Primoris Services Corporation
Primoris Services Corp (Form: 10-K, Received: 03/16/2015 15:55:36)

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, 2014

 

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-known 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 $1,157.7 million based upon the closing price of such common equity as of June 30, 2014 (the last business day of the Registrant’s most recently completed second fiscal quarter). On March 16, 2015, there were 51,569,564 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

 

T ABLE 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

23

 

 

 

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

28

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

48

Item 8.

Financial Statements and Supplementary Data

49

Item 9.

Changes In and Disagreements With Accountants on Accounting and Financial Disclosure

49

Item 9A.

Controls and Procedures

49

Item 9B.

Other Information

50

 

 

 

Part III

 

 

Item 10.

Directors, Executive Officers and Corporate Governance

51

Item 11.

Executive Compensation

51

Item 12.

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

51

Item 13.

Certain Relationships and Related Transactions, and Director Independence

51

Item 14.

Principal Accounting Fees and Services

51

 

 

 

Part IV

 

 

Item 15.

Exhibits and Financial Statement Schedules

52

 

 

 

Signatures

58

 

 

Index to Consolidated Financial Statements

F-1

 

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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 construction 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. Growing both organically and through acquisitions, Primoris has more than doubled its revenues since 2010.  The Company’s national footprint now extends nearly nationwide and into Canada.

 

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.

 

The Company’s common stock trades on the NASDAQ Select Global Market under the symbol “PRIM”.  Founded as ARB, Inc. in 1960, 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 accordance with the terms of the purchase agreement, we changed the name of the Sprint operations to “Primoris Pipeline Services” in March 2015.

 

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 entered into several smaller agreements to purchase businesses or business assets to 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”).  During 2014 we acquired Vadnais Trenchless Services, Inc. (“Vadnais”) and made three small acquisitions during the third quarter 2014 which consisted of the net assets of Surber Roustabout, LLC (“Surber”), Ram-Fab, LLC (“Ram-Fab”) and Williams Testing, LLC (“Williams”). We continue to evaluate potential acquisition candidates especially those with strong management teams with good reputations.

 

Reportable Segments

 

For a number of years and through the end of the second quarter 2014, the Company segregated its business into three operating segments: the East Construction Services segment, the West Construction Services segment and the Engineering segment.  In the third quarter 2014, the Company reorganized its business segments to match the change in the Company’s internal organization and management structure.  The segment changes during the quarter reflect the focus of our new chief operating officer on the services we provide to our energy related customers, primarily in the Gulf Coast area (the “Energy segment”) and a continuing geographic view for the West and East segments. The chief operating officer regularly reviews the operating and financial performance based on these revised segments.  The operating segments include:  The West Construction Services segment (“West segment”), which is unchanged from the previous segment, the East Construction Services segment (“East segment”), which is realigned from the previous East Construction Services segment and the Energy segment (which includes the previous Engineering segment).  All prior period amounts related to the segment change have been retrospectively reclassified throughout these consolidated financial statements to conform to the new presentation.  The following is a brief description of each of the Company’s reportable segments and business activities.

 

The West segment includes the underground and industrial operations and construction services performed by ARB, ARB Structures, Inc., Rockford, Alaska Continental Pipeline, Inc., Q3C, Primoris Renewables, LLC, Juniper Rock Corporation, Stellaris, LLC and Vadnais, acquired in June 2014.  Most of the entities perform work primarily in California; however, Rockford operates throughout the United States and Q3C operates in Colorado and the upper Midwest United States.  The Blythe joint venture is also included as a part of the segment.  The West segment consists of businesses headquartered primarily in the western United States.

 

The East segment includes the JCG Heavy Civil division, the JCG Infrastructure and Maintenance division, BW Primoris and Cardinal Contractors, Inc. construction business, located primarily in the southeastern United States and in the Gulf Coast region of the United States and includes the heavy civil construction and infrastructure and maintenance operations.

 

The Energy segment businesses are located primarily in the southeastern United States and in the Gulf Coast region of the United States.  The segment includes the operations of the PES pipeline and gas facility construction and maintenance operations, the JCG Industrial division and the newly acquired Surber and Ram-Fab operations.  Additionally, the segment includes the OnQuest, Inc. and OnQuest Canada, ULC operations for the design and installation of high-performance furnaces and heaters for the oil refining, petrochemical and power generation industries.

 

Each of the three segments specializes 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;

 

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

 

·                   Providing construction of highways and bridges; and

 

·                   Providing industrial and environmental construction.

 

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 budgets 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 are in a period of uncertainty caused by the significant decline in oil prices since the middle of 2014.  We expect that the decline will impact underground pipeline opportunities in oil and gas gathering lines, compressor systems and related infrastructure especially in the shale formations.  In the near term we do not expect a significant decline in mid-stream pipelines as the existing pipeline infrastructure appears to be insufficient to meet the continuing natural gas demand which could lead to opportunities for new pipeline construction.  In many cases, customers have invested significant time and money in obtaining regulatory approval, purchasing raw materials and obtaining end-user agreements for mid-stream lines; therefore, we anticipate that the customers will complete their pipeline projects.  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 and mid-stream pipeline in both our West and Energy 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 and over the next few years also the Energy 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 in California.

 

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 may 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.  Both our East and Energy segments provide 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 East and Energy 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.  Offsetting these financial 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 East segment services.

 

Strategy

 

Our strategy continues to emphasize 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

 

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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.

 

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, Southern California Gas, 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

 

2014

 

2013

 

2012

 

Texas DOT

 

8.8

%

7.2

%

5.8

%

Petrochemical producer

 

7.9

%

*

 

*

 

Private Gas and electric utility

 

7.0

%

5.4

%

*

 

Public gas and electric utility

 

6.9

%

7.9

%

14.6

%

Pipeline operator

 

5.8

%

*

 

*

 

Gas utility

 

*

 

7.4

%

5.6

%

Private gas and electric utility

 

*

 

*

 

6.9

%

Gas utility

 

*

 

7.7

%

*

 

Louisiana DOT

 

*

 

*

 

11.1

%

Totals

 

36.4

%

35.6

%

44.0

%

 


(*)                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, 2014, 2013 and 2012, approximately 53.6%, 50.0% and 55.9%, 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, 2014:

 

Segment

 

Project

 

Location

 

Approximate
Contract
Amount

 

Estimated
Completion
Date

 

Remaining
Backlog at
December 31,
2014

 

 

 

 

 

 

 

(Millions)

 

 

 

(Millions)

 

West

 

89 mile 36” crude oil pipeline

 

Rosenburg, TX

 

$

133

 

09/2015

 

$

132

 

West

 

71 MW Power plant project

 

Pasadena, CA

 

$

55

 

05/2016

 

$

48

 

East

 

IH 35 from S.363 to N.363

 

Temple, TX

 

$

250

 

06/2017

 

$

217

 

East

 

IH 35 Salado to Belton

 

Salado, TX

 

$

127

 

10/2015

 

$

88

 

Energy

 

Industrial facility

 

Lake Charles, LA

 

$

165

 

12/2016

 

$

165

 

Energy

 

100,000 GPD LNG plant

 

Miami, FL

 

$

27

 

9/2015

 

$

25

 

 

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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. In each market we also compete with local, private companies.

 

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 majority of the Company’s revenues are derived from customers in the United States and approximately 1% is generated from sources outside the United States.  Assets located outside the United States also represent approximately 1% of total assets of the Company.  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 Energy segment’s office in Calgary, Canada, but relates to specific projects in other countries, especially in the Far East and Australia.

 

Risks Attendant to Foreign Operations

 

In 2014 approximately 1.0% 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.

 

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.

 

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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.

 

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.

 

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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 impact 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, 2014, we employed approximately 1,267 salaried employees and approximately 5,490 hourly employees.  The total number of hourly personnel employed is subject to the volume of construction in progress. During the calendar year 2014, the aggregate number of employees ranged from approximately 6,500 to 8,700.

 

The following is a summary of employees by function and geography as of December 31, 2014:

 

 

 

CA

 

LA

 

TX

 

CO

 

FL

 

MN

 

Other
US

 

Canada

 

Total

 

Salaried

 

309

 

208

 

435

 

83

 

39

 

68

 

95

 

30

 

1,267

 

Hourly

 

1183

 

1,320

 

1,381

 

415

 

163

 

247

 

781

 

0

 

5,490

 

Total

 

1,492

 

1,528

 

1,816

 

498

 

202

 

315

 

876

 

30

 

6,757

 

 

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 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.

 

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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 in end markets 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.

 

Traditionally, the construction industry has lagged recoveries in the general economy. While economic conditions have improved in general, economic, regulatory and market conditions affecting some of our specific end markets may adversely impact the demand for our services, resulting in the delay, reduction or cancellation of certain projects and these conditions 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.

 

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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.  Since the middle of 2014, there has been a significant decrease in oil prices caused partially by a significant increase in the supply of natural gas due to the development of North American shale formations.  If the lower price results in a decrease in activity in the discovery or development of oil and gas reserves, customers could reduce their capital spending on underground projects which could result in a reduction of demand for our services which could adversely affect our overall financial position, results of operations and cash flow.

 

Specific government decisions could affect demand for our construction services.  For example, a limitation on the use of “fracking” technology, or creation of significant regulatory issues for the construction of underground pipelines, 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.

 

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.

 

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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 2014, 2013 and 2012 was approximately 64%, 66%, and 69%, 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.

 

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 53% of our revenue in 2014, 50% of our revenue in 2013 and 56% of our revenue in 2012. 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.

 

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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 2014, 2013 and 2012, revenue attributable to our services outside of the United States was 1.0%, 0.8% and 0.7% 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.

 

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.

 

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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 2014, 2013 and 2012 was 23%, 48% and 51%, respectively.  The approximate portion of revenue generated from unit-price contracts for the years 2014, 2013 and 2012 was 32%, 39% and 30%, 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.

 

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.

 

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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 letters 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 $250,000 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. 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, 2014, approximately 34% of our hourly employees, primarily consisting of field laborers, were covered by collective bargaining agreements. Of the 82 collective bargaining agreements to which we are a party, forty five expire during 2015 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.

 

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.

 

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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. 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;

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

·                   The inability to enforce covenants not to compete.

 

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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 for which we may not be reimbursed by our customers.  The employee insurance requirements are expected to impact our expenses beginning in 2015 as 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 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.

 

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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.

 

In May 2014, the Financial Accounting Standards Board finalized revised standards for revenue recognition which become effective for the Company beginning in 2017.  The FASB has also announced they expect to finalize standards regarding the accounting for leases.  These changes and other future changes 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, 2014, our balance sheet included a goodwill amount of $119 million and intangible assets of $40 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 share 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, 2014, our internal control over financial reporting was effective using the internal control standards issued by the Committee of Sponsoring Organizations (“COSO”) of the Treadway Commission:  Internal control—Integrated Framework (1992).  In 2013, an updated set of internal control standards, COSO 2013, was published.  We intend to adopt the COSO 2013 framework in assessing our internal control over financial reporting in 2015; 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.

 

Starting in the fourth quarter of 2014 and continuing through the date of this Annual Report on Form 10-K, the Company’s management, outside counsel and the Audit Committee of the Board of Directors spent considerable time and resources reviewing and analyzing various issues relating to the methods used by the Company’s subsidiaries to recognize revenue and estimate contingencies for ongoing projects.  The internal review is not yet completed and we cannot estimate when such review will be completed.  However, as outlined in Item 9A of this Annual Report on Form 10-K, our CEO and CFO concluded that our internal control over financial reporting is effective as of December 31, 2014.  During the fourth quarter of 2014, we made process and procedural changes that we believe enhance our controls over revenue recognition, and these enhanced controls were in place at December 31, 2014.   We anticipate continuing enhancement of our controls, especially as we begin to integrate our financial and operations information systems onto a common platform.

 

As our internal review is ongoing, we cannot predict the final outcome of the review. Until our review efforts are completed, the Company’s management, outside counsel and the Audit Committee of the Board of Directors will continue to devote considerable time and resources.  A government entity or other third party could bring an action and seek interest, injunctions, fines, civil and criminal penalties, or other remedies, or assert other claims or litigation against the Company with respect to any issues that might arise in connection with the review. We also may not be able to effectively improve and expand our financial infrastructure, and internal operating and administrative systems and controls, or do so on a timely basis. Findings from the our review could result in a loss of investor confidence and decrease in the market value of our common stock, the reduced ability to obtain financing and the loss of customers.

 

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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, which have resulted in dilution to our stockholders.  Our Articles of Incorporation permit us to issue up to 90 million shares of common stock of which 51.56 million were outstanding at December 31, 2014.  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.

 

Our Chairman, Chief Executive Officer and President is a significant stockholder, which may make it possible for him to have significant influence over the outcome of matters submitted to our stockholders for approval and his interests may differ from the interests of other stockholders.

 

As of December 31, 2014 our Chairman, Chief Executive Officer and President beneficially owned approximately 23% of the outstanding shares of our common stock. He 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 and Energy segments of our business have 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 Energy segment also has business offices located in San Dimas, California and in Calgary, Canada. The West 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.

 

We lease most of the facilities used in our operations. The leases are generally for 10 to 12-year terms, expiring through 2023.  The aggregate lease payments made for our facilities in 2014 were approximately $6.0 million. We believe that our facilities are adequate to meet our current and foreseeable requirements for the next several years.

 

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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 2014, 2013 and 2012, we spent approximately $88.0 million, $85.8 million and $40.3 million, respectively, in cash for property and equipment. Additionally, we acquired property and equipment through the use of capital leases of approximately $0.0 million in 2014, $2.6 million in 2013 and $2.9 million in 2012.  We estimate that our capital equipment includes the following:

 

·                   Heavy construction and specialized equipment—1,415 units; and

·                   Transportation equipment—2,870 units.

 

We believe the ownership of equipment is generally 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, 2014 and 2013:

 

 

 

2014

 

2013

 

Useful Life

 

 

 

(In Thousands)

 

(In Thousands)

 

 

 

Land and buildings

 

$

40,604

 

$

36,883

 

30 years

 

Leasehold improvements

 

11,267

 

7,958

 

Lease life

 

Office equipment

 

3,651

 

3,171

 

3 - 5 years

 

Construction equipment

 

308,915

 

247,997

 

3 - 7 years

 

Transportation equipment

 

83,845

 

67,550

 

3 - 18 years

 

 

 

448,282

 

363,559

 

 

 

Less: accumulated depreciation and amortization

 

(176,851

)

(137,047

)

 

 

Net property, plant and equipment

 

$

271,431

 

$

226,512

 

 

 

 

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”). In the Lawsuit, the North Texas Tollway Authority (“NTTA”) alleged 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 claimed that the cost to repair the retaining wall was approximately $5,400.  The NTTA also alleged that six other walls constructed on the project by JCG had the same potential exposure to failure.  For the past 18 months, the Company participated in Court-ordered mediation, and on February 25, 2015 the Lawsuit was settled for an expected cost to the Company of $9 million.  During the years ended December 31, 2014, 2013, and 2012, the Company recorded liability amounts of $3,000, $4,500 and $1,500, respectively.  The amounts recorded were the approximate amounts that the Company allocated for negotiation purposes in the mediation process.

 

At December 31, 2014, the Company is engaged in dispute resolution to enforce collection for two construction projects completed by the Company in 2014.  For one project, a cost reimbursable contract, the Company has recorded a receivable of $33.8 million, and for the other project, the Company has recorded a receivable of $29.3 million.  At December 31, 2014, the Company has not recorded revenues in excess of cost for these two projects.  At this time, the Company cannot predict the amount that it will collect nor the timing of any collection.

 

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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.

 

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 51,561,396 shares of common stock and 364 stockholders of record as of December 31, 2014. 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 2014 and 2013.

 

 

 

Market price per
Share

 

 

 

High

 

Low

 

Year ended December 31, 2014

 

 

 

 

 

First quarter

 

$

33.35

 

$

29.26

 

Second quarter

 

$

30.88

 

$

26.39

 

Third quarter

 

$

29.80

 

$

23.88

 

Fourth quarter

 

$

28.72

 

$

19.99

 

 

 

 

 

 

 

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

 

 

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Dividends

 

The following table shows cash dividends to our common stockholders declared by the Company during the three years ended December 31, 2014:

 

Declaration Date

 

Payable Date

 

Record Date

 

Type

 

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

 

 

 

 

 

 

 

 

 

February 26, 2014

 

April 15, 2014

 

March 31, 2014

 

$

0.035 per share

 

May 2, 2014

 

July 15, 2014

 

June 30, 2014

 

$

0.035 per share

 

August 5, 2014

 

October 15, 2014

 

September 30, 2014

 

$

0.040 per share

 

November 4, 2014

 

January 15, 2015

 

December 31, 2014

 

$

0.040 per share

 

 

In addition, on February 24, 2015, the Board of Directors declared a $0.04 per common share dividend with a payable date of April 15, 2015 and a record date of March 31, 2015. 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.

 

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 2014, our employees purchased 77,455 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 6,375 shares of common stock in March 2014 and 6,172 shares in August 2014.  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, 2014.

 

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

 

148,512

 

0

 

2,278,651

 

Equity compensation plans not approved by security holders

 

0

 

0

 

0

 

Total

 

148,512

 

0

 

2,278,651

 

 

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, 2014 included in Part II, Item 8 “ Financial Statements and Supplementary Data ”.

 

Repurchases of Securities

 

In February 2014, the Company’s Board of Directors authorized a share repurchase program under which the Company, from time to time and depending on market conditions, share price and other factors, may acquire shares of its common stock on the open market or in privately negotiated transactions up to an aggregate purchase price of $23 million.  During the period from February 2014 through September 2014, the Company purchased and cancelled 100,000 shares of stock for $2.8 million at an average cost of $28.44 per share.  This share repurchase program expired on December 31, 2014.

 

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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. This share repurchase program expired on December 31, 2012.

 

Sales of Unregistered Securities during 2012 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 unregistered 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.

 

All securities listed on the following table are issued unregistered shares of our common stock. At December 31, 2014, there was no remaining obligation to issue shares of common stock under contingent consideration arrangements. We relied on Section 4(a)(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

 

 

 

 

 

 

 

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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Table of Contents

 

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, 2009, and in each quarter up to December 31, 2014. 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, 2009.  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, 2009 THROUGH DECEMBER 31, 2014

CUMULATIVE TOTAL RETURN

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

 

 

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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.

 

 

 

Year Ended December 31,

 

 

 

2014

 

2013

 

2012

 

2011

 

2010

 

 

 

(In millions except share and per share data)

 

Statement of Operations Data:

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

2,086

 

$

1,944

 

$

1,542

 

$

1,460

 

$

942

 

Cost of revenues

 

1,850

 

1,688

 

1,349

 

1,275

 

819

 

Gross profit

 

236

 

256

 

193

 

185

 

123

 

Selling, general and administrative expense

 

132

 

131

 

96

 

86

 

65

 

Operating income

 

104

 

125

 

97

 

99

 

58

 

Other income (expense)

 

(2

)

(5

)

(4

)

(2

)

(2

)

Income before provision for income taxes

 

102

 

120

 

93

 

97

 

56

 

Income tax provision

 

(38

)

(45

)

(34

)

(38

)

(22

)

Net Income

 

$

64

 

$

75

 

$

59

 

$

59

 

$

34

 

 

 

 

 

 

 

 

 

 

 

 

 

Less net income attributable to noncontrolling interests

 

(1

)

(5

)

(2

)

 

 

Net income attributable to Primoris

 

$

63

 

$

70

 

$

57

 

$

59

 

$

34

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends per common share

 

$

0.15

 

$

0.135

 

$

0.12

 

$

0.11

 

$

0.10

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share attributable to Primoris:

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

1.22

 

$

1.35

 

$

1.10

 

$

1.15

 

$

0.79

 

Diluted

 

$

1.22

 

$

1.35

 

$

1.10

 

$

1.14

 

$

0.72

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding (in thousands):

 

 

 

 

 

 

 

 

 

 

 

Basic

 

51,607

 

51,540

 

51,391

 

50,707

 

42,694

 

Diluted

 

51,747

 

51,610

 

51,406

 

51,153

 

46,878

 

 

 

 

As of December 31,

 

 

 

2014

 

2013

 

2012

 

2011

 

2010

 

Balance Sheet Data:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

139

 

$

196

 

$

158

 

$

120

 

$

115

 

Short term investments

 

$

31

 

$

19

 

$

3

 

$

23

 

$

26

 

Accounts receivable, net

 

$

337

 

$

305

 

$

268

 

$

187

 

$

208

 

Total assets

 

$

1,111

 

$

1,051

 

$

931

 

$

728

 

$

704

 

Total current liabilities

 

$

419

 

$

430

 

$

421

 

$

345

 

$

382

 

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

 

$

205

 

$

193

 

$

132

 

$

67

 

$

73

 

Stockholders’ equity

 

$

454

 

$

398

 

$

333

 

$

275

 

$

208

 

 

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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.

 

Generally, 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.  The “Critical Accounting Policies and Estimates” section below provides additional information on our contracts and revenue recognition practices.

 

For a number of years and through the end of the second quarter 2014, we segregated our business into three operating segments: the East Construction Services segment, the West Construction Services segment and the Engineering segment.  In the third quarter 2014, we reorganized our business segments to match the change in the Company’s internal organization and management structure.  The segment changes during the quarter reflect the focus of our new chief operating officer on the services we provide to our energy related customers, primarily in the Gulf Coast area (the “Energy segment”) and a continuing geographic view for the West and East segments. The chief operating officer regularly reviews our operating performance based on these revised segments.  The operating segments include:  The West Construction Services segment (“West segment”), which is unchanged from the previous segment, the East Construction Services segment (“East segment”), which is realigned from the previous East Construction Services segment and the Energy segment (which includes the previous Engineering segment).  All prior period amounts related to the segment change have been retrospectively reclassified throughout this Annual Report on Form 10-K to conform to the new presentation.  The following is a brief description of each of our reportable segments and business activities.

 

The West segment includes the underground and industrial operations and construction services performed by ARB, ARB Structures, Inc., Rockford, Alaska Continental Pipeline, Inc., Q3C, Primoris Renewables, LLC, Juniper Rock Corporation, Stellaris, LLC and Vadnais, acquired in June 2014.  Most of the entities perform work primarily in California; however, Rockford operates throughout the United States and Q3C operates in Colorado and the upper Midwest United States.  The Blythe joint venture is also included as a part of the segment.  The West segment consists of businesses headquartered primarily in the western United States.

 

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Table of Contents

 

The East segment includes the JCG Heavy Civil division, the JCG Infrastructure and Maintenance division, BW Primoris and Cardinal Contractors, Inc. construction business, located primarily in the southeastern United States and in the Gulf Coast region of the United States and includes the heavy civil construction and infrastructure and maintenance operations.

 

The Energy segment businesses are located primarily in the southeastern United States and in the Gulf Coast region of the United States.  The segment includes the operations of the PES pipeline and gas facility construction and maintenance operations, the JCG Industrial division and the newly acquired Surber and Ram-Fab operations.  Additionally, the segment includes the OnQuest, Inc. and OnQuest Canada, ULC operations for the design and installation of high-performance furnaces and heaters for the oil refining, petrochemical and power generation industries.

 

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

 

Subsidiary

 

Operating Segment

 

Prior Operating Segment

ARB, Inc., including Stellaris, LLC (“ARB”)

 

West

 

West

ARB Structures, Inc.

 

West

 

West

Q3 Contracting, Inc. (“Q3C”)

 

West

 

West

Rockford Corporation (“Rockford”)

 

West

 

West

Vadnais Trenchless Services, Inc. (“Vadnais”); acquired in 2014

 

West

 

West

Silva Group (“Silva”)

 

East

 

East

Cardinal Contractors, Inc.

 

East

 

East

BW Primoris, LLC (“BWP”)

 

East

 

East

James Construction Group, LLC (“JCG”):

 

 

 

 

JCG Heavy Civil Division

 

East

 

East

JCG Infrastructure and Maintenance Division

 

East

 

East

JCG Industrial Division

 

Energy

 

East

Primoris Energy Services Corporation (“PES”)

 

Energy

 

East

OnQuest, Inc.

 

Energy

 

Engineering

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

 

Energy

 

Engineering

 

In 2012, PES purchased Sprint Pipeline Services, L.P. which has operated using the Sprint name as a DBA from the acquisition through February 2015.  In accordance with the purchase agreement, the name of the former Sprint operating entity was changed to “Primoris Pipeline Services” (“PPS”) in March 2015.  In this Annual Report on Form 10-K references to PPS are references to the Sprint operating entity.  PES acquired two subsidiaries, The Saxon Group (“Saxon”) in 2012 and Force Specialty Services, Inc. (“FSSI”) in 2013. Effective January 1, 2014, Saxon and FSSI were merged into PES along with the Industrial division of JCG.   Throughout this Annual Report on Form 10-K, references to PPS, FSSI, Saxon and James Industrial are to the divisions of PES for 2014, while the references for the years prior to 2014 are to the entities or divisions.

 

The Company owns 50% of the Blythe Power Constructors joint venture (“Blythe”) created for the installation of a parabolic trough solar field and steam generation system in California, and its operations are included as part of the West Construction Services segment.  The Company determined that in accordance with FASB Topic 810, the Company was the primary beneficiary of a variable interest entity and has consolidated the results of Blythe in its financial statements.  The project has been completed and the project warranty will expire in May 2015 at which time the Company anticipates terminating Blythe.

 

In January 2014, the Company created a wholly owned subsidiary, BW Primoris, LLC, a Texas limited liability company (“BWP”). BWP’s goal is to develop water projects, primarily in Texas, that will need the Company’s construction services.  On January 22, 2014, BWP entered into an agreement to purchase the assets and business of Blaus Wasser, LLC, a Wyoming limited liability company, for approximately $5 million.  During the first quarter of 2014, BWP entered into an intercompany construction contract with Cardinal Contractors, Inc. to build a small water treatment facility which will be owned by BWP.  When the treatment facility is completed, the facility will generate revenues through a take-or-pay contract with a west Texas municipal entity.  For 2014, all intercompany revenue and profit of the project have been eliminated, and at December 31, 2014, a total of $12.9 million has been capitalized as property, plant and equipment.

 

In May 2014, the Company created a wholly owned subsidiary, Vadnais Trenchless Services, Inc., a California company (“Vadnais”), which on June 5, 2014,  purchased the assets of Vadnais Corporation for $6.4 million. Vadnais Corporation was a general contractor specializing in micro-tunneling. The assets purchased were primarily equipment, buildings and land.   The purchase included a contingent earnout on meeting certain operating targets.

 

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During the third quarter 2014, the Company made three small purchases totaling $8.2 million to acquire the net assets of Surber Roustabout, LLC (“Surber”), Ram-Fab, LLC (“Ram-Fab”) and Williams Testing, LLC (“Williams”). Surber and Ram-Fab operate as divisions of PES, and Williams is a division of Cardinal Contractors, Inc.  Surber provides general oil and gas related construction activities in Texas; Ram-Fab is a fabricator of custom piping systems located in Arkansas; and Williams provides construction services related to sewer pipeline maintenance, rehabilitation and integrity testing in the Florida market.  The Surber and Ram-Fab purchases provided for a contingent earnout amounts as discussed in “Note 4— Business Combinations

 

For some end markets we perform the same services in each of the West, East and Energy 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 over three years derived from our major end-markets, with prior periods conformed to the current year market breakdown:

 

 

 

Twelve Months Ended
December 2014

 

Twelve Months Ended
December 2013

 

Twelve Months Ended
December 2012

 

 

 

 

 

 

 

 

 

Underground capital projects

 

17

%

23

%

14

%

Utility services

 

28

%

29

%

27

%

Industrial

 

27

%

22

%

22

%

Heavy Civil

 

22

%

20

%

29

%

Engineering

 

3

%

2

%

2

%

Other

 

3

%

4

%

6

%

Total

 

100

%

100

%

100

%

 

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 many factors, most of which are not within our control. 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 recent significant reduction in the price of oil has created uncertainty with respect to demand for our oil and gas pipeline and roustabout services in the near term, with additional uncertainty resulting over the length of time that prices will remain depressed.  When the current oversupply eases and with the continuing global demand increases for oil, oil prices would expect to recover from the current levels.  We believe that while the construction of gathering lines within the oil shale formations may remain at lower levels for an extended period, the need for pipeline infrastructure for mid-stream companies will result in a continuing need for our services over time.  The continuing changes in the regulatory environment also can affect the demand for our services, either by increasing our work or delaying projects.  For example, the regulatory environment in California may well result in delays for the construction of gas-fired power plants while the regulators continue to search for significant renewable resources.  We believe that regulated utility customers will continue to invest in our maintenance and replacement services.

 

Seasonality, cyclicality and variability

 

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.

 

The variability resulting from the combination of seasonality and awards of large projects were demonstrated in the fourth quarter of 2014 when revenues were less than that of the second and third quarters, primarily reflecting the completion of a large power plant project in 2013.

 

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

 

Fixed-price contracts — Historically, a substantial portion of our revenue has been generated under fixed-price contracts. For fixed-price contracts, we recognize revenues primarily using the percentage-of-completion method, which may result in uneven and irregular results. In the percentage-of-completion method, estimated revenues, estimated contract values and total costs incurred to date are used to calculate revenues earned.  Unforeseen events and circumstances can alter the estimate of the costs and potential profit associated with a particular contract.  Total estimated costs, and thus contract revenues and income, can be impacted by changes in productivity, scheduling, the unit cost of labor, subcontracts, materials and equipment. Additionally, external factors such as weather, client needs, client delays in providing permits and approvals, labor availability, governmental regulation and politics may affect the progress of a project’s completion and thus the timing of revenue recognition.  To the extent that original cost estimates are modified, estimated costs to complete increase, delivery schedules are delayed, or progress under a contract is otherwise impeded, cash flow, revenue recognition and profitability from a particular contract may be adversely affected.

 

We consider unapproved change orders to be contract variations for which we have customer approval for a change in scope but for which we do not have an agreed upon price change.  Costs associated with unapproved change orders are included in the estimated cost to complete the contracts and are treated as project costs as incurred. We recognize revenue equal to costs incurred on unapproved change orders when realization of change order 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.

 

We consider claims to be amounts that we seek, or will seek, to collect from customers or others for customer-caused changes in contract specifications or design, or other customer-related causes of unanticipated additional contract costs on which there is no agreement with customers on both scope and price changes. Claims are included in the calculation of revenue when realization is probable and amounts can be reliably determined. Revenue in excess of contract costs incurred on claims are recognized when the amounts have been agreed upon with the customer.  Revenue in excess of contract costs from claims is recognized when an 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.

 

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Other contract forms — We also use unit-price, time and material, and cost reimbursable plus fee contracts.  For these jobs, revenue is recognized primarily based on contractual terms.  For example, time and material contract revenues are generally recognized on an input basis, based on labor hours incurred and on purchases made.  Similarly, unit price contracts generally recognize revenue on an output based measurement such as the completion of specific units at a specified unit price.

 

At any time during a fixed-price contract if an estimate of total contract cost indicates a loss on a contract, the projected loss is recognized in full at that time. The loss amount is recognized as an “accrued loss provision” and is included in the accrued expenses and other liabilities amount on the balance sheet. As the percentage-of-completion method is used to calculate revenues, the accrued loss provision is changed so that the gross profit for the contract remains zero in future periods. If we anticipate that there will be a loss for unit price or cost reimbursable contracts, the projected loss is recognized in full at that time.  The provision for estimated losses on uncompleted contracts was $2.4 million and $1.4 million at December 31, 2014 and 2013, 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.

 

In all forms of contracts, we estimate collectability of contract amounts at the same time that we estimate project costs.  If we anticipate that there may be issues associated with the collectability of the full amount calculated as revenue, we may reduce the amount recognized as revenue to reflect the uncertainty associated with realization of the eventual cash collection.  For example, when a cost reimbursable project exceeds the client’s expected budget amount, the client frequently requests an adjustment to the final amount.  Similarly, some utility clients reserve the right to audit costs for significant periods after performance of the work.  In these situations, we may choose to defer recognition of revenue up to the time that the client pays for the services.  In some instances we may be sufficiently concerned about the collectability of contract amounts that we may choose to recognize revenue only to the extent of cost that is with no margin, until we believe that we have resolved the collectability matter.

 

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

 

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

 

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.

 

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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.

 

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

 

Reporting Unit

 

Segment

 

December 31,
2014

 

Rockford

 

West

 

$

32.1

 

Q3C

 

West

 

13.2

 

JCG (includes Heavy Civil and Infrastructure and Maintenance divisions)

 

East

 

42.9

 

Cardinal Contractors, Inc.

 

East

 

0.4

 

PES (includes JCG Industrial, PPS, FSSI, Saxon & Surber divisions)

 

Energy

 

28.4

 

OnQuest Canada, ULC

 

Energy

 

2.4

 

Total Goodwill

 

 

 

$

119.4

 

 

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.

 

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We self-insure worker’s compensation claims up to $0.25 million per claim.  We maintained a self-insurance reserve totaling approximately $22.3 million at December 31, 2014 and approximately $20.6 million at December 31, 2013. 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 as an increase or decrease in net 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 our ability to generate sufficient future taxable earnings in certain jurisdictions. If we subsequently determine that some or all deferred tax assets that were previously offset by a valuation allowance are realizable, the value of the deferred tax assets would be increased and the valuation allowance would be reduced, 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 that the tax authority has full 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 positions 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.  The Company has no plans to withdraw from any other agreements.

 

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.  We provide 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, we review and evaluate 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

 

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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.

 

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.

 

Results of Operations

 

Revenue, gross profit, operating income and net income for the years ended December 31, 2014, 2013 and 2012 were as follows:

 

 

 

2014

 

2013

 

2012

 

 

 

(Millions)

 

% of
Revenue

 

(Millions)

 

% of
Revenue

 

(Millions)

 

% of
Revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

2,086.2

 

100.0

%

$

1,944.2

 

100.0

%

$

1,541.7

 

100.0

%

Gross profit

 

236.0

 

11.3

%

256.0

 

13.2

%

192.7

 

12.5

%

Selling, general and administrative expense

 

132.2

 

6.3

%

130.8

 

6.8

%

96.4

 

6.3

%

Operating income

 

103.8

 

5.0

%

125.2

 

6.4

%

96.3

 

6.2

%

Other income (expense)

 

(1.5

)

(0.1

)%

(5.6

)

(0.2

)%

(4.2

)

(0.3

)%

Income before income taxes

 

102.3

 

4.9

%

119.6

 

6.2

%

92.1

 

6.0

%

Provision for income taxes

 

(38.6

)

(1.9

)%

(44.9

)

(2.3

)%

(33.8

)

(2.2

)%

Net income

 

63.7

 

3.0

%

74.7

 

3.9

%

58.3

 

3.8

%

Net income attributable to noncontrolling interests

 

(0.5

)

(0.0

)%

(5.0

)

(0.3

)%

(1.5

)

(0.1

)

Net income to Primoris

 

$

63.2

 

3.0

%

$

69.7

 

3.6

%

$

56.8

 

3.7

%

 

Consolidated Results

 

Revenues

 

2014 and 2013

 

Revenue in 2014 grew to $2.1 billion, an increase of $142.0 million, or 7.3% from the prior year. The increase in revenue at the energy segment of $269.8 million, and at the East segment of $59.5 million, was partially offset by a decline in the West segment of $187.3 million. In 2014, the West segment represented 46.2% of total revenue, the Energy segment represented 30.3%, and the East segment was 23.5% of total revenue.  Revenue from acquisitions made in 2014 and 2013 added $18.9 million to revenue.

 

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 acquisitions made in 2012 were $344.8 million, an increase of $152.4 million, or 79.2%, from the $192.4 million in 2012.  Organically, revenues at the West segment increased by $163.2 million, or 19.6%, revenues at the East segment decreased by $39.5 million, or 8.4%, and revenues increased at the Energy segment by $46.6 million, or 33.6%, all compared to 2012.  In 2013, the West segment represented 59.2% of total revenues, the East segment represented 22.1% of total revenues and the Energy segment represented 18.7% of total revenues.  In 2012, the West segment represented 54.0% of total revenues, the East segment represented 30.5% of total revenues and the Energy segment represented 15.5% of total revenues.

 

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Gross Profit

 

2014 and 2013

 

Gross profit for 2014 decreased by $20.0 million, or 7.8%, from 2013.  As discussed in the segment results below, the decrease in gross profit was $47.3 million in the West segment.  Gross profit for the Energy segment increased by $25.9 million and increased by $1.4 million for the East segment.  Gross profit from acquisitions made in 2014 and 2013 added $3.0 million to 2014 gross profit.  The large decrease in both revenue and gross profit in the West segment resulted in a decrease of gross profit as a percentage of revenue from 13.2%  to 11.3%.

 

Gross profit as a percentage of revenues decreased from 13.2% in 2013 to 11.3% in 2014.

 

2013 and 2012

 

Gross profit increased by $63.3 million, or 32.9%, in 2013 compared with 2012.  Of this increase, gross profit from 2012 acquisitions 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 $14.7 million, or 36.6%, whereas profit at the Energy segment increased by $6.6 million, or 19.9%, all compared to 2012.  In 2013, the West segment gross profit represented 74.5% of total gross profit, the Energy segment gross profit represented 15.5% of the gross profit, and the East segment represented 10.0% of gross profit.  In 2012, the West segment gross profit represented 61.9% of total gross profit, the East segment gross profit represented 20.9% of the gross profit, and the Energy segment represented 17.2% of gross profit.

 

Gross profit as a percentage of revenues increased from 12.5% in 2012 to 13.2% in 2013.

 

Selling, general and administrative expenses

 

2014 and 2013

 

Selling, general and administrative (“SG&A”) expenses 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 were $132.2 million in 2014 compared to $130.8 million in 2013.  The prior year included one-time expenses of $8.2 million, as described in the following paragraph.  Excluding the one-time expenses, SG&A in 2014 increased $9.6 million, or 7.8%, which included an increase of $1.4 million as a result of the 2014 acquisitions of Vadnais, Surber and Ram-Fab.  Remaining increases were due to increases in compensation and benefits, marketing and communications expenses and professional fees.

 

2013 and 2012

 

SG&A expenses consist primarily of compensation 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; 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.

 

SG&A as a percentage of revenue

 

SG&A expenses as a percentage of revenue decreased to 6.3% for 2014, from 6.8% for 2013 and 6.3% for 2012.  Excluding the prior year 2013 one-time charges of $8.2 million, the 2013 percentage would have been 6.3% of revenues.  With this adjustment, SG&A expenses as a percentage of revenues over the last three years would be unchanged at 6.3%.

 

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Other income and expense

 

Non-operating income and expense items for the years ended December 31, 2014, 2013 and 2012 were as follows:

 

 

 

2014

 

2013

 

2012

 

 

 

(Millions)

 

(Millions)

 

(Millions)

 

Other income (expense)

 

 

 

 

 

 

 

Income (loss) from non-consolidated investments

 

$

5.3

 

$

(4.8

)

$

0.2

 

Foreign exchange gain (loss)

 

0.3

 

0.2

 

(0.1

)

Other income (expense)

 

(0.8

)

4.8

 

(0.9

)

Interest income

 

0.1

 

0.1

 

0.2

 

Interest expense

 

(6.4

)

(5.9

)

(3.6

)

Total other income (expense)

 

$

(1.5

)

$

(5.6

)

$

(4.2

)

 

For 2014, income from non-consolidated joint ventures was due primarily to the sale of our interest of the WesPac-energy non-consolidated joint venture.

 

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.

 

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.

 

The foreign exchange gain for 2014 and 2013 and the loss for 2012 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.

 

The 2014 net other expense of $0.8 million was due to adjustments to the fair value of the contingent consideration liabilities related to the acquisitions of Q3C, Surber and Vadnais.

 

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 PPS, 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 which consisted of (a) the increase in the estimated fair value of the contingent earn-out liabilities for the Rockford, PPS, Saxon and Q3C acquisitions, and (b) income of $0.6 million for final settlement in December 2012 of a previously discontinued operation in Ecuador.

 

Interest income is derived from interest earned on excess cash invested 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 main reasons for the increase in interest expenses for 2014 of $0.5 million, compared to 2013, is an increase in our equipment debt financing, and a full year of interest on the $25 million long-term note drawn-down in July 2013.

 

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, and the $25 million long-term note drawn-down in July 2013, coupled with an increase in our equipment debt financing.

 

The weighted average interest rate on total debt outstanding at December 31, 2014, 2013 and 2012 was 3.0%, 3.3% and 2.7%, respectively.

 

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Provision for income taxes

 

Our provision for income tax decreased $6.3 million to $38.6 million for 2014 compared to 2013 as a result of decreased pretax profits between the years and a decrease in our effective tax rate.  The effective tax rate on income before provision for income taxes and noncontrolling interests was 37.77% and 37.54% for the years 2014 and 2013, respectively.  The effective tax rate excluding income attributable to noncontrolling interests was 37.96% for the year 2014 and 39.19% for 2013.  The two primary reasons for the decrease were a reduction in the state effective tax rate and the benefit recognized at the conclusion of the IRS examination.

 

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 between the years and an increase in our effective tax rate.  The effective tax rate on income before provision for income taxes and noncontrolling interests for the year 2013 was 37.54%.  The effective tax rate excluding income attributable to noncontrolling interests was 39.19%.

 

Segment Results

 

As discussed in the Introduction of this Item 7, we realigned our segment reporting in the third quarter of 2014, and we have adjusted all historical numbers below to reflect this realignment.  The following discussion describes the significant factors contributing to the results of our three operating segments.  All intersegment revenues and gross profit, which were immaterial, have been eliminated in the following tables.

 

West Segment

 

Revenue and gross profit for the West segment for the years ending December 31, 2014, 2013 and 2012 were as follows:

 

 

 

2014

 

2013

 

2012

 

 

 

(Millions)

 

% of
Revenue

 

(Millions)

 

% of
Revenue

 

(Millions)

 

% of
Revenue

 

West Construction Services

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

964.1

 

 

 

$

1,151.4

 

 

 

$

832.8

 

 

 

Gross profit

 

$

143.5

 

14.9

%

$

190.7

 

16.6

%

$

119.3

 

14.3

%

 

2014 and 2013

 

West segment revenue in 2014 decreased by $187.3 million, or 16.3%, compared to 2013.  Revenue declined at Rockford by $175.6 million primarily as a result of the completion of several large projects in 2013 and a $102 million decrease for a customer in the Marcellus shale region.   Revenue decreased by $41.8 million at the ARB Underground division primarily due to reduced revenue of $23.2 million from traditional MSA customers, a decline of $40.1 million for one-time projects completed in 2013 partially offset by an increase in pipeline integrity work for a large gas utility customer.  ARB Industrial division revenues declined by $21.8 million as a result of an $84.3 million decrease from the substantial completion of a major power plant project in 2013.  The decrease was partially offset by an increase of $53.2 million for construction of a solar plant project in the Mojave Desert in 2014.  Finally, revenue at Q3C increased $62.2 million compared to 2013 due primarily to increase in work for a large utility located in the north central United States.

 

Gross profit for the West segment decreased by $47.3 million or 24.8%.  The primary reason for the decrease was a reduction of gross profit at ARB of $54.3 million.  The declines were due to a combination of the close out of a major power plant project, the substantial completion of the Blythe joint venture project, the mix of MSA jobs at ARB Underground and the decline in revenue including $4.4 million less equipment cost absorption by the jobs as a result of the lower activity levels in 2014 compared to 2013.  Gross profit at Rockford decreased by $5.1 million while gross profit at Q3C increased by $13.5 million, with the revenue at the operating units serving as the primary driver of gross profit changes.

 

Gross profit as a percentage of revenues decreased to 14.9% in 2014 compared to 16.6% in 2013. The percentage in 2013 was higher than our historical percentages, which have ranged from 13% to 16% of revenue as a result of the substantial completion in 2013 of a power plant project by the ARB Industrial division.  In addition, ARB Industrial recorded revenue of $29.5 million in 2013 and revenue of $82.6 million in 2014 for construction services at a large solar project in the Mojave Desert.  Because of uncertainty as to collectability at the end of the cost-reimbursable project, we recorded revenues equal to cost for this project.  Excluding the revenue and cost of this project, gross profit as a percentage of revenues would have been 16.3% for 2014 compared to 17.0% for 2013.

 

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 primarily from decreases at 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.

 

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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 $41.4 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 $1.1 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.  The 2013 percentage was higher than historical percentages.

 

East Segment

 

Revenue and gross profit for the East segment for the years ended December 31, 2014, 2013 and 2012 were as follows:

 

 

 

2014

 

2013

 

2012

 

 

 

(Millions)

 

% of
Revenue

 

(Millions)

 

% of
Revenue

 

(Millions)

 

% of
Revenue

 

East Construction Services

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

489.9

 

 

 

$

430.4

 

 

 

$

470.0

 

 

 

Gross profit

 

$

25.7

 

5.3

%

$

24.3

 

5.6

%

$

40.2

 

8.6

%

 

2014 and 2013

 

Revenue for the East segment increased by $59.5 million, or 13.8% from 2013.  Of the increase, $66.1 million was at JCG’s heavy civil and infrastructure and maintenance divisions due primarily to increases of $42.8 million in Texas DOT revenue and an increase of $40.2 million in Mississippi DOT revenue.  The increases were partially offset by a reduction of $19.1 million in Louisiana DOT revenue.  Additionally, Cardinal Construction revenue decreased by $8.9 million, reflecting decreased work in the wastewater facility market in Florida.

 

Gross profit for the East segment increased by $1.4 million, or 5.9%, compared to 2013.  The increased percentage was lower than the revenue growth primarily as a result of reduced gross profit of $1.9 million for JCG heavy civil projects offset by increases of $1.8 million at JCG’s infrastructure and maintenance divisions and $0.6 million for Cardinal Construction projects.  Heavy civil experienced a $7.9 million decrease in gross profit due to both the impact of the lower Louisiana DOT revenues and reduced gross profit on Texas DOT work.  This decrease was partially offset by gross profit increases of $5.6 million in other heavy civil work, primarily on Mississippi DOT projects.

 

Gross profit as a percentage of revenues decreased to 5.3 % in 2014 compared to 5.6% in 2013 primarily as a result of the lower gross profit Texas and Louisiana heavy civil projects.

 

2013 and 2012

 

Revenue for the East segment decreased by $39.5 million, or 8.4% from 2012.  Of the decrease, $54.8 million was at JCG’s heavy civil and infrastructure and maintenance divisions.  The primary reason for the decrease was a reduction of $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 continued to decrease into 2014.  Cardinal Construction revenues increased by $14.6 million reflecting improved opportunities in the wastewater facility market in the Texas area.

 

Gross profit for the East segment decreased by $15.9 million, or 39.5%, compared to 2012.  The gross profit at the JCG heavy civil division decreased by $17.1 million primarily reflecting the impact of the revenue decrease and increased weather related costs for LADOT projects.  This decrease was offset by an increase of $2.1 million at Cardinal Contractors as a result of their increased revenue.

 

Gross profit as a percentage of revenues decreased to 5.6% in 2013 compared to 8.6% in 2012 primarily as a result of the decreased profitability at the JCG heavy civil division.

 

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Energy Segment

 

Revenue and gross profit for the Energy segment for the years ended December 31, 2014, 2013 and 2012 were as follows:

 

 

 

2014

 

2013

 

2012

 

 

 

(Millions)

 

% of
Revenue

 

(Millions)

 

% of
Revenue

 

(Millions)

 

% of
Revenue

 

Energy Segment

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

632.2

 

 

 

$

362.4

 

 

 

$

238.9

 

 

 

Gross profit

 

$

66.8

 

10.6

%

$

40.9

 

11.3

%

$

33.2

 

13.9

%

 

2014 and 2013

 

Revenue for the Energy segment increased by $269.8 million, or 74.5% from 2013.    The JIC Industrial division revenue increased by $129.0 million primarily from work activity at petrochemical facilities in south Louisiana.  PES’s PPS division revenue increased by $85.5 million as a result of increased revenues from capital projects.  PES’s Saxon division revenue increased by $17.1 million and OnQuest and OnQuest Canada revenue in 2014 increased by $21.5 million as a result of additional revenue from construction of a micro LNG facility in 2014.

 

Gross profit for the Energy segment increased by $25.9 million, or 63.1%, compared to 2013.    The JIC Industrial division gross profit increased $14.6 million primarily due to the division’s increased revenues.  PES’s PPS division gross profit increased $4.1 million due to increased revenues and the Saxon division gross profit increased $3.7 million as a result of increased revenues and improved profit margins compared to 2013.   OnQuest and OnQuest Canada profit margins in 2014 increased by $1.5 million due to increased revenues.

 

Gross profit as a percentage of revenues decreased to 10.6% in 2014 compared to 11.3% in 2013 primarily as a result of the reduced margins at PES’s PPS division.  Similar to ARB Industrial, PPS recorded revenues equal to cost for a large pipeline project for which we have concerns about collectability of the full contractual amount.  In 2013, PPS recorded revenue of $9.2 million and in 2014, PPS recorded revenue of $121.2 million for the project.  Excluding the revenue of this project, gross profit as a percentage of revenues would have been 13.0% for 2014 compared to 11.6% for 2013.

 

2013 and 2012

 

In 2012, we acquired Sprint and Saxon, and in 2013, we acquired FSSI, all of which are a part of the Energy segment.  Combined, these companies are referred to as “Acquired Companies” in the following discussion.

 

Revenue for the Energy segment increased by $123.4 million, or 51.7% 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.  OnQuest and OnQuest Canada revenue in 2013 decreased by $1.6 million due primarily to the impact of completing a $16 million project in 2012.

 

Gross profit for the Energy segment increased by $7.8 million, or 23.4%, compared to 2012, primarily due to the gross profit increase of $6.5 million at JCG’s Industrial Division.  The gross profit contribution from the Acquired Companies was $0.5 million with project delays affecting Sprint’s ability to improve its margin from the prior year and project execution issues impacting Saxon.

 

Gross profit as a percentage of revenues decreased to 11.3% in 2013 compared to 13.9% in 2012 primarily as a result of the reduced margins at the Acquired Companies.

 

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 $170.5 million at December 31, 2014 compared to $214.8 million at December 31, 2013.  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.

 

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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 2014, capital expenditures were approximately $88 million.  For 2014, the amount of depreciation, amortization and equipment sales was approximately $64 million.  Included in the total investment amount was approximately $22 million for the building of the BWP treatment facility and a new facilities for JCG and PES.  Capital expenses are expected to total $75-$85 million for 2015 with one key item being the amount of investment needed for the $290+ million Sasol project in Lake Charles, LA.

 

Cash Flows

 

Cash flows during the years ended December 31, 2014, 2013 and 2012 are summarized as follows:

 

 

 

2014

 

2013

 

2012

 

 

 

(Millions)

 

(Millions)

 

(Millions)

 

Change in cash

 

 

 

 

 

 

 

Net cash provided by operating activities

 

$

36.1

 

$

77.7

 

$

98.4

 

Net cash used in investing activities

 

(102.6

)

(97.1

)

(95.0

)

Net cash provided (used) in financing activities

 

9.9

 

57.9

 

33.9

 

Net change in cash

 

$

(56.6

)

$

38.5

 

$

37.3

 

 

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, 2014, 2013 and 2012 were as follows:

 

 

 

2014

 

2013

 

2012

 

 

 

(Millions)

 

(Millions)

 

(Millions)

 

Operating Activities

 

 

 

 

 

 

 

Operating income

 

$

103.8

 

$

125.2

 

$

96.3

 

Depreciation and amortization

 

58.4

 

49.9

 

35.6

 

Loss (gain) on sale of property and equipment

 

(1.9

)

(1.4

)

(2.8

)

Stock-based compensation expense

 

0.9

 

0.3

 

 

Distributions received from non-consolidated entities

 

 

2.8

 

1.4

 

Other than temporary impairment expense for non-consolidated entities

 

 

4.0

 

 

Intangible asset impairment

 

 

0.8

 

 

Net deferred taxes

 

9.0

 

(12.6

)

(0.9

)

Changes in assets and liabilities

 

(88.7

)

(45.6

)

7.0

 

Foreign exchange gain (loss)

 

0.3

 

0.2

 

(0.1

)

Interest income

 

0.1

 

0.1

 

0.2

 

Interest expense

 

(6.4

)

(5.9

)

(3.6

)

Other income (expense)

 

(0.8

)

4.8

 

(0.9

)

Provision for income taxes

 

(38.6

)

(44.9

)

(33.8

)

Net cash provided by operating activities

 

$

36.1

 

$

77.7

 

$

98.4

 

 

Net cash provided by operating activities for 2014 of $36.1 million decreased by $41.7 million compared to 2013.  This was caused by the decrease in operating income of $21.4 million and due to the $88.7 million net changes in assets and liabilities.  This accounted for the $41.6 million reduction in cash from operations compared to 2013.   The components of the change in assets and liabilities for the twelve months ended December 31, 2014 are summarized as follows:

 

·                   a decrease of $4.8 million in customer retention deposits;

 

·                   an increase of $29.7 million in accounts receivable primarily as a result of the withholding of $34.1 million of receivable payment due from a PPS customer with whom we have a dispute (compared to a $7.5 million balance at the end of 2013) as discussed further in the section “Receivable Collection Actions” below.   At December 31, 2014, accounts receivable represented 30.4% of our total assets compared to 29.0% at the end of 2013.  We continue to maintain an excellent collection history, and we have certain lien rights that can provide additional security for collections;

 

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·                   an increase of $11.5 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 $1.2 million for ARB and $9.4 million for Rockford;

 

·                   an increase in inventory and other current assets of $25.7 million primarily as a result of an increase in current tax receivable and an increase in customer held inventory and prepaid expenses of $20.2 million;

 

·                   accounts payable increased nominally by $0.9 million, primarily impacted by the timing of vendor payments;

 

·                   a net decrease of $14.8 million in billings in excess of costs and estimated earnings reflecting the timing of work progression and billings;

 

·                   a decrease of $4.1 million in contingent earn-out liabilities, primarily as a result of a payment of $5.0 million made in March 2014 offset by increases from acquisitions in 2014; and

 

·                   a net decrease of $7.4 million in accrued expenses, mainly due to a decrease in the corporate taxes payable.

 

During the twelve months of 2014, we paid $57.6 million for income taxes compared to $48.1 million in the same period of the previous year.  The Company expects that its tax overpayments will result in refunds of $4.5 million and the prepayment of $17.3 million for the 2015 tax year.

 

Investing activities

 

 

 

2014

 

2013

 

2012

 

 

 

(Millions)

 

(Millions)

 

(Millions)

 

Capital expenditures — cash

 

$

88.0

 

$

87.1

 

$

37.4

 

Capital expenditures — financed

 

 

2.6

 

2.9

 

Total capital expenditures

 

$

88.0

 

$

89.7

 

$

40.3

 

 

We purchased property and equipment for $88.0 million, $89.7 million and $40.3 million in the years ended December 31, 2014, 2013 and 2012, 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.

 

We periodically sell and acquire equipment, typically to update our fleet. We received proceeds from the sale of used equipment of $5.8 million, $7.9 million and $9.0 million for 2014, 2013 and 2012, respectively. For the past few years, we have been able to rent major equipment not used for our own projects to third parties, but with the current economic environment, equipment rentals have decreased.

 

As part of our cash management program, we invested $33.8 million, $23.1 million and $6.9 million in 2014, 2013 and 2012, respectively, in short-term investments, and sold $21.5 million, $7.4 million and $26.4 million in 2014, 2013 and 2012, respectively.  Short-term investments consist primarily of U.S. Treasury bills with various financial institutions that are backed by the federal government.

 

We used $14.6 million in cash for the Vadnais and Surber/Ram-Fab/Williams acquisitions in 2014 and $2.3 million in cash for the FSSI acquisition in 2013 and $86.2 million in cash for the Sprint, Silva, Saxon and Q3C acquisitions during 2012.

 

Financing activities

 

Financing activities provided cash of $9.9 million in 2014. Significant transactions impacting cash flows from financing activities included:

 

·                   $58.5 million in new and refinanced notes secured by our equipment;

·                   $35.1 million in repayment of long-term debt and the repayment of $3.3 million in capital leases;

·                    $1.6 million in payments of accumulated earnings to the Blythe non-controlling interest holder;

·                   Dividend payments of $7.5 million to our stockholders during the year ended December 31, 2014;

·                   Repurchase of common stock for $2.8 million; and

·                   $1.7 million in proceeds from the issuance of 77,455 shares of common stock purchased by the participants in the Primoris Long-term Retention Plan.

 

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Debt Activities

 

Credit Facility

 

As of December 31, 2014, the Company had a revolving credit facility, amended on December 12, 2014 (the “Credit Agreement”) with The PrivateBank and Trust Company, as administrative agent (the “Administrative Agent”) and co-lead arranger, The Bank of the West, as co-lead arranger, and IBERIABANK Corporation.  On December 12, 2014, the Credit Agreement was amended to include two additional lenders, Branch Banking and Trust Company and UMB Bank, N.A. (the “Lenders”).  The Credit Agreement is a $125 million revolving credit facility whereby the Lenders agree to make loans on a revolving basis from time to time and to issue letters of credit for up to the $125 million committed amount. The termination date of the Credit Agreement is December 28, 2017.

 

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

 

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

 

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

 

Commercial letters of credit were $4.7 million at December 31, 2014 and $5.1 million at December 31, 2013.  Other than commercial letters of credit, there were no borrowings under this line of credit during the twelve months ended December 31, 2014, leaving available borrowing capacity at $120.3 million at December 31, 2014.

 

Senior Secured Notes and Shelf Agreement

 

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

 

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

 

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

 

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

 

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

 

The Company was in compliance with the covenants for the Credit Agreement and Notes Agreement at December 31, 2014.

 

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Canadian Credit Facility

 

The Company has a credit facility for $8.0 million in Canadian dollars with a Canadian bank for purposes of issuing commercial letters of credit in Canada.  The credit facility has an annual renewal and provides for the issuance of commercial letters of credit for a term of up to five years. The facility provides for an annual fee of 1% for any issued and outstanding commercial letters of credit. Letters of credit can be denominated in either Canadian or U.S. dollars. At December 31, 2014 and December 31, 2013, letters of credit outstanding totaled $2.6 million and $2.3 million in Canadian dollars, respectively.  At December 31, 2014, the available borrowing capacity was $5.4 million in Canadian dollars.  The credit facility contains a working capital restrictive covenant for our Canadian subsidiary, OnQuest Canada, ULC.  At December 31, 2014, OnQuest Canada, ULC was in compliance with the covenant.

 

Contractual Obligations

 

As of December 31, 2014, we had $245.2 million of outstanding long-term debt and capital lease obligations.  There were no short-term borrowings.

 

A summary of contractual obligations as of December 31, 2014 were as follows:

 

 

 

Total

 

1 Year

 

2 - 3 Years

 

4 - 5 Years

 

After 5 Years

 

 

 

(In Millions)

 

Long-term debt and capital lease obligations

 

$

245.2

 

$

40.6

 

$

88.2

 

$

72.5

 

$

43.9

 

Interest on long-term debt (1)

 

24.0

 

6.2

 

9.5

 

5.4

 

2.9

 

Equipment operating leases

 

12.5

 

7.0

 

3.9

 

1.0

 

0.6

 

Contingent consideration obligations

 

6.9

 

5.9

 

1.0

 

 

 

Real property leases

 

12.5

 

3.5

 

5.4

 

3.3

 

0.3

 

Real property leases—related parties

 

9.2

 

1.4

 

2.9

 

2.0

 

2.9

 

 

 

$

310.3

 

$

64.6

 

$

110.9

 

$

84.2

 

$

50.6

 

Letters of credit

 

$

6.9

 

$

6.9

 

$

 

$

 

 

 


(1)                                  The interest amount represents interest payments for our fixed rate debt assuming that principal payments are made as originally scheduled.

 

The table does not include obligations under multi-employer pension plans in which some of our employees participate.  Our multi-employer pension plan contribution rates are generally specified in our collective bargaining agreements, and contributions are made to the plans based on employee payrolls.  Our obligations for future periods cannot be determined because we cannot predict the number of employees that we will employ at any given time nor the plans in which they may participate.

 

We may also be required to make additional contributions to multi-employer pension plans if they become underfunded, and these contributions will be determined based on our union payroll.  The Pension Protection Act of 2006 added special funding and operational rules for multi-employer plans that are classified as “endangered,” “seriously endangered” or “critical” status.  Plans in these classifications must adopt measures to improve their funded status through a funding improvement or rehabilitation plan, which may require additional contributions from employers.  The amounts of additional funds that we may be obligated to contribute cannot be reasonably estimated and is not included in the table above.

 

In November 2011, Rockford, ARB and Q3C, along with other members of the Pipe Line Contractors Association (“PLCA”), withdrew from the Central States Southeast and Southwest Areas Pension Fund multiemployer pension plan (the “Plan”). The Company withdrew from the Plan in order to mitigate its liability in connection with the Plan, which is significantly underfunded.  The Company recorded a liability of $7.5 million based on information provided by the Plan.  However, the Plan has asserted that the PLCA members did not effect a proper withdrawal in 2011.  The Company believes that a legally effective withdrawal occurred in November 2011 and has recorded the withdrawal liability on that basis.  In May 2014, the Plan asserted that the liability was $11.7 million.  Without agreeing to the amount, the Company has made monthly payments, which are being expensed, including interest, totaling $733 through December 31, 2014.  See Note 17 — “ Multiemployer Plans ” of the Notes to Consolidated Financial Statements included in Item 8 of this Form 10-K.

 

We have also excluded from the table any interest and fees associated with letters of credit and commitment fees under our credit facility since these amounts are unknown and variable.

 

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Related Party Transactions

 

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

 

Primoris leases properties from SIGI at the following locations:

 

·                   Bakersfield, California (lease expires October 2022)

·                   Pittsburg, California (lease expires April 2023)

·                   San Dimas, California (lease expires March 2019)

·                   Pasadena, Texas (lease was mutually terminated as of August 31, 2014)

 

Primoris leases a property from Roger Newnham, a former owner and current manager of our subsidiary, OnQuest Canada, ULC. The property is located in Calgary, Canada.

 

Primoris leases a property from Lemmie Rockford, one of the Rockford sellers, which commenced November 1, 2011.  The property is located in Toledo, Washington.  The lease expires in January 2016.

 

Primoris leases a property from Quality RE Partners, owned by three of the Q3C selling shareholders, of whom two are current employees, including Jay Osborn, President of Q3C.  The property is located in Little Canada, Minnesota.

 

Further information regarding related party transactions can be found in Note 20 — “ Related Party Transactions ” of the Notes to Consolidated Financial Statements included in Item 8 of this Form 10-K.

 

We believe that the amounts that we pay for the leases approximate terms that we could obtain from independent third parties.  In addition, any new leases, extensions of lease terms and changes in lease terms or amounts must be approved in advance by the independent directors of the Board of Directors Audit Committee.

 

Off Balance Sheet Transactions

 

As is common in our industry, we enter into certain off-balance sheet arrangements in the ordinary course of business that result in risks not directly reflected on our balance sheet.  We have no off-balance sheet financing arrangement with variable interest entities.  The following represent transactions, obligations or relationships that could be considered material off-balance sheet arrangements.

 

·                   Letters of credit issued under our lines of credit. At December 31, 2014, we had letters of credit outstanding of $6.9 million, primarily for international projects in our Energy segment and for providing security to our insurance carriers.  These letters of credit are used by some of our vendors to ensure reimbursement for amounts that they are disbursing on our behalf, such as beneficiaries under our self-funded insurance program.  In addition, from time to time, certain customers require us to post a letter of credit to ensure payments to our subcontractors or guarantee performance under our contracts.  Letters of credit reduce our borrowing availability under our Credit Agreement and Canadian Credit Facility.  If these letters of credit were drawn on by the beneficiary, we would be required to reimburse the issuer of the letter of credit, and we may be required to record a charge to earnings for the reimbursement.  We do not believe that it is likely that any material claims will be made under a letter of credit.

 

·                   We enter into non-cancellable operating leases for some of our facilities, equipment and vehicles, including leases with related parties.  At December 31, 2014, equipment operating leases had a remaining commitment of $12.4 million and facility rental commitments were $21.7 million.

 

·                   Employment agreements which provide for compensation and benefits under certain circumstances and which may contain a change of control clause.  We may be obligated to make payments under the terms of these agreements.

 

·                   In the ordinary course of our business, we may be required by our customers to post surety bid or completion bonds in connection with services that we provide. At December 31, 2014, we had $1.5 billion in outstanding bonds.  We do not believe that it is likely that we would have to fund material claims under our surety arrangements.

 

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·                   Certain of our subsidiaries are parties to collective bargaining agreements with unions.  In most instances, these agreements require that we contribute to multi-employer pension and health and welfare plans.  For many plans, the contributions are determined annually and required future contributions cannot be determined since contribution rates depend on the total number of union employees and actuarial calculations based on the demographics of all participants.  The Employee Retirement Income Security Act of 1974 (ERISA), as amended by the Multi-Employer Pension Amendments Act of 1980, subject employers to potential liabilities in the event of an employer’s complete or partial withdrawal of an underfunded multi-employer pension plan.  The Pension Protection Act of 2006 added new funding rules for plan years after 2007 for multi-employer plans that are classified as “endangered”, “seriously endangered”, or “critical” status.  As discussed in Note 17 — “ Multiemployer Plans ” of the Notes to Consolidated Financial Statements included in Item 8 of this Form 10-K, we have recognized a withdrawal liability for one plan.  We currently do not anticipate withdrawal from any other multi-employer pension plans.  Withdrawal liabilities or requirements for increased future contributions could negatively impact our results of operations and liquidity; and

 

·                   Other guarantees that we make from time to time, such as guaranteeing the obligations of our subsidiaries.

 

Receivable Collection Actions

 

As all construction contractors, we negotiate payments with our customers from time to time, and we may encounter delays in receiving payments from our customers.  However, in 2014, we encountered unusual situations with two contracts.  In one instance, ARB Industrial performed work on a solar plant in the Mojave Desert.  Based on our concerns about eventual collectability for the cost-reimbursable contract and in spite of many assurances of payment from the owner, we chose to recognize revenue equal to cost.  At the end of the project, the owner chose not to pay the final amounts due totaling