Primoris Services Corporation
Primoris Services Corp (Form: 10-Q, Received: 05/06/2015 15:56:19)

Table of Contents

 

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

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

 

For the quarterly period ended March 31, 2015

 

OR

 

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

 

For the transition period from              to             .

 

Commission file number 0001-34145

 

Primoris Services Corporation

(Exact name of registrant as specified in its charter)

 

Delaware

 

20-4743916

(State or Other Jurisdiction of

 

(I.R.S. Employer

Incorporation or Organization)

 

Identification No.)

 

 

 

2100 McKinney Avenue, Suite 1500

 

 

Dallas, Texas

 

75201

(Address of Principal Executive Offices)

 

(Zip Code)

 

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

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  x   No  o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes   x  No  o

 

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

 

Large accelerated filer   x

 

Accelerated filer   o

 

 

 

Non-accelerated filer   o

 

Smaller reporting company   o

Do not check if a smaller reporting company.

 

 

 

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

 

At May 5, 2015, 51,665,821 shares of the registrant’s common stock, par value $0.0001 per share, were outstanding.

 

 

 



Table of Contents

 

PRIMORIS SERVICES CORPORATION

 

INDEX

 

 

Page No.

 

 

Part I. Financial Information

 

 

 

Item 1. Financial Statements:

 

 

 

—Condensed Consolidated Balance Sheets at March 31, 2015 and December 31, 2014

3

 

 

—Condensed Consolidated Statements of Income for the three months ended March 31, 2015 and 2014

4

 

 

— Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2015 and 2014

5

 

 

—Notes to Condensed Consolidated Financial Statements

7

 

 

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

20

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

32

 

 

Item 4. Controls and Procedures

32

 

 

Part II. Other Information

 

 

 

Item 1. Legal Proceedings

33

 

 

Item 1A. Risk Factors

33

 

 

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

33

 

 

Item 3. Defaults Upon Senior Securities

33

 

 

Item 4. (Removed and Reserved)

33

 

 

Item 5. Other Information

33

 

 

Item 6. Exhibits

34

 

 

Signatures

35

 

2



Table of Contents

 

PART I.  FINANCIAL INFORMATION

 

ITEM 1.  FINANCIAL STATEMENTS

 

PRIMORIS SERVICES CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(In Thousands, Except Share Amounts)

(Unaudited)

 

 

 

March 31,
2015

 

December 31,
2014

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

106,018

 

$

139,465

 

Short-term investments

 

30,494

 

30,992

 

Customer retention deposits and restricted cash

 

823

 

481

 

Accounts receivable, net

 

299,028

 

337,382

 

Costs and estimated earnings in excess of billings

 

85,120

 

68,654

 

Inventory and uninstalled contract materials

 

60,677

 

58,116

 

Deferred tax assets

 

13,555

 

13,555

 

Prepaid expenses and other current assets

 

37,083

 

31,720

 

Total current assets

 

632,798

 

680,365

 

Property and equipment, net

 

282,046

 

271,431

 

Intangible assets, net

 

37,930

 

39,581

 

Goodwill

 

128,727

 

119,410

 

Other long-term assets

 

400

 

400

 

Total assets

 

$

1,081,901

 

$

1,111,187

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

121,049

 

$

128,793

 

Billings in excess of costs and estimated earnings

 

145,982

 

158,595

 

Accrued expenses and other current liabilities

 

75,887

 

83,401

 

Dividends payable

 

2,063

 

2,062

 

Current portion of capital leases

 

1,509

 

1,650

 

Current portion of long-term debt

 

41,226

 

38,909

 

Current portion of contingent earnout liabilities

 

919

 

5,901

 

Total current liabilities

 

388,635

 

419,311

 

Long-term capital leases, net of current portion

 

431

 

657

 

Long-term debt, net of current portion

 

202,617

 

204,029

 

Deferred tax liabilities

 

19,484

 

19,484

 

Long-term contingent earnout liabilities, net of current portion

 

1,048

 

1,021

 

Other long-term liabilities

 

14,119

 

12,899

 

Total liabilities

 

626,334

 

657,401

 

Commitments and contingencies

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

Common stock—$.0001 par value, 90,000,000 shares authorized, 51,665,821 and 51,561,396 issued and outstanding at March 31, 2015 and December 31, 2014

 

5

 

5

 

Additional paid-in capital

 

162,359

 

160,186

 

Retained earnings

 

293,236

 

293,628

 

Noncontrolling interests

 

(33

)

(33

)

Total stockholders’ equity

 

455,567

 

453,786

 

Total liabilities and stockholders’ equity

 

$

1,081,901

 

$

1,111,187

 

 

See Accompanying Notes to Condensed Consolidated Financial Statements

 

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PRIMORIS SERVICES CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In Thousands, Except Per Share Amounts)

(Unaudited)

 

 

 

Three months ended
March 31,

 

 

 

2015

 

2014

 

 

 

 

 

 

 

Revenues

 

$

392,780

 

$

470,074

 

Cost of revenues

 

354,775

 

420,317

 

Gross profit

 

38,005

 

49,757

 

Selling, general and administrative expenses

 

33,760

 

29,712

 

Operating income

 

4,245

 

20,045

 

Other income (expense):

 

 

 

 

 

Income from non-consolidated entities

 

 

14

 

Foreign exchange gain

 

436

 

26

 

Other expense

 

(44

)

(114

)

Interest income

 

12

 

52

 

Interest expense

 

(1,922

)

(1,668

)

Income before provision for income taxes

 

2,727

 

18,355

 

Provision for income taxes

 

(1,055

)

(7,090

)

Net income

 

$

1,672

 

$

11,265

 

 

 

 

 

 

 

Less net income attributable to noncontrolling interests

 

$

 

$

(432

)

 

 

 

 

 

 

Net income attributable to Primoris

 

$

1,672

 

$

10,833

 

Earnings per share:

 

 

 

 

 

Basic

 

$

0.03

 

$

0.21

 

Diluted

 

$

0.03

 

$

0.21

 

Weighted average common shares outstanding:

 

 

 

 

 

Basic

 

51,572

 

51,610

 

Diluted

 

51,726

 

51,714

 

 

See Accompanying Notes to Condensed Consolidated Financial Statements

 

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PRIMORIS SERVICES CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)

(Unaudited)

 

 

 

Three months Ended

 

 

 

March 31,

 

 

 

2015

 

2014

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

1,672

 

$

11,265

 

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

 

 

 

 

 

Depreciation

 

13,854

 

11,709

 

Amortization of intangible assets

 

1,651

 

1,843

 

Loss (gain) on sale of property and equipment

 

510

 

(355

)

Income from non-consolidated entities

 

 

(14

)

Stock—based compensation expense

 

262

 

137

 

Changes in assets and liabilities:

 

 

 

 

 

Customer retention deposits and restricted cash

 

(342

)

5,249

 

Accounts receivable

 

41,236

 

15,831

 

Costs and estimated earnings in excess of billings

 

(16,164

)

(17,921

)

Other current assets

 

(7,065

)

(7,938

)

Accounts payable

 

(8,487

)

(8,213

)

Billings in excess of costs and estimated earnings

 

(13,453

)

(26,064

)

Contingent earnout liabilities

 

(4,955

)

(4,886

)

Accrued expenses and other current liabilities

 

(6,421

)

1,534

 

Other long-term liabilities

 

(280

)

(3,855

)

Net cash provided by (used in) operating activities

 

2,018

 

(21,678

)

Cash flows from investing activities:

 

 

 

 

 

Purchase of property and equipment

 

(16,581

)

(15,067

)

Proceeds from sale of property and equipment

 

2,823

 

1,391

 

Purchase of short-term investments

 

 

(586

)

Sale of short-term investments

 

498

 

1,946

 

Cash received for the sale of Alvah minority interest

 

 

1,189

 

Cash paid for acquisitions

 

(22,302

)

 

Net cash used in investing activities

 

(35,562

)

(11,127

)

Cash flows from financing activities:

 

 

 

 

 

Proceeds from issuance of long-term debt

 

11,000

 

 

Repayment of capital leases

 

(367

)

(1,079

)

Repayment of long-term debt

 

(10,095

)

(11,314

)

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

 

1,621

 

1,671

 

Dividends paid

 

(2,062

)

(1,805

)

Cash distribution to non-controlling interest holder

 

 

(1,125

)

Net cash provided by (used in) financing activities

 

97

 

(13,652

)

Net change in cash and cash equivalents

 

(33,447

)

(46,457

)

Cash and cash equivalents at beginning of the period

 

139,465

 

196,077

 

Cash and cash equivalents at end of the period

 

$

106,018

 

$

149,620

 

 

See Accompanying Notes to Condensed Consolidated Financial Statements

 

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SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

 

 

 

Three months Ended

 

 

 

March 31,

 

 

 

2015

 

2014

 

 

 

(Unaudited)

 

Cash paid during the period for:

 

 

 

 

 

Interest

 

$

1,922

 

$

1,508

 

 

 

 

 

 

 

Income taxes, net of refunds received

 

$

505

 

$

2,341

 

 

SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES

 

 

 

Three months Ended

 

 

 

March 31,

 

 

 

2015

 

2014

 

 

 

(Unaudited)

 

 

 

 

 

 

 

Dividends declared and not yet paid

 

2,063

 

$

1,808

 

 

See Accompanying Notes to Condensed Consolidated Financial Statements

 

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PRIMORIS SERVICES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)

 

Note 1—Nature of Business

 

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

 

Reportable Operating Segments — In the third quarter 2014, the Company reorganized its business segments to match the changes in the Company’s internal organization and management structure.  The current 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 included certain subsidiaries that were included as part of the prior year East Construction Services and Engineering segments (“Energy segment”).  All prior period amounts related to the segment change have been retrospectively reclassified throughout these quarterly financial statements to conform to the new presentation.  See Note 20 — Reportable Operating Segments.

 

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

 

Subsidiary

 

Operating Segment

 

Prior Operating Segment

ARB, Inc. (“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

Primoris AV, Energy and Electrical Construction Corp. (“Primoris AV”); acquired February 28, 2015

 

Energy

 

N/A

OnQuest, Inc.

 

Energy

 

Engineering

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

 

Energy

 

Engineering

 

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 will terminate the Blythe joint venture. Financial information is presented in “Note 12—Noncontrolling Interests.”

 

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 the years 2015 and 2014, all intercompany revenue and profit of the project was eliminated, and at March 31, 2015, a total of $13.4 million has been capitalized as property, plant and equipment.

 

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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, building and land.  The purchase included a contingent earnout on meeting certain operating targets.

 

During the third quarter 2014, the Company made three small purchases totaling $8.2 million acquiring 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 8—Business Combinations”.

 

On February 28, 2015, the Company acquired Aevenia, Inc. (“Aevenia”) for approximately $23 million in cash. Aevenia has been re-branded as Primoris AV, Energy and Electrical Construction Corporation (“Primoris AV”) and operates as part of Primoris’ Energy segment.

 

Headquartered in Moorhead, Minnesota, Primoris AV is an energy and electrical construction company. For the year ended December 31, 2014, Primoris AV generated operating income of $4.2 million on revenues of $44.4 million. The estimated value of the assets purchased and liabilities assumed on the acquisition date included $4.0 million in current assets, $2.3 million in current liabilities, plant and equipment of $11.2 million and $9.3 million in intangible assets and goodwill.

 

Primoris AV specializes in overhead and underground line work, substations, telecom/fiber, and certain other client-specific on-demand call out services. The majority of their work is delivered under unit-price Master Services Agreements (“MSAs”). Primoris AV has operations in Minnesota, North Dakota, South Dakota and Iowa. The Company believes there are opportunities for Primoris AV to grow sales by performing in-house work for other Primoris subsidiaries and to expand the Company’s offerings to new geographies in the Midwest.

 

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

 

Note 2—Basis of Presentation

 

Interim consolidated financial statements The interim condensed consolidated financial statements for the three-month period ended March 31, 2015 and 2014 have been prepared in accordance with Rule 10-01 of Regulation S-X of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). As such, certain disclosures, which would substantially duplicate the disclosures contained in the Company’s Annual Report on Form 10-K, filed on March 16, 2015, which contains the Company’s audited consolidated financial statements for the year ended December 31, 2014, have been omitted.

 

This First Quarter 2015 Report should be read in concert with the Company’s most recent Annual Report on Form 10-K.  The interim financial information is unaudited.  In the opinion of management, the interim information includes all adjustments (consisting of normal recurring adjustments) necessary for the fair presentation of the interim financial information.

 

Revenue recognition

 

Fixed-price contracts — Historically, a substantial portion of the Company’s revenue has been generated under fixed-price contracts. For fixed-price contracts, the Company recognizes revenues 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.

 

The Company considers unapproved change orders to be contract variations for which it has customer approval for a change in scope but for which it does not have an agreed upon price change. Costs associated with unapproved change orders are included in the estimated cost to complete the contracts and are treated as project costs as incurred. The Company recognizes revenue equal to costs incurred on unapproved change orders based on an estimated probability of realization from change order approval. 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.

 

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

 

Other contract forms — The Company also uses 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.

 

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, the Company estimates its collectability of contract amounts at the same time that it estimates project costs.  If the Company anticipates that there may be issues associated with the collectability of the full amount calculated as revenues, the Company 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, the Company may choose to defer recognition of revenue up to the time that the client pays for the services.

 

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.

 

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

 

For projects that were in process in at the end of the prior year, there can be a difference in revenues and profits that would have been recognized in the prior year, had current year estimates of costs to complete been known at the end of the prior year.

 

Customer Concentration — The Company operates in multiple industry segments encompassing the construction of commercial, industrial and public works infrastructure assets throughout primarily the United States. Typically, the top ten customers in any one calendar year generate revenues in excess of 50% of total revenues; however, the group that comprise the top ten customers varies from year to year.

 

During the three months ending March 31, 2015, revenues generated by the top ten customers were $236 million, which represented 60.2% of total revenues during the period. During that period, a large midstream pipeline company represented 13.9% of total revenues and TX DOT represented 10.9% of total revenues.

 

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During the three months ending March 31, 2014, revenues generated by the top ten customers were $283 million, which represented 60.1% of total revenues during the period. During that period, a large solar electric plant represented 12.7% of total revenues and TX DOT represented 9.3% of total revenues.

 

At March 31, 2015, approximately 10.6% of the Company’s accounts receivable were due from one customer, and that customer provided 13.9% of the Company’s revenues for the three months ended March 31, 2015. In addition, of total accounts receivable, approximately 17.2% of total accounts receivable are currently in dispute resolution. See Note 19 — “Commitments and Contingencies”.

 

At March 31, 2014, approximately 12.7% of the Company’s accounts receivable were due from one customer, and that customer provided 12.7% of the Company’s revenues for the three months ended March 31, 2014.

 

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. Federal law requires that if the Company were to withdraw from an agreement, it would incur a withdrawal obligation. The potential withdrawal obligation may be significant. Any withdrawal liability would be recorded when it is probable that a liability exists and can be reasonably estimated, in accordance with GAAP. In November 2011, the Company withdrew from the Central States Southeast and Southwest Areas Pension Fund multiemployer pension plan, as discussed in Note 19 — “Commitments and Contingencies.” The Company has no plans to withdraw from any other agreements.

 

Inventory and uninstalled contract materials — Inventory consists of expendable construction materials and small tools that will be used in construction projects and is valued at the lower of cost, using first-in, first-out method, or market. Uninstalled contract materials are certain job specific materials not yet installed, primarily for highway construction projects, which are valued using the specific identification method relating the cost incurred to a specific project. In most cases, the Company is able to invoice a state agency for the materials, but title has not yet passed to the state agency.

 

Note 3—Recent Accounting Pronouncements

 

In May 2014, the FASB issued ASU No. 2014-09, “ Revenue from Contracts with Customers (Topic 606)” . The new standard is effective for reporting periods beginning after December 15, 2016 and early adoption is not permitted. The comprehensive new standard will supersede existing revenue recognition guidance and require revenue to be recognized when promised goods or services are transferred to customers in amounts that reflect the consideration to which the company expects to be entitled in exchange for those goods or services. Adoption would require new qualitative and quantitative disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments, information about contract balances and performance obligations, and assets recognized from costs incurred to obtain or fulfill a contract.  The guidance permits two implementation approaches, one requiring retrospective application of the new standard with restatement of prior years and one requiring prospective application of the new standard with disclosure of results under old standards. For the Company, the new standard is currently effective January 1, 2017; however, the FASB recently issued a proposal that, when finalized, would defer the effective date for us to January 1, 2018.  The Company is currently evaluating the potential impact of adoption and the implementation approach to be used.

 

In February 2015, the FASB issued ASU 2015-02 “ Consolidation (Topic 810): Amendment to the Consolidation Analysis ” which amends existing consolidation guidance, including amending the guidance related to determining whether an entity is a variable interest entity. The update is effective for interim and annual periods beginning after December 15, 2015, although early adoption is permitted. The guidance may be applied using a modified retrospective approach whereby the entity records a cumulative effect of adoption at the beginning of the fiscal year of initial application. A reporting entity may also apply the amendments on a full retrospective basis. The Company is currently evaluating the potential impact of this authoritative guidance on our consolidated financial statements.

 

In August 2014, the FASB issued ASU 2014-15 “ Presentation of Financial Statements — Going Concern (Subtopic 205-40) ” to address the diversity in practice in determining when there is substantial doubt about an entity’s ability to continue as a going concern and when and how an entity must disclose certain relevant conditions and events. This update requires an entity to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern for a period of one year after the date that the financial statements are issued (or available to be issued). If such conditions or events exist, an entity should disclose that there is substantial doubt about the entity’s ability to continue as a going concern for a period of one year after the date that the financial statements are issued (or available to be issued), along with the principal conditions or events that raise substantial doubt, management’s evaluation of the significance of those conditions or events in relation to the entity’s ability to meet its obligations and management’s plans that are intended to mitigate those conditions or events. The guidance is effective for annual and interim periods ending after December 15, 2016. This guidance will impact the disclosure and presentation of how we report any substantial doubt about our ability to continue as a going concern, if such substantial doubt were to exist. The Company will adopt this guidance effective January 1, 2017.

 

Note 4—Fair Value Measurements

 

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

 

In general, fair values determined by Level 1 inputs use quoted prices (unadjusted) in active markets for identical assets or liabilities. Fair values determined by Level 2 inputs use data points that are observable such as quoted prices, interest rates and yield curves. Fair values determined by Level 3 inputs are “unobservable data points” for the asset or liability and include situations where there is little, if any, market activity for the asset or liability.

 

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The following table presents, for each of the fair value hierarchy levels identified under ASC Topic 820, the Company’s financial assets and liabilities that are required to be measured at fair value at March 31, 2015 and December 31, 2014:

 

 

 

 

 

Fair Value Measurements at Reporting Date

 

 

 

Amount
Recorded
on Balance
Sheet

 

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

 

Significant
Other
Observable
Inputs
(Level 2)

 

Significant
Unobservable
Inputs
(Level 3)

 

Assets as of March 31, 2015:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

106,018

 

$

106,018

 

 

 

Short-term investments

 

$

30,494

 

$

30,494

 

 

 

Liabilities as of March 31, 2015:

 

 

 

 

 

 

 

 

 

Contingent consideration

 

$

1,967

 

 

 

$

1,967

 

 

 

 

 

 

 

 

 

 

 

Assets as of December 31, 2014:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

139,465

 

$

139,465

 

 

 

Short-term investments

 

$

30,992

 

$

30,992

 

 

 

Liabilities as of December 31, 2014:

 

 

 

 

 

 

 

 

 

Contingent consideration

 

$

6,922

 

 

 

$

6,922

 

 

Short-term investments consist primarily of U.S. Treasury bills with various financial institutions that are backed by the federal government.

 

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

 

The following table provides changes to the Company’s contingent consideration liability Level 3 fair value measurements during the three months ended March 31, 2015 and 2014:

 

 

 

Significant Unobservable Inputs
(Level 3)

 

 

 

2015

 

2014

 

Contingent Consideration Liability

 

 

 

 

 

 

 

Beginning balance, January 1, 2015 and 2014

 

$

6,922

 

$

9,233

 

Additions to contingent consideration liability:

 

 

 

 

 

Change in fair value of contingent consideration liability

 

45

 

114

 

Reductions in the contingent consideration liability:

 

 

 

 

 

Payment to Q3C sellers for meeting performance targets

 

(5,000

)

(5,000

)

Ending balance, March 31, 2015 and 2014

 

$

1,967

 

$

4,347

 

 

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

 

Note 5—Accounts Receivable

 

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

 

 

 

March 31,
2015

 

December 31,
2014

 

 

 

 

 

 

 

Contracts receivable, net of allowance for doubtful accounts of $710 at March 31, 2015 and $540 at December 31, 2014

 

$

256,199

 

$

287,806

 

Retention receivable

 

42,644

 

49,104

 

 

 

298,843

 

336,910

 

Other accounts receivable

 

185

 

472

 

 

 

$

299,028

 

$

337,382

 

 

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Note 6—Costs and Estimated Earnings on Uncompleted Contracts

 

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

 

 

 

March 31,
2015

 

December 31,
2014

 

 

 

 

 

 

 

Costs incurred on uncompleted contracts

 

$

3,994,118

 

$

5,194,769

 

Gross profit recognized

 

461,852

 

613,510

 

 

 

4,455,970

 

5,808,279

 

Less: billings to date

 

(4,516,832

)

(5,898,220

)

 

 

$

(60,862

)

$

(89,941

)

 

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

 

 

 

March 31,
2015

 

December 31,
2014

 

 

 

 

 

 

 

Costs and estimated earnings in excess of billings

 

$

85,120

 

$

68,654

 

Billings in excess of costs and estimated earnings

 

(145,982

)

(158,595

)

 

 

$

(60,862

)

$

(89,941

)

 

Note 7—Equity Method Investments

 

Alvah, Inc.

 

As part of its acquisition of Q3C in November 2012, the Company acquired a 49% membership interest in Alvah, Inc., a California corporation (“Alvah”).  Alvah was engaged in electrical contracting activities, primarily in Northern California, and has worked as a subcontractor for ARB both prior to and subsequent to the Q3C acquisition.

 

On February 5, 2014, the majority owner of Alvah, in accordance with the original investment agreement, elected to purchase the Company’s minority interest effective January 1, 2014 for a cash payment of $1,189.  At the time of the transaction, the Company recorded income adjustments of $14 related to the final sale in the first quarter of 2014.

 

Note 8 — Business Combinations

 

On February 28, 2015, the Company acquired Aevenia, Inc. (“Aevenia”) for approximately $23 million in cash. Aevenia has been re-branded as Primoris AV, Energy and Electrical Construction Corporation (“Primoris AV”), and operates as part of Primoris’ Energy segment. Headquartered in Moorhead, Minnesota, Primoris AV is an energy and electrical construction company. For the year ended December 31, 2014, Primoris AV generated operating income of $4.2 million on revenues of $44.4 million. The estimated value of the assets purchased and liabilities assumed on the acquisition date included $4.0 million in current assets, $2.3 million in current liabilities, plant and equipment of $11.2 million and $9.3 million in intangible assets and goodwill. The Company has temporarily included the $9.3 million value as part of goodwill at March 31, 2015. Due to the short period of time between the acquisition date and this report, the estimated values are preliminary and subject to change.

 

Primoris AV specializes in overhead and underground line work, substations, telecom/fiber, and certain other client-specific on-demand call out services. The majority of their work is delivered under unit-price Master Services Agreements (“MSAs”). Primoris AV has operations in Minnesota, North Dakota, South Dakota and Iowa. The Company believes there are opportunities for Primoris AV to grow sales by performing in-house work for other Primoris subsidiaries and to expand the Company’s offerings to new geographies in the Midwest.

 

Supplemental Unaudited Pro Forma Information for the three months ended March 31, 2015 and 2014

 

The following pro forma information for the three months ended March 31, 2015 and 2014 presents the results of operations of the Company as if the Primoris AV acquisition and the 2014 acquisitions of Vadnais, Surber, Ram-Fab and Williams had all occurred at the beginning of 2014. The supplemental pro forma information has been adjusted to include:

 

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

 

·                                           the pro forma impact of the expense associated with amortization of the discount for the fair value of the contingent consideration (related to the 2014 Vadnais, Surber and Ram-fab acquisitions) for potential earnout liabilities that may be achieved during the years 2015 through 2017; and

 

·                                           the pro forma tax effect of both the income before income taxes and the pro forma adjustments, calculated using a tax rate of 39.0% for the three months ended March 31, 2015 and the same period in 2014.

 

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The pro forma results are presented for illustrative purposes only and are not necessarily indicative of, or intended to represent, the results that would have been achieved had the various acquisitions been completed on January 1, 2014.  For example, the pro forma results do not reflect any operating efficiencies and associated cost savings that the Company might have achieved with respect to the Primoris AV acquisition.

 

 

 

Three months
ended March 31,

 

 

 

2015

 

2014

 

 

 

 

 

 

 

Revenues

 

395,778

 

483,809

 

Income before provision for income taxes

 

180

 

16,168

 

Net income attributable to Primoris

 

118

 

9,499

 

 

 

 

 

 

 

Weighted average common shares outstanding:

 

 

 

 

 

Basic

 

51,572

 

51,610

 

Diluted

 

51,726

 

51,714

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

Basic

 

$

0.00

 

$

0.18

 

Diluted

 

$

0.00

 

$

0.18

 

 

Note 9—Intangible Assets

 

At March 31, 2015 and December 31, 2014, intangible assets totaled $37,930 and $39,581, respectively, net of amortization.  The table below summarizes the intangible asset categories, amounts and the average amortization periods, which are generally on a straight-line basis, as follows:

 

 

 

Amortization

 

March 31,

 

December 31,

 

 

 

Period

 

2015

 

2014

 

Tradename

 

3 to 10 years

 

$

17,354

 

$

18,194

 

Non-compete agreements

 

2 to 5 years

 

$

900

 

$

1,074

 

Customer relationships

 

5 to 15 years

 

$

19,676

 

$

20,313

 

Total

 

 

 

$

37,930

 

$

39,581

 

 

Amortization expense of intangible assets was $1,651 and $1,843 for the three months ended March 31, 2015 and 2014, respectively.  Estimated future amortization expense for intangible assets is as follows:

 

For the Years Ending
December 31,

 

Estimated
Intangible
Amortization
Expense

 

2015 (remaining nine months)

 

$

4,746

 

2016

 

5,980

 

2017

 

5,703

 

2018

 

5,239

 

2019

 

3,388

 

Thereafter

 

12,874

 

 

 

$

37,930

 

 

Note 10—Accounts Payable and Accrued Liabilities

 

At March 31, 2015 and December 31, 2014, accounts payable included retention amounts of approximately $8,412 and $9,285, respectively.  These amounts are due to subcontractors and have been retained pending contract completion and customer acceptance of jobs.

 

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

 

 

 

March 31,
2015

 

December 31,
2014

 

 

 

 

 

 

 

Payroll and related employee benefits

 

$

31,133

 

$

37,261

 

Insurance, including self-insurance reserves

 

34,379

 

34,377

 

Reserve for estimated losses on uncompleted contracts

 

3,013

 

2,363

 

Corporate income taxes and other taxes

 

4,317

 

3,775

 

Accrued overhead cost

 

983

 

1,059

 

Other

 

2,062

 

4,566

 

 

 

$

75,887

 

$

83,401

 

 

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Note 11—Credit Arrangements

 

Revolving Credit Facility

 

As of March 31, 2015, the Company had a revolving credit facility, as 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, 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 outstanding were $3,620 at March 31, 2015 and $4,659 at December 31, 2014.  Other than commercial letters of credit, there were no borrowings under this line of credit during the three months ended March 31, 2015, and available borrowing capacity at March 31, 2015 was $121,380.

 

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/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 March 31, 2015.

 

Canadian Credit Facility

 

The Company has a credit facility for $8,000 in Canadian dollars with a Canadian bank for purposes of issuing commercial letters of credit in Canada.  The credit facility has an annual renewal and provides for the issuance of commercial letters of credit for a term of up to five years. The facility provides for an annual fee of 1% for any issued and outstanding commercial letters of credit. Letters of credit can be denominated in either Canadian or U.S. dollars. At March 31, 2015 and December 31, 2014, letters of credit outstanding totaled $2,505 and $2,563 in Canadian dollars, respectively.  At March 31, 2015, the available borrowing capacity was $5,495 in Canadian dollars.  The credit facility contains a working capital restrictive covenant for our Canadian subsidiary, OnQuest Canada, ULC.  At March 31, 2015, OnQuest Canada, ULC was in compliance with the covenant.

 

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Table of Contents

 

Note 12 — Noncontrolling Interests

 

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

 

The Blythe joint venture operating activities are included in the Company’s consolidated statements of income as follows for the three months ended March 31:

 

 

 

March 31,
2015

 

March 31,
2014

 

 

 

 

 

 

 

Revenues

 

$

 

$

940

 

Net income attributable to noncontrolling interests

 

 

432

 

 

Since Blythe is a partnership, no tax effect was recognized for the income.  Blythe made no distributions in 2015 and made distributions of $1,125 to the non-controlling interests and $1,125 to the Company during the three months ending March 31, 2014. There were no capital contributions made during the year ended December 31, 2014 or through the three months ended March 31, 2015.

 

The carrying values of the assets and liabilities associated with the operations of the Blythe joint venture are included in the Company’s consolidated balance sheets and were immaterial at December 31, 2014 and March 31, 2015. The project has been completed and following the end of the project warranty period in May 2015, Blythe will be terminated.

 

Note 13 — Contingent Earnout Liabilities

 

In March 2014, the Company paid $5,000 to the sellers of Q3C based on achievement of the 2013 operating performance targets. The sellers were paid an additional $5,000 in March 2015 based on achieving an operating performance target for the calendar year 2014.

 

In June 2014, the Company acquired the assets of Vadnais Company for $6,354 in cash plus an earnout of $900, with $450 payable in 2015 and $450 payable in 2016, contingent upon meeting a certain performance targets for each of the two years.  The estimated fair value of the contingent consideration on the acquisition date was $679.

 

During the third quarter 2014, the Company made three small purchases totaling $8.2 million in cash for the net assets of Surber Roustabout, LLC, Ram-Fab, LLC and Williams Testing, LLC.  The Surber purchase provided a contingent earnout amount of up to $1.8 million over a 3-year period, which had an estimated fair value of $1.0 million on the acquisition date.  The Ram-Fab purchase included a $0.2 million contingent earnout based on estimated earnings of a six-month operating project.

 

Note 14—Related Party Transactions

 

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

 

Primoris leases properties from SIGI at the following locations:

 

1.                                       Bakersfield, California (lease expires October 2022)

2.                                       Pittsburg, California (lease expires April 2023)

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

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

 

During the three months ended March 31, 2015 and 2014, the Company paid $205 and $219, respectively, in lease payments to SIGI for the use of these properties.

 

Primoris leases a property from Roger Newnham, a former owner and current manager of our subsidiary, OnQuest Canada, ULC. The property is located in Calgary, Canada. During the three months ended March 31, 2015 and 2014, Primoris paid $66 and $72, respectively, in lease payments. The current term of the lease is through December 31, 2017.

 

Primoris leases a property from Lemmie Rockford, one of the Rockford sellers, which commenced November 1, 2011.  The property is located in Toledo, Washington. During the three months ended March 31, 2015 and 2014, Primoris paid $23 in both periods, in lease payments. The lease expires in January 2016.

 

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Table of Contents

 

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. During the three months ended March 31, 2015 and 2014, the Company paid $66 in both periods, in lease payments to Quality RE Partners. The lease expires in October 2022.

 

Note 15—Stock-Based Compensation

 

On May 3, 2013, the Board of Directors granted 100,000 Restricted Stock Units (“Units”) to an executive under the 2013 Long-term Incentive Equity Plan (the “Equity Plan”).  Commencing annually on May 10, 2014 and ending April 30, 2017, the Units will vest in four equal installments subject to continuing employment of the executive.  On May 10, 2014, 25,000 of these Units vested.  On March 24, 2014, the Board of Directors granted 48,512 Units to another executive under the Equity Plan.  The Units will vest 50% on September 23, 2015 and 50% on March 23, 2017, subject to continuing employment of the executive.  Vesting in both grants is also subject to earlier acceleration, termination, cancellation or forfeiture as provided in the underlying Primoris Restricted Stock Unit agreement (“RSU Award Agreement”).  Each Unit represents the right to receive one share of the Company’s common stock when vested.

 

Under guidance of ASC Topic 718 “ Compensation — Stock Compensation ”, stock-based compensation cost is measured at the date of grant (utilizing the prior-day closing price), based on the calculated fair value of the stock-based award, and is recognized as expense over the employee’s requisite service period (generally the vesting period of the award).

 

The fair value of the Units was based on the closing market price of our common stock on the day prior to the date of the grant.  Stock compensation expense for the Units is being amortized using the straight-line method over the service period.  For the three months ended March 31, 2015 and 2014, the Company recognized $262 and $137, respectively, in compensation expense.  At March 31, 2015, approximately $2.1 million of unrecognized compensation expense remains for the Units, which will be recognized over the next 2.1 years through April 30, 2017.

 

Vested Units accrue “Dividend Equivalents” (as defined in the Equity Plan) which will be accrued as additional Units.  At March 31, 2015, there were 168 Dividend Equivalent Units that were accrued on 25,000 Units that vested on April 30, 2014.

 

Note 16—Income Taxes

 

The effective tax rate for the three months ended March 31, 2015 for both income before taxes and noncontrolling interests and for income attributable to Primoris is 38.69%.  The rate differs from the U.S. federal statutory rate of 35% due primarily to state income taxes, the “Domestic Production Activity Deduction” and nondeductible meals and incidental per diems common in the construction industry.

 

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

 

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences of temporary differences between the financial reporting basis and tax basis of the Company’s assets and liabilities. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period of enactment date.

 

In the third quarter of 2014, the Internal Revenue Service concluded an examination of our federal income tax returns for 2011 and 2012 which did not have a material impact on our financial statements. The Company’s federal income tax returns are no longer subject to examination for tax years before 2013. The statutes of limitation of state and foreign jurisdictions vary generally between 3 to 5 years. Accordingly, the tax years 2009 through 2013 generally remain open to examination by the other taxing jurisdictions in which the Company operates.

 

Note 17—Dividends and Earnings Per Share

 

The Company has paid or declared cash dividends during 2015 as follows:

 

·                                     On November 4, 2014, the Company declared a cash dividend of $0.04 per common share, payable to stockholders of record on December 31, 2014.  The dividend, totaling $2,062, was paid on January 15, 2015.

 

·                                     On February 24, 2015, the Company declared a cash dividend of $0.04 per common share, payable to stockholders of record on March 31, 2015.  The dividend, totaling $2,063, was paid on April 15, 2015.

 

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The table below presents the computation of basic and diluted earnings per share for the three months ended March 31, 2015 and 2014:

 

 

 

Three months
ended March 31,

 

 

 

2015

 

2014

 

Numerator:

 

 

 

 

 

Net income attributable to Primoris

 

$

1,672

 

$

10,833

 

Denominator:

 

 

 

 

 

Weighted average shares for computation of basic earnings per share

 

51,572

 

51,610

 

Dilutive effect of shares issued to independent directors

 

5

 

 

Dilutive effect of unvested restricted stock units and vested dividend equivalent units (1)

 

149

 

104

 

Weighted average shares for computation of diluted earnings per share

 

51,726

 

51,714

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

Basic

 

$

0.03

 

$

0.21

 

Diluted

 

$

0.03

 

$

0.21

 

 


(1)          Represents the dilutive effect of a grant for 100,000 shares of Units on May 3, 2013 and 48,512 shares of Units on March 24, 2014 and the effect of 168 vested Dividend Equivalent Units as of March 31, 2015.

 

Note 18—Stockholders’ Equity

 

Common stock — In March 2015, the Company received $1,621 for 96,257 shares of common stock purchased under a long-term incentive plan.  The Company’s Long-Term Retention Plan (“LTR Plan”) for managers and executives allows participants to use a portion of their annual bonus amount to purchase Company common stock at a discount from the market price. The shares purchased in March 2015 were for bonus amounts earned in 2014 and the number of shares was calculated at 75% of the average market closing price for the month of December 2014.  In March 2014, the Company received $1,671 for 77,455 shares of common stock issued under the LTR Plan for bonus amounts earned in the prior year.

 

In March 2015 and 2014, the Company issued 8,168 shares and 6,375 shares of common stock, respectively, as part of the quarterly compensation of the non-employee members of the Board of Directors.

 

As discussed in Note 15 — “Stock Based Compensation” , the Board of Directors has granted a total of 148,512 shares of Units under the Equity Plan.

 

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 certain conditions, could purchase up to $23 million in Company stock.  During the three months ending March 31, 2014, the Company did not purchase any shares of stock. The share repurchase program expired on December 31, 2014.

 

Note 19—Commitments and Contingencies

 

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

 

Total lease expense during the three months ended March 31, 2015 and 2014 was $4,144 and $3,637, respectively, including amounts paid to related parties of $360 and $380, respectively.

 

Letters of credit At March 31, 2015, the Company had letters of credit outstanding of $5,601 and at December 31, 2014, the Company had letters of credit outstanding of $6,864.  The outstanding amounts include the U.S. dollar equivalents for letters of credit issued in Canadian dollars.

 

Litigation — On February 7, 2012, the Company was sued in an action entitled North Texas Tollway Authority, Plaintiff v. James Construction Group, LLC, and KBR, Inc., Defendants, v. Reinforced Earth Company, Third-Party Defendant (the “Lawsuit”). The Company participated in court-ordered mediation for 18 months, and on February 25, 2015 the Lawsuit was settled for an expected cost to the Company of $9 million.

 

At March 31, 2015, 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 $32.9 million, and for the other project, the Company has recorded a receivable of $29.7 million, and received $11.2 million of the amount due in April 2015. At March 31, 2015, the Company has not recorded revenues in excess of cost for these two projects; however, the Company has specific reserves for both projects of approximately $29 million included in “billings in excess of costs and estimated earnings . 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.

 

Bonding— At March 31, 2015 and December 31, 2014, the Company had bid and completion bonds issued and outstanding totaling approximately $1,423,744 and $1,518,018, respectively.

 

Withdrawal liability for multiemployer pension plan In November 2011, Rockford and ARB, along with other members of the Pipe Line Contractors Association (“PLCA”), withdrew from the Central States Southeast and Southwest Areas Pension Fund multiemployer pension plan (the “Plan”). The Company withdrew from the Plan in order to mitigate its liability in connection with the Plan, which is significantly underfunded. The Company recorded a liability of $7,500 based on information provided by the Plan. However, the Plan has asserted that the PLCA members did not affect a proper withdrawal in 2011. The Company believes that a legally effective withdrawal occurred in November 2011 and has recorded the withdrawal liability on that basis. In May 2014, the Plan asserted that the liability was $11.7 million. Without agreeing to the amount and while initiating an appeal, the Company has made monthly payments, which are being expensed, including interest, totaling $1,008 through March 31, 2015.

 

Prior to the Company’s acquisition, Q3C had also withdrawn from the Plan. In November 2012, Q3C estimated a withdrawal liability of $85. In the first quarter of 2013, the Plan asserted that the liability was $119. Without agreeing to the amount, Q3C has made monthly payments, including interest, totaling $34 through March 31, 2015.

 

Contingent Consideration Earnouts related to acquisitions are discussed in Note 13 — “Contingent Earnout Liabilities” .

 

Note 20—Reportable Operating Segments

 

In the third quarter 2014, the Company reorganized its business segments to match the change in the Company’s internal organization and management structure. All prior period amounts related to the segment change have been retrospectively reclassified 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, 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 the Cardinal Contractors, Inc. construction business, located primarily in the southeastern United States and in the Gulf Coast region of the United States.

 

The Energy segment businesses are located primarily in the southeastern United States, the Gulf Coast region and the upper Midwest 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 Primoris AV, Surber and Ram-Fab operations. Additionally, the segment includes the OnQuest, Inc. and OnQuest Canada, ULC operations for the design and installation of LNG facilities and high-performance furnaces and heaters for the oil refining, petrochemical and power generation industries.

 

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Table of Contents

 

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

 

Segment Revenues

 

Revenue by segment for the three months ended March 31, 2015 and 2014 were as follows:

 

 

 

For the three months ended March 31,

 

 

 

2015

 

2014

 

Segment

 

Revenue

 

% of
Segment
Revenue

 

Revenue

 

% of
Segment
Revenue

 

 

 

 

 

 

 

 

 

 

 

West

 

$

186,385

 

47.5

%

$

234,027

 

49.8

%

East

 

123,700

 

31.5

%

106,970

 

22.8

%

Energy

 

82,695

 

21.0

%

129,077

 

27.4

%

Total

 

$

392,780

 

100.0

%

$

470,074

 

100.0

%

 

Segment Gross Profit

 

Gross profit by segment for the three months ended March 31, 2015 and 2014 were as follows:

 

 

 

For the three months ended March 31,

 

 

 

2015

 

2014

 

Segment

 

Gross
Profit

 

% of
Segment
Revenue

 

Gross
Profit

 

% of
Segment
Revenue

 

 

 

 

 

 

 

 

 

 

 

West

 

$

21,464

 

11.5

%

$

31,674

 

13.5

%

East

 

9,108

 

7.4

%

6,758

 

6.3

%

Energy

 

7,433

 

9.0

%

11,325

 

8.8

%

Total

 

$

38,005

 

9.7

%

$

49,757

 

10.6

%

 

Segment Goodwill

 

The following presents the amount of goodwill recorded by segment at March 31, 2015 and at December 31, 2014.

 

Segment

 

March 31,
2015

 

December 31,
2014

 

 

 

 

 

 

 

West

 

$

45,239

 

$

45,239

 

East

 

43,267

 

43,267

 

Energy

 

40,221

 

30,904

 

Total

 

$

128,727

 

$

119,410

 

 

Geographic Region — Revenues and Total Assets

 

The majority of the Company’s revenues are derived from customers in the United States, and less than 1% is generated from sources outside of the United States. Approximately 1% of total assets were located outside of the United States.

 

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PRIMORIS SERVICES CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS

 

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

 

Forward Looking Statements

 

This Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2015 (“First Quarter 2015 Report”) contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which are subject to the “safe harbor” created by those sections. Forward-looking statements include information concerning our possible or assumed future results of operations, business strategies, financing plans, competitive position, industry environment, potential growth opportunities, the effects of regulation and the economy, generally. Forward-looking statements include all statements that are not historical facts and can be identified by terms such as “anticipates”, “believes”, “could”, “estimates”, “expects”, “intends”, “may”, “plans”, “potential”, “predicts”, “projects”, “should”, “will”, “would” or similar expressions.

 

Forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. We discuss many of these risks in detail in Part I, Item 1A “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2014 and our other filings with the Securities and Exchange Commission (“SEC”). You should read this First Quarter 2015 Report, our Annual Report on Form 10-K for the year ended December 31, 2014 and our other filings with the SEC completely and with the understanding that our actual future results may be materially different from what we expect.

 

Given these uncertainties, you should not place undue reliance on these forward-looking statements. Also, forward-looking statements represent our management’s beliefs and assumptions only as of the date of this First Quarter 2015 Report. We assume no obligation to update these forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in any forward-looking statements, even if new information becomes available.

 

The following discussion and analysis should be read in conjunction with the unaudited financial statements and the accompanying notes included in Part 1, Item 1 of this First Quarter 2015 Report and our Annual Report on Form 10-K for the year ended December 31, 2014.

 

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 generally recognize revenue as units are completed or services are performed.

 

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 now 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 First Quarter 2015 Report to conform to the new presentation.  The following is a brief description of each of our reportable segments and business activities.

 

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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, 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 our 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, the Gulf Coast region and the upper Midwest region of the United States.  The segment includes the PES pipeline and gas facility construction and maintenance operations, the JCG Industrial division, the Surber and Ram-Fab divisions and the newly acquired operations of Primoris AV. Additionally, the segment includes the OnQuest, Inc. and OnQuest Canada, ULC operations for the design and installation of LNG facilities and 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. (“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

Primoris AV, Energy and Electrical Construction Corp. (“Primoris AV”); acquired February 28, 2015

 

Energy

 

N/A

OnQuest, Inc.

 

Energy

 

Engineering

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

 

Energy

 

Engineering

 

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 will terminate 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.  All intercompany revenue and profit of the project have been eliminated, and at March 31, 2015, a total of $13.4 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 is 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.

 

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 has been integrated into 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.

 

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Table of Contents

 

On February 28, 2015, the Company acquired Aevenia, Inc. (“Aevenia”) for approximately $23 million in cash. Aevenia has been re-branded as Primoris AV, Energy and Electrical Construction Corporation (“Primoris AV”), and operates as part of Primoris’ Energy segment. For the year ended December 31, 2014, Primoris AV generated operating income of $4.2 million on revenues of $44.4 million. The estimated value of the assets purchased and liabilities assumed on the acquisition date included $4.0 million in current assets, $2.3 million in current liabilities, plant and equipment of $11.2 million and $9.3 million in intangible assets and goodwill. Due to the short period of time between the acquisition date and this report, the estimated values are preliminary and subject to change.

 

Headquartered in Moorhead, Minnesota, Primoris AV is an energy and electrical construction company that specializes in overhead and underground line work, substations, telecom/fiber, and certain other client-specific on-demand call out services. The majority of their work is delivered under unit-price Master Services Agreements (“MSAs”). Primoris AV has operations in Minnesota, North Dakota, South Dakota and Iowa. The Company believes there are opportunities for Primoris AV to grow sales by performing in-house work for other Primoris subsidiaries and to expand the Company’s offerings to new geographies in the Midwest.

 

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 derived from our major end-markets, with prior periods conformed to the current year market breakdown:

 

 

 

Twelve Months Ended
March 2015

 

Twelve Months Ended
December 2014

 

Twelve Months Ended
March 2014

 

 

 

 

 

 

 

 

 

Underground capital projects

 

17

%

17

%

23

%

Utility services

 

30

%

28

%

27

%

Industrial

 

23

%

27

%

24

%

Heavy Civil

 

23

%

22

%

20

%

Engineering

 

4

%

3

%

2

%

Other

 

3

%

3

%

4

%

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. However, we believe that regulated utility customers will continue to invest in the maintenance and replacement services provided by us.

 

Seasonality and cyclicality

 

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

 

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

 

Critical Accounting Policies and Estimates

 

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

 

As described in our Annual Report on Form 10-K for the year ended December 31, 2014, our critical accounting policies relate primarily to revenue recognition for fixed and unit price contracts, income taxes, goodwill, long-lived assets, reserves for uninsured risks and litigation and contingencies. There have been no material changes to our critical accounting policies since December 31, 2014.

 

Results of operations

 

Revenues, gross profit, operating income and net income for the three months ended March 31, 2015 and 2014 were as follows:

 

 

 

Three Months Ended March 31,

 

 

 

2015

 

2014

 

 

 

(Thousands)

 

% of
Revenue

 

(Thousands)

 

% of
Revenue

 

Revenues

 

$

392,780

 

100.0

%

$

470,074

 

100.0

%

Gross profit

 

38,005

 

9.7

%

49,757

 

10.6

%

Selling, general and administrative expense

 

33,760

 

8.6

%

29,712

 

6.3

%

Operating income

 

4,245

 

1.1

%

20,045

 

4.3

%

Other income (expense)

 

(1,518

)

(0.4

)%

(1,690

)

(0.4

)%

Income before income taxes

 

2,727

 

0.7

%

18,355

 

3.9

%

Income tax provision

 

(1,055

)

(0.3

)%

(7,090

)

(1.5

)%

Net income

 

$

1,672

 

0.4

%

$

11,265

 

2.4

%

Net income attributable to noncontrolling interests

 

 

%

(432

)

(0.1

)%

Net income attributable to Primoris

 

$

1,672

 

0.4

%

$

10,833

 

2.3

%

 

Revenues

 

Revenues for the three months ended March 31, 2015 decreased by $77.3 million, or 16.4%, compared to the same period in 2014. The primary reason for the decrease was the impact of severe wet, winter weather.

 

From an end-market perspective, our end-market revenues for underground capital projects decreased by $25.5 million and the industrial end-market revenues decreased by $89.0 million, as compared to the first quarter of 2014. Revenues increased in our heavy civil end-market by $17.0 million, in our underground utility end-market by $10.0 million, in the engineering end-market by $8.8 million and by $1.4 million in our other end-markets, as compared to the first quarter of 2014.

 

Gross Profit

 

Gross profit decreased by $11.8 million, or 23.6%, for the three months ended March 31, 2015 compared to the same period in 2014, primarily due to the decrease in revenues.  Gross profit as a percentage of revenue declined 0.9% from 10.6% to 9.7%.

 

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Selling, general and administrative expenses

 

Selling, general and administrative expenses (“SG&A”) increased $4.0 million, or 13.6%, for the three months ended March 31, 2015, compared to the same period in 2014. Of the increase, $0.3 million was from the acquisition of Vadnais, $1.1 million from expenses associated with the Company’s internal review of methods used by the Company’s subsidiaries to recognize revenue and estimate contingencies for ongoing projects, with the remainder primarily from increased compensation and compensation-related expenses.  The internal review began in the fourth quarter of 2014 and is still ongoing.  For further information, please refer to the risk factor entitled “We may not be successful in continuing to meet the internal control requirements of the Sarbanes-Oxley Act of 2002” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.

 

SG&A as a percentage of revenue increased to 8.6% for the three months ended March 31, 2015, compared to 6.3% for the corresponding period in 2014 as a result of increased expenses and the significant decrease in revenues for the quarter.

 

Other income and expense

 

Non-operating income and expense items for the three months ended March 31, 2015 and 2014 were as follows:

 

 

 

Three Months
Ended March 31,

 

 

 

2015

 

2014

 

 

 

(Thousands)

 

Income from non-consolidated investments

 

$

 

$

14

 

Foreign exchange gain (loss)

 

436

 

26

 

Other expense

 

(44

)

(114

)

Interest income

 

12

 

52

 

Interest expense

 

(1,922

)

(1,668

)

Total other income (expense)

 

$

(1,518

)

$

(1,690

)

 

In the quarter ended March 31, 2014, income from non-consolidated investments was from an adjustment of the final sale price of the Alvah investment.

 

The increase in the foreign exchange gain for 2015 reflects currency exchange fluctuations of the stronger United States dollar compared to the Canadian dollar and due to increased activity in our OnQuest Canada operation. Our contracts in Calgary, Canada are primarily sold in United States dollars, but a portion of the work is paid for with Canadian dollars creating a currency exchange difference.

 

The decrease in other expense for 2015 was the result of lower fair value adjustments to contingent earnout liabilities reflecting the decrease in total earnout liabilities.

 

For the three months ended March 31, 2015, interest expense was $1.9 million, compared to $1.7 million for the same period in 2014.  The increase was due primarily to increased equipment debt financing.

 

Provision for income taxes

 

Our provision for income taxes decreased $6.0 million for the three months ended March 31, 2015 to $1.1 million compared to $7.1 million in the same period in 2014 primarily as a result of lower income before taxes and a lower effective tax rate. The tax rate applied to income attributable to Primoris in the three months ended March 31, 2015 was 38.7%, compared to 39.6% for the same period in 2014.  The 0.9% decrease in the effective tax rate resulted primarily from the variability of state taxes and the partial non-deductibility of reduced meals and incidental per diem expenses.

 

To determine our quarterly provision for income taxes, we use an estimated annual effective tax rate, which is based on expected annual income, statutory tax rates and tax planning opportunities available in the various jurisdictions in which we operate. Certain significant or unusual items are separately recognized in the quarter in which they occur and can be a source of variability in the effective tax rate from quarter to quarter.

 

Segment results

 

West Segment

 

Revenue and gross profit for the West segment for the three months ended March 31, 2015 and 2014 were as follows:

 

 

 

Three Months Ended March 31,

 

 

 

2015

 

2014

 

 

 

(Thousands)

 

% of
Revenue

 

(Thousands)

 

% of
Revenue

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

186,385

 

 

 

$

234,027

 

 

 

Gross profit

 

21,464

 

11.5

%

31,674

 

13.5

%

 

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Revenue for the West segment decreased by $47.6 million, or 20.4%, for the three months ended March 31, 2015, compared to the same period in 2014. Revenue decreased by $63.5 million at the ARB Industrial division, due primarily to the completion of a large solar power project in the prior year. Rockford revenue grew by $13.0 million from an 88-mile pipeline project in the Houston, Texas area.

 

Gross profit for the West segment decreased by $10.2 million, or 32.2%, during the three months ended March 31, 2015, compared to the same period in 2014. The decrease in gross profit at the ARB Industrial division was $5.0 million and gross profit at Q3C decreased by $4.2 million primarily as a result of work shutdowns due to poor weather. Additionally, gross profit at Rockford decreased by $5.7 million due to completion of a higher margin project in the prior year March 31, 2014 quarter. Offsetting these decreases was an increase in gross profit of $4.8 million at the ARB Underground division on relatively a flat revenue change.

 

Gross profit as a percentage of revenue decreased to 11.5% during the three months ended March 31, 2015, from 13.5% in the same period in 2014 as a result of a decreased margins realized by Q3C and Rockford. Q3C experienced decreased margins due primarily to weather caused work shutdowns in its Pipeline and Midwest divisions. Rockford’s decreased margin was primarily due to reduced margins on the Houston pipeline project as a result of initial startup costs and the impact of severe wet, winter weather.

 

East Segment

 

Revenue and gross profit for the East segment for the three months ended March 31, 2015 and 2014 were as follows:

 

 

 

Three Months Ended March 31,

 

 

 

2015

 

2014

 

 

 

(Thousands)

 

% of
Revenue

 

(Thousands)

 

% of
Revenue

 

East Construction Services

 

 

 

 

 

 

 

 

 

Revenue

 

$

123,700

 

 

 

$

106,970

 

 

 

Gross profit

 

9,108

 

7.4

%

6,758

 

6.3

%

 

East segment revenue increased by $16.7 million, or 15.6 % for the three months ended March 31, 2015 compared to the same period in 2014. JCG’s Heavy Civil division revenue decreased by $1.8 million as increases of $5.1 million from LADOT projects and $2.6 million from MSDOT projects were partially offset by a decrease of $9.6 million from TXDOT and municipal projects. Revenue at the JCG Infrastructure and Maintenance division increased by $18.8 million as a result of increases in Florida and a large petrochemical project in Louisiana.

 

Gross profit increased by $2.3 million or 34.8% for the three months ended March 31, 2015. The gross profit increase at JCG’s Infrastructure and Maintenance division was $3.3 million. This increase was partially offset by a decrease at JCG’s Heavy Civil division of $1.8 million.

 

Gross Profit as a percentage of revenues increased to 7.4% during the three months ended March 31, 2015 from 6.3% in the prior year quarter reflecting higher margins for infrastructure and maintenance projects.

 

Energy Segment

 

Revenue and gross profit for the Energy segment for the three months ended March 31, 2015 and 2014 were as follows:

 

 

 

Three Months Ended March 31,

 

 

 

2015

 

2014

 

 

 

(Thousands)

 

% of
Revenue

 

(Thousands)

 

% of
Revenue

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

82,695

 

 

 

$

129,077

 

 

 

Gross profit

 

7,433

 

9.0

%

11,325

 

8.8

%

 

Revenue for the Energy segment decreased by $46.4 million, or 35.9%, for the three months ended March 31, 2015, compared to the same period in 2014. The revenues were lower by $37.3 million at the PES Pipeline division, by $15.3 million at the PES Industrial division and by $9.2 million at the PES Saxon division. These decreases reflect primarily the impact of completion of projects that were active in the first quarter of 2014, but were completed prior to the start of the current quarter. Weather delays impacted 2015 revenues and the uncertainties associated with the significant decrease in crude oil prices impacted work at the Pipeline and Saxon divisions. Revenues increased by $8.9 million at OnQuest primarily from work on a Texas LNG plant and from fees earned on a suspended project.

 

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Table of Contents

 

Gross profit for the Energy segment for the three months ended March 31, 2015 decreased by $3.9 million or 34.4%, compared to the same period in 2014. Gross profit was reduced by $6.4 million primarily as a result of the decreased revenues at PES.  This was partially offset by the gross profit increase of $2.8 million at OnQuest, due primarily to fees earned on a suspended project during the quarter.

 

Gross Profit as a percent of revenues increased slightly to 9.0% during the three months ended March 31, 2015 from 8.8% in the prior year quarter. The prior year included zero margin revenues from a PES Pipeline division project.

 

Geographic area financial information

 

The majority of the Company’s revenues are derived from customers in the United States and less than 1% is generated from sources outside of the United States.

 

Backlog

 

For companies in the construction industry, backlog can be an indicator of future revenue streams. Different companies define and calculate backlog in different manners.  For the Company, backlog is defined as a combination of: (1) anticipated revenue from the uncompleted portions of existing contracts for which we have known revenue amounts for fixed price and fixed unit price contracts (“Fixed Backlog”), and (2) the estimated revenues on master service agreements (“MSA”) for the next four quarters (“MSA Backlog”).  We do not include time-and-equipment, time-and-materials and cost reimbursable plus fee contracts in the calculation of backlog, since their ultimate revenue amount is difficult to estimate in advance.

 

The two components of backlog, Fixed Backlog and MSA Backlog, are detailed below.

 

Fixed Backlog

 

Fixed Backlog by operating segment for Fixed Backlog for the periods ending December 31, 2014 and March 31, 2015 and the changes in Fixed Backlog for the three months ended March 31, 2015 (in thousands):

 

Segment

 

Beginning Fixed
Backlog at
December 31,
2014

 

Contract
Additions to
Fixed Backlog

 

Revenue
Recognized from
Fixed Backlog

 

Ending Fixed
Backlog
at March 31,
2015

 

Revenue
Recognized from
Non-Fixed Backlog
Projects

 

Total Revenue
for three months
ended March 31,
2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

West

 

$

237,349

 

$

315,088

 

$

105,324

 

$

447,113

 

$

81,061

 

$

186,385

 

East

 

1,009,645

 

65,246

 

120,880

 

954,011

 

2,820

 

123,700

 

Energy

 

300,961

 

60,046

 

74,243

 

286,764

 

8,452

 

82,695

 

Total

 

$

1,547,955

 

$

440,380

 

$

300,447

 

$

1,687,888

 

$

92,333

 

$

392,780

 

 

Revenues recognized from non-Fixed Backlog projects shown above are generated by MSA projects and projects completed under time-and-equipment, time-and-materials and cost-reimbursable-plus-fee contracts.

 

As of March 31, 2015, our total Fixed Backlog was $1.69 billion representing an increase of $139.9 million, or 9.0%, from $1.55 billion as of December 31, 2014.  We expect that approximately 59% of the total Fixed Backlog at March 31, 2015, will be recognized as revenue over the next four quarters, with approximately $222 million expected for the West Construction Services segment, $500 million for the East Construction Services segment and $279 million for the Energy segment.

 

MSA and Total Backlog

 

The following table outlines historical MSA revenues for the past five quarters ($ in thousands):

 

 

 

2015

 

2014

 

First Quarter

 

$

90,668

 

$

77,165

 

Second Quarter

 

N/A

 

111,443

 

Third Quarter

 

N/A

 

182,383

 

Fourth Quarter

 

N/A

 

131,006

 

 

MSA Backlog includes anticipated MSA revenues for the next twelve months.  We determined estimated MSA revenues based on historical trends, anticipated seasonal impacts and estimates of customer demand based on communications with our customers.

 

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The following table shows the makeup of total backlog, both Fixed Backlog and MSA Backlog, by operating segment at March 31, 2015 (in thousands).

 

Segment:

 

Fixed Backlog at
March 31,
2015

 

MSA Backlog
at March 31,
2015

 

Total Backlog
at March 31,
2015

 

 

 

 

 

 

 

 

 

West

 

$

447,113

 

$

401,496

 

$

848,609

 

East

 

954,011

 

8,900

 

962,911

 

Energy

 

286,764

 

45,061

 

331,825

 

Total

 

$

1,687,888

 

$

455,457

 

$

2,143,345

 

 

We expect that during the next four quarters, we will recognize as revenue approximately 73% of the West total backlog at March 31, 2015; approximately 53% of the East total backlog and approximately 98% of the Energy total backlog.

 

Backlog should not be considered a comprehensive indicator of future revenues, as a percentage of our revenues are derived from projects that are not part of a backlog calculation. The backlog estimates include amounts from estimated MSA revenues, but our customers are not contractually obligated to purchase an amount of services from us under the MSAs. Any of our contracts, MSA, fixed price or fixed unit price, may be terminated by our customers on relatively short notice. In the event of a project cancellation, we may be reimbursed for certain costs, but typically we have no contractual right to the total revenues reflected in backlog.  Projects may remain in backlog for extended periods of time as a result of customer delays, regulatory requirements or project specific issues. Future revenues from projects completed under time-and-equipment, time-and-materials and cost-reimbursable-plus-fee contracts are not included in our estimated backlog amount.

 

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 and short-term investments totaled $136.5 million at March 31, 2015 compared to $170.5 million at December 31, 2014. 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.

 

Cash Flows

 

Cash flows during the three months ended March 31, 2015 and 2014 are summarized as follows:

 

 

 

Three months Ended
March 31,

 

 

 

2015

 

2014

 

 

 

(Thousands)

 

Change in cash:

 

 

 

 

 

Net cash (used in) provided by operating activities

 

$

2,018

 

$

(21,678

)

Net cash (used in) provided by investing activities

 

(35,562

)

(11,127

)

Net cash provided by (used in) financing activities

 

97

 

(13,652

)

Net change in cash and cash equivalents

 

$

(33,447

)

$

(46,457

)

 

The first quarter of each calendar year tends to be the lowest for cash generation reflecting the overall lower work activities.  Of the $13.0 million improvement in cash flow for the first quarter of 2015 compared to the first quarter of 2014, $23.7 million of the improvement was provided by operating activities. This improvement was offset by cash used in investing activities, which included $22.3 million in cash for the acquisition of Primoris AV.

 

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Table of Contents

 

Operating Activities

 

The source of our cash flow from operating activities and the use of that cash in our operations for the three months ended March 31, 2015 and 2014 were as follows:

 

 

 

Three months Ended

 

 

 

 

 

March 31,

 

 

 

 

 

2015

 

2014

 

Change

 

 

 

(Thousands)

 

 

 

Operating Activities:

 

 

 

 

 

 

 

Operating income

 

$

4,245

 

$

20,045

 

$

(15,800

)

Depreciation and amortization

 

15,505

 

13,552

 

1,953

 

Stock-based compensation expense

 

262

 

137

 

125

 

Loss (gain) on sale of property and equipment

 

510

 

(355

)

865

 

Changes in assets and liabilities

 

(15,931

)

(46,263

)

30,332

 

Net other income (expense) and tax provision

 

(2,573

)

(8,794

)

6,221

 

Net cash provided by (used by) operating activities

 

$

2,018

 

$

(21,678

)

$

23,696

 

 

Net cash provided by operating activities for the three months ended March 31, 2015 of $2.0 million increased by $23.7 million compared to the same period in the prior year as increases in depreciation and amortization and improvements in the net changes in the balance sheet assets and liabilities more than offset the reduced operating income.

 

As shown in the table above, the largest change in operating cash flow was due to the net change in assets and liabilities of $30.3 million.  This change is outlined below:

 

·                   The reduction in the use of cash relating to construction projects, which include the change in accounts receivable, customer retention deposits, costs and estimated earnings in excess of billings and billings in excess of costs and estimated earnings amounted to $34.2 million.  This decrease in the use of cash is primarily due to the reduction in revenues of $77.3 million for the three months ended March 31, 2015 compared to the same period in 2014.

 

The primary changes from December 31, 2014 to March 31, 2015 included:

 

·                   Accounts receivable decreased by $41.2 million reflecting the traditionally lower revenues in the first quarter of 2015 compared to the fourth quarter of 2014. At March 31, 2015 accounts receivable represented 27.6% of our total assets compared to 30.4% at the end of 2014.  With the exception of two specific collection issues on two large projects (see the discussion in the “Receivable Collection Actions” below), we continue to maintain an excellent collection history, and we have certain lien rights that can provide additional security for collections;

 

·                   Costs and estimated earnings in excess of billings increased by $16.1 million. The increases are associated with the time lag from when revenues were earned until the customer can be billed, which was approximately $5.3 million for ARB, $8.6 million for Rockford and $3.9 million for Q3C, offset by a reduction of $1.7 million primarily at PES.

 

·                   Billings in excess of costs and estimated earnings decreased by $13.5 million reflecting the completion of work paid for in advance.

 

·                   Uninstalled inventory increased by $2.5 million in the first quarter of 2015 compared to the first quarter of 2014;

 

·                   The earn-out liability was essentially unchanged from the prior year quarter, though it decreased by approximately $5.0 million compared to December 31, 2014 as a result of payments made to the sellers of Q3C upon achievement of certain operating targets in 2014; and

 

·                   The remaining increase in the use of cash of $1.9 million resulted primarily from a reduction in accrued expenses for the first quarter 2015 compared to the first quarter of 2014.

 

Investing activities

 

During the three months ended March 31, 2015, we purchased property and equipment for $16.6 million in cash compared to $15.1 million during the same period in the prior year. We believe that 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.

 

Historically, we have invested an amount that approximated the sum of depreciation and amortization expenses plus proceeds from equipment sales. Equipment purchases for 2015 are expected to be approximately $65 million.

 

We periodically sell and acquire equipment, typically to update our fleet. We received proceeds from the sale of used equipment of $2.8 million during the three months ending March 31, 2015 and $1.4 million during the same period in 2014.

 

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Table of Contents

 

As part of our cash management program, we invested $0.0 million and $0.6 million during the three months ended March 31, 2015 and 2014, respectively, in short-term investments, and sold short-term investments of $0.5 million and $1.9 million during the three months ended March 31, 2015 and 2014, respectively.  Short-term investments consist primarily of U.S. Treasury bills with various financial institutions that are backed by the federal government.

 

On February 28, 2015, we purchased Primoris AV for a total of $23.0 million, using $22.3 million in cash, and recording a short-term payable of $0.7 million due to the sellers.  We made no acquisitions during the three months ended March 31, 2014.

 

Financing activities

 

Financing activities provided cash of $0.1 million for the three months ended March 31, 2015, which was net of several significant transactions impacting cash flows from financing activities, which included:

 

·                   $10.1 million in repayment of long-term debt and the repayment of $0.4 million in capital leases;

·                   Proceeds from new equipment borrowing of $11.0 million;

·                    Dividend payments of $2.1 million to our stockholders during the three months ended March 31, 2015; and

·                   $1.6 million in proceeds from the issuance of 96,257 shares of common stock purchased by the participants in the Primoris Long-term Retention Plan.

 

Debt Activities

 

For a description of our credit agreements, see Note 11 — “ Credit Agreements ” in Item 1, Financial Statements of this First Quarter 2015 Report.

 

Related party transactions

 

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

 

Primoris leases properties from SIGI at the following locations:

 

1.                                       Bakersfield, California (lease expires October 2022)

2.                                       Pittsburg, California (lease expires April 2023)

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

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

 

During the three months ended March 31, 2015 and 2014, the Company paid $0.21 million and $0.22 million, respectively, in lease payments to SIGI for the use of these properties.

 

Primoris leases a property from Roger Newnham, a former owner and current manager of our subsidiary, OnQuest Canada, ULC. The property is located in Calgary, Canada. During the three months ended March 31, 2015 and 2014, Primoris paid $0.07 million in both periods, in lease payments. The current term of the lease is through December 31, 2017.

 

Primoris leases a property from Lemmie Rockford, one of the Rockford sellers, which commenced November 1, 2011.  The property is located in Toledo, Washington. During the three months ended March 31, 2015 and 2014, Primoris paid $0.02 million in both periods, in lease payments. 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. During the three months ended March 31, 2015 and 2014, the Company paid $0.06 million in both periods, in lease payments to Quality RE Partners. The lease expires in October 2022.

 

Common stock

 

For a discussion of items affecting our common stock, please see Note 18 — “ Stockholders’ Equity “ in Item 1, Financial Statements of this First Quarter 2015 Report.

 

Contractual Obligations

 

As of March 31, 2015, we had $245.8 million of outstanding long-term debt and capital lease obligations and there were no short-term borrowings.

 

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Table of Contents

 

A summary of contractual obligations as of March 31, 2015 were as follows:

 

 

 

Total

 

1 Year

 

2 - 3 Years

 

4 - 5 Years

 

After 5 Years

 

 

 

(In Thousands)

 

Long-term debt and capital lease obligations

 

$

245,783

 

$

42,735

 

$

89,875

 

$

71,217

 

$

41,956

 

Interest on long-term debt (1)

 

23,012

 

6,199

 

9,256

 

5,026

 

2,531

 

Equipment operating leases

 

13,648

 

7,718

 

3,990

 

1,263

 

677

 

Contingent consideration obligations

 

1,967

 

919

 

1,048

 

 

 

Real property leases

 

11,385

 

3,104

 

5,221

 

2,976

 

84

 

Real property leases—related parties

 

8,657

 

1,439

 

2,831

 

1,941

 

2,446

 

 

 

$

304,452

 

$

62,114

 

$

112,221

 

$

82,423

 

$

47,694

 

Letters of credit

 

$

5,601

 

$

4,048

 

$

1,553

 

$

 

 

 


(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 and ARB, along with other members of the Pipe Line Contractors Association (“PLCA”), withdrew from the Central States Southeast and Southwest Areas Pension Fund multiemployer pension plan (the “Plan”). The Company withdrew from the Plan in order to mitigate its liability in connection with the Plan, which is significantly underfunded. The Company recorded a liability of $7.5 million based on information provided by the Plan. However, the Plan has asserted that the PLCA members did not affect a proper withdrawal in 2011. The Company believes that a legally effective withdrawal occurred in November 2011 and has recorded the withdrawal liability on that basis. In May 2014, the Plan asserted that the liability was $11.7 million. Without agreeing to the amount and while initiating an appeal, the Company has made monthly payments, which are being expensed, including interest. Following a formal resolution to the issue, we will be required to pay an assessed amount over a period of years, although the number of years is not certain and we may also negotiate a lump-sum settlement. As a result, we have not included the estimated withdrawal liability in the table above. Furthermore, we have excluded the payments associated with the contested withdrawal liability of Q3C based on its minimal value.  See Note 19 — “ Commitments and Contingencies ” in Item 1, Financial Statements of this First Quarter 2015 Report.

 

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 variable.

 

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 March 31, 2015, we had letters of credit outstanding of $5.6 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 March 31, 2015, equipment operating leases had a remaining commitment of $13.6 million and facility rental commitments were $20.0 million;

 

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·                    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 March 31, 2015, we had $1.4 billion in outstanding bonds.  We do not believe that it is likely that we would have to fund material claims under our surety arrangements;

 

·                    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 19 — “ Commitments and Contingencies “ in Item 1, Financial Statements of this First Quarter 2015 Report, 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 $32.9 million. We are currently engaged in alternative dispute resolution as required by the contract. The owner has bonded around the liens that we filed, and we believe that action will enhance collectability of amounts due at the end of the dispute process.

 

In addition, Primoris Pipeline Services constructed a large capital pipeline for a customer in Texas. During the early stages of the project, we became concerned that the customer would not pay us for ancillary items as we believe is required by the contract. As a result of our concerns about eventual collectability, we chose to recognize revenue equal to cost. We have initiated legal action and filed liens to collect our $29.7 million receivable. In April 2015, we received $11.2 million of the amount due.

 

The Company has specific reserves for both projects of approximately $29 million included in “ billings in excess of costs and estimated earnings ”. While we believe that in both instances we are owed the full amount of the receivable, there can be no guarantee of the final amount that we receive or the timing of a resolution of the two matters.

 

Effects of Inflation and Changing Prices

 

Our operations are affected by increases in prices, whether caused by inflation or other economic factors. We attempt to recover anticipated increases in the cost of labor, equipment, fuel and materials through price escalation provisions in certain major contracts or by considering the estimated effect of such increases when bidding or pricing new work or by entering into back-to-back contracts with suppliers and subcontractors.

 

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Item 3.  Quantitative and Qualitative Disclosures About Market Risk

 

In the ordinary course of business, we are exposed to risks related to market conditions. These risks primarily include fluctuations in foreign currency exchange rates, interest rates and commodity prices. We may seek to manage these risks through the use of financial derivative instruments. These instruments may include foreign currency exchange contracts and interest rate swaps.

 

We do not execute transactions or use financial derivative instruments for trading or speculative purposes. We enter into transactions with counter parties that are generally financial institutions in a matter to limit significant exposure with any one party.

 

The carrying amounts for cash and cash equivalents, accounts receivable, short term investments, short-term debt, accounts payable and accrued liabilities shown in the consolidated balance sheets approximate fair value at March 31, 2015 and December 31, 2014, due to the generally short maturities of these items. At March 31, 2015 and December 31, 2014, we held short term investments which were primarily in U.S. Treasury bills with various financial institutions that are backed by the federal government.  We expect to hold our investments to maturity.

 

At March 31, 2015, all of our long-term debt was subject to fixed interest rates.

 

At March 31, 2015, we had no derivative financial instruments.

 

Item 4.  Controls and Procedures

 

Disclosure Controls and Procedures

 

As of March 31, 2015, we carried out an evaluation, under the supervision and with the participation of our management, including our chief executive officer (“CEO”) and chief financial officer (“CFO”), of the effectiveness of the design and operation of our “disclosure controls and procedures”, as such term is defined under Exchange Act Rules 13a-15(e) and 15d-15(e).

 

Based on this evaluation, our CEO and CFO concluded that, at March 31, 2015, the disclosure controls and procedures were effective at the reasonable assurance level to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.

 

In designing and evaluating the disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In reaching a reasonable level of assurance, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.  The Company’s disclosure controls and procedures are designed to provide reasonable assurance of achieving their stated objectives. We anticipate continuing enhancement of our controls, especially as we begin to integrate our financial and operations information systems onto a common platform.

 

Changes in Internal Control Over Financial Reporting

 

During the fiscal quarter ended March 31, 2015, there were no changes to our internal control over financial reporting practices or processes that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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Part II. Other Information

 

Item 1.  Legal Proceedings

 

On February 7, 2012, the Company was sued in an action entitled North Texas Tollway Authority, Plaintiff v. James Construction Group, LLC, and KBR, Inc., Defendants, v. Reinforced Earth Company, Third-Party Defendant (the “Lawsuit”). The Company participated in Court-ordered mediation for 18 months, and on February 25, 2015 the Lawsuit was settled for an expected cost to the Company of $9.0 million.

 

At March 31, 2015, 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 $32.9 million, and for the other project, the Company has recorded a receivable of $29.7 million, and received $11.2 million of the amount due in April 2015. At March 31, 2015, the Company has not recorded revenues in excess of cost for these two projects, however, the Company has specific reserves for both projects of approximately $29 million included in “billings in excess of costs and estimated earnings . At this time, the Company cannot predict the amount that it will collect nor the timing of any collection.

 

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.

 

Item 1A.  Risk Factors.

 

In addition to the information set forth in this Report, you should carefully consider the factors discussed in the section entitled “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2014, which to our knowledge have not materially changed. Those risks, which could materially affect our business, financial condition or future results, are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

 

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

 

None

 

Item 3.  Defaults Upon Senior Securities.

 

None.

 

Item 4.  (Removed and Reserved).

 

Item 5.  Other Information.

 

None.

 

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Item 6.  Exhibits.

 

The following exhibits are filed as part of this Quarterly Report on Form 10-Q.

 

Exhibit
Number

 

Description

31.1

 

Rule 13a-14(a)/15d-14(a) Certification by the Registrant’s Chief Executive Officer (*)

31.2

 

Rule 13a-14(a)/15d-14(a) Certification by the Registrant’s Chief Financial Officer (*)

32.1

 

Section 1350 Certification by the Registrant’s Chief Executive Officer (*)

32.2

 

Section 1350 Certification by the Registrant’s Chief Financial Officer (*)

101 INS

 

XBRL Instance Document (*)

101 SCH

 

XBRL Taxonomy Extension Schema Document (*)

101 CAL

 

XBRL Taxonomy Extension Calculation Linkbase Document (*)

101 LAB

 

XBRL Taxonomy Extension Label Linkbase Document (*)

101 PRE

 

XBRL Taxonomy Extension Presentation Linkbase Document (*)

101 DEF

 

XBRL Taxonomy Extension Definition Linkbase Document (*)

 


(*)

 

Filed herewith

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

PRIMORIS SERVICES CORPORATION

 

 

Date:

May 6, 2015

/s/ PETER J. MOERBEEK

 

Peter J. Moerbeek

 

Executive Vice President, Chief Financial Officer (Principal Financial and Accounting Officer)

 

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EXHIBITS ATTACHED TO THIS QUARTERLY REPORT ON FORM 10-Q

 

Exhibit
Number

 

Description

31.1

 

Rule 13a-14(a)/15d-14(a) Certification by the Registrant’s Chief Executive Officer (*)

31.2

 

Rule 13a-14(a)/15d-14(a) Certification by the Registrant’s Chief Financial Officer (*)

32.1

 

Section 1350 Certification by the Registrant’s Chief Executive Officer (*)

32.2

 

Section 1350 Certification by the Registrant’s Chief Financial Officer (*)

101 INS

 

XBRL Instance Document (*)

101 SCH

 

XBRL Taxonomy Extension Schema Document (*)

101 CAL

 

XBRL Taxonomy Extension Calculation Linkbase Document (*)

101 LAB

 

XBRL Taxonomy Extension Label Linkbase Document (*)

101 PRE

 

XBRL Taxonomy Extension Presentation Linkbase Document (*)

101 DEF

 

XBRL Taxonomy Extension Definition Linkbase Document (*)

 


(*)

 

Filed herewith

 

36


Exhibit 31.1

 

RULE 13a-14(a)/15d-14(a) CERTIFICATION PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

 

I, Brian Pratt, certify that:

 

1.                                                       I have reviewed this Quarterly Report on Form 10-Q for the period ended March 31, 2015 of Primoris Services Corporation;

 

2.                                                       Based on my knowledge, this Quarterly Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Quarterly Report;

 

3.                                                       Based on my knowledge, the financial statements, and other financial information included in this Quarterly Report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this Quarterly Report;

 

4.                                                       The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

(a)                                  Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiari