(Thousands)

 

(Thousands)

 

Capital expenditures — cash

 

$

87,050

 

$

37,395

 

$

29,052

 

Capital expenditures — financed

 

2,637

 

2,932

 

5,312

 

Total capital expenditures

 

$

89,687

 

$

40,327

 

$

34,364

 

 

We purchased property and equipment for $89.7 million, $40.3 million and $34.4 million in the years ended December 31, 2013, 2012 and 2011, respectively, principally for our construction activities. We believe the ownership of equipment is generally preferable to renting equipment on a project-by-project basis, as ownership helps to ensure the equipment is available for our workloads when needed. In addition, ownership has historically resulted in lower overall equipment costs.

 

For 2013 purchases, we paid $87.1 million in cash, and we financed $2.6 million through capital leases.  Included in the 2013 purchases amount is approximately $26.2 million for equipment in support of the increased activity at Q3C and $2.0 million for the purchase of land and buildings in