Primoris Services Corporation
Primoris Services Corp (Form: 10-Q, Received: 08/06/2015 08:05:16)

Table of Contents

 

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

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

 

For the quarterly period ended June 30, 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 August 5, 2015, 51,675,569 shares of the registrant’s common stock, par value $0.0001 per share, were outstanding.

 

 

 



Table of Contents

 

PRIMORIS SERVICES CORPORATION

 

IN DEX

 

 

Page No.

 

 

Part I. Financial Information

 

 

 

Item 1. Financial Statements:

 

 

 

—Condensed Consolidated Balance Sheets at June 30, 2015 and December 31, 2014

3

 

 

—Condensed Consolidated Statements of Income for the three and six months ended June 30, 2015 and 2014

4

 

 

— Condensed Consolidated Statements of Cash Flows for the three and six months ended June 30, 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

22

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

36

 

 

Item 4. Controls and Procedures

36

 

 

Part II. Other Information

 

 

 

Item 1. Legal Proceedings

37

 

 

Item 1A. Risk Factors

37

 

 

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

37

 

 

Item 3. Defaults Upon Senior Securities

37

 

 

Item 4. (Removed and Reserved)

37

 

 

Item 5. Other Information

37

 

 

Item 6. Exhibits

38

 

 

Signatures

39

 

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)

 

 

 

June 30,
2015

 

December 31,
2014

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

85,970

 

$

139,465

 

Short-term investments

 

 

30,992

 

Customer retention deposits and restricted cash

 

1,385

 

481

 

Accounts receivable, net

 

318,513

 

337,382

 

Costs and estimated earnings in excess of billings

 

109,537

 

68,654

 

Inventory and uninstalled contract materials

 

65,248

 

58,116

 

Deferred tax assets

 

13,555

 

13,555

 

Prepaid expenses and other current assets

 

32,488

 

31,720

 

Total current assets

 

626,696

 

680,365

 

Property and equipment, net

 

286,275

 

271,431

 

Intangible assets, net

 

39,860

 

39,581

 

Goodwill

 

124,562

 

119,410

 

Other long-term assets

 

2,200

 

400

 

Total assets

 

$

1,079,593

 

$

1,111,187

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

129,892

 

$

128,793

 

Billings in excess of costs and estimated earnings

 

138,176

 

158,595

 

Accrued expenses and other current liabilities

 

85,960

 

83,401

 

Dividends payable

 

2,841

 

2,062

 

Current portion of capital leases

 

1,319

 

1,650

 

Current portion of long-term debt

 

41,249

 

38,909

 

Current portion of contingent earnout liabilities

 

737

 

5,901

 

Total current liabilities

 

400,174

 

419,311

 

Long-term capital leases, net of current portion

 

274

 

657

 

Long-term debt, net of current portion

 

192,054

 

204,029

 

Deferred tax liabilities

 

19,484

 

19,484

 

Long-term contingent earnout liabilities, net of current portion

 

1,075

 

1,021

 

Other long-term liabilities

 

9,852

 

12,899

 

Total liabilities

 

622,913

 

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 June 30, 2015 and December 31, 2014

 

5

 

5

 

Additional paid-in capital

 

162,624

 

160,186

 

Retained earnings

 

294,030

 

293,628

 

Noncontrolling interests

 

21

 

(33

)

Total stockholders’ equity

 

456,680

 

453,786

 

Total liabilities and stockholders’ equity

 

$

1,079,593

 

$

1,111,187

 

 

See Accompanying Notes to Condensed Consolidated Financial Statements

 

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Table of Contents

 

PRIMORIS SERVICES CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In Thousands, Except Per Share Amounts)

(Unaudited)

 

 

 

Three Months Ended

 

Six months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

Revenues

 

$

483,545

 

$

515,291

 

$

876,325

 

$

985,365

 

Cost of revenues

 

437,049

 

454,097

 

791,824

 

874,414

 

Gross profit

 

46,496

 

61,194

 

84,501

 

110,951

 

Selling, general and administrative expenses

 

38,547

 

33,213

 

72,307

 

62,925

 

Operating income

 

7,949

 

27,981

 

12,194

 

48,026

 

Other income (expense):

 

 

 

 

 

 

 

 

 

Income from non-consolidated entities

 

 

 

 

14

 

Foreign exchange gain (loss)

 

(140

)

149

 

296

 

175

 

Other expense

 

(45

)

(327

)

(89

)

(441

)

Interest income

 

6

 

14

 

18

 

66

 

Interest expense

 

(1,738

)

(1,196

)

(3,660

)

(2,864

)

 

 

 

 

 

 

 

 

 

 

Income before provision for income taxes

 

6,032

 

26,621

 

8,759

 

44,976

 

Provision for income taxes

 

(2,340

)

(10,618

)

(3,395

)

(17,708

)

Net income

 

$

3,692

 

$

16,003

 

$

5,364

 

$

27,268

 

 

 

 

 

 

 

 

 

 

 

Less net income attributable to noncontrolling interests

 

(54

)

 

(54

)

(432

)

 

 

 

 

 

 

 

 

 

 

Net income attributable to Primoris

 

$

3,638

 

$

16,003

 

$

5,310

 

$

26,836

 

 

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.07

 

$

0.31

 

$

0.10

 

$

0.52

 

Diluted

 

$

0.07

 

$

0.31

 

$

0.10

 

$

0.52

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

51,666

 

51,655

 

51,619

 

51,631

 

Diluted

 

51,815

 

51,804

 

51,770

 

51,759

 

 

See Accompanying Notes to Condensed Consolidated Financial Statements

 

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Table of Contents

 

PRIMORIS SERVICES CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)

(Unaudited)

 

 

 

Six months Ended

 

 

 

June 30,

 

 

 

2015

 

2014

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

5,364

 

$

27,268

 

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

 

 

 

 

 

Depreciation

 

28,512

 

23,941

 

Amortization of intangible assets

 

3,370

 

3,687

 

Gain on sale of property and equipment

 

(24

)

(809

)

Income from non-consolidated entities

 

 

(14

)

Stock—based compensation expense

 

524

 

409

 

Changes in assets and liabilities:

 

 

 

 

 

Customer retention deposits and restricted cash

 

(904

)

5,248

 

Accounts receivable

 

21,603

 

(6,366

)

Costs and estimated earnings in excess of billings

 

(40,581

)

(30,965

)

Other current assets

 

(6,726

)

(9,846

)

Accounts payable

 

356

 

3,273

 

Billings in excess of costs and estimated earnings

 

(21,318

)

(15,268

)

Contingent earnout liabilities

 

(4,910

)

(4,559

)

Accrued expenses and other current liabilities

 

3,820

 

3,232

 

Other long-term assets

 

(1,800

)

 

Other long-term liabilities

 

(4,547

)

(2,068

)

Net cash used in operating activities

 

(17,261

)

(2,837

)

Cash flows from investing activities:

 

 

 

 

 

Purchase of property and equipment

 

(35,674

)

(38,625

)

Proceeds from sale of property and equipment

 

3,602

 

3,017

 

Purchase of short-term investments

 

 

(2,280

)

Sale of short-term investments

 

30,992

 

18,686

 

Cash received for the sale of Alvah

 

 

1,189

 

Cash paid for acquisition

 

(22,302

)

(6,354

)

Net cash used in investing activities

 

(23,382

)

(24,367

)

Cash flows from financing activities:

 

 

 

 

 

Proceeds from issuance of long-term debt

 

11,000

 

15,400

 

Repayment of capital leases

 

(714

)

(1,967

)

Repayment of long-term debt

 

(20,635

)

(18,673

)

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

 

1,621

 

1,671

 

Dividends paid

 

(4,124

)

(3,612

)

Cash distribution to non-controlling interest holder

 

 

(1,515

)

Net cash used in financing activities

 

(12,852

)

(8,696

)

Net change in cash and cash equivalents

 

(53,495

)

(35,900

)

Cash and cash equivalents at beginning of the period

 

139,465

 

196,077

 

Cash and cash equivalents at end of the period

 

$

85,970

 

$

160,177

 

 

See Accompanying Notes to Condensed Consolidated Financial Statements

 

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Table of Contents

 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

 

 

 

Six months Ended

 

 

 

June 30,

 

 

 

2015

 

2014

 

 

 

(Unaudited)

 

Cash paid during the period for:

 

 

 

 

 

Interest

 

$

3,588

 

$

2,554

 

 

 

 

 

 

 

Income taxes, net of refunds received

 

$

5,645

 

$

17,235

 

 

SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES

 

 

 

Six Months Ended

 

 

 

June 30,

 

 

 

2015

 

2014  

 

 

 

(Unaudited)

 

 

 

 

 

 

 

Dividends declared and not yet paid

 

2,841

 

$

1,808

 

 

See Accompanying Notes to Condensed Consolidated Financial Statements

 

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Table of Contents

 

PRIMORIS SERVICES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)

 

Note 1—Nature of Business

 

Organization and operations Primoris Services Corporation (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.

 

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

Primoris Energy Services Corporation (“PES”)

 

Energy

 

East

PES Industrial Division (formerly JCG Industrial Division)

 

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

 

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, the project warranty expired in May 2015 and final distributions and dissolution will be completed in the third quarter 2015.  Financial information is presented in “Note 11— 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. All intercompany revenue and profit of the construction project was eliminated, and at June 30, 2015, a total of $13.6 million has been capitalized as property, plant and equipment, including the approximately $5 million acquisition cost.

 

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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 contingent earnout amounts as discussed in “Note 7— Business Combinations ”.

 

On February 28, 2015, the Company acquired Aevenia, Inc. (“Aevenia”) for $22.7 million, consisting of $22.3 million in cash and a payable of $0.4 million to the sellers. 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. 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 and six month periods ended June 30, 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 Second 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 at the end of the prior year or prior quarter, there can be a difference in revenues and profits that would have been recognized in the prior year or prior quarter, had current estimates of costs to complete been known at the end of the prior year or prior quarter.

 

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.

 

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During the three and six months ending June 30, 2015, revenues generated by the top ten customers were $255 million and $483 million, respectively, which represented 52.7% and 55.1%, respectively, of total revenues during the periods. During these respective periods, a pipeline operator represented 11.5% and 12.5% of total revenues and TXDOT represented 9.2% and 10.0% of total revenues.

 

During the three and six months ending June 30, 2014, revenues generated by the top ten customers were $293 million and $575 million, respectively, which represented 56.8% and 58.4%, respectively, of total revenues during the periods. During these respective periods, TXDOT represented 9.0% and 9.2%, respectively, of total revenues and a pipeline operator represented 8.8% and 8.2%, respectively, of total revenues.

 

At June 30, 2015, approximately 8.2% of the Company’s accounts receivable were due from one customer, and that customer provided 7.0% of the Company’s revenues for the six months ended June 30, 2015. In addition, of total accounts receivable, approximately 15.8% of total accounts receivable are currently in dispute resolution. See “Note 18 — Commitments and Contingencies ”.

 

At June 30, 2014, approximately 15.2% of the Company’s accounts receivable were due from one customer, and that customer provided 8.0% of the Company’s revenues for the six months ended June 30, 2014. In addition, of total accounts receivable at June 30, 2014, approximately 16.5% are currently in dispute resolution. See “Note 18 — Commitments and Contingencies ”.

 

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. In accordance with GAAP, any withdrawal liability would be recorded when it is probable that a liability exists and can be reasonably estimated. In November 2011, the Company withdrew from the Central States Southeast and Southwest Areas Pension Fund multiemployer pension plan, as discussed in “Note 18 — 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 has been 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 deferred 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.

 

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Note 4—Fair Value Measurements

 

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

 

In general, fair values determined by Level 1 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.

 

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 June 30, 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 June 30, 2015:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

85,970

 

$

85,970

 

 

 

Short-term investments

 

$

 

$

 

 

 

Liabilities as of June 30, 2015:

 

 

 

 

 

 

 

 

 

Contingent consideration

 

$

1,812

 

 

 

$

1,812

 

 

 

 

 

 

 

 

 

 

 

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 at December 31, 2014 consisted 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.

 

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The following table provides changes to the Company’s contingent consideration liability Level 3 fair value measurements during the six months ended June 30, 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

 

90

 

441

 

Vadnais acquisition

 

 

729

 

Reductions in the contingent consideration liability:

 

 

 

 

 

Payment to Q3C sellers for meeting performance targets

 

(5,000

)

(5.000

)

Reduction due to non-attainment of performance target — Ram-Fab

 

(200

)

 

Ending balance, June 30, 2015 and 2014

 

$

1,812

 

$

5,403

 

 

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:

 

 

 

June 30,
2015

 

December 31,
2014

 

 

 

 

 

 

 

Contracts receivable, net of allowance for doubtful accounts of $1,093 at June 30, 2015 and $540 at December 31, 2014

 

$

275,339

 

$

287,806

 

Retention receivable

 

42,682

 

49,104

 

 

 

318,021

 

336,910

 

Other accounts receivable

 

492

 

472

 

 

 

$

318,513

 

$

337,382

 

 

Note 6—Costs and Estimated Earnings on Uncompleted Contracts

 

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

 

 

 

June 30,
2015

 

December 31,
2014

 

 

 

 

 

 

 

Costs incurred on uncompleted contracts

 

$

4,451,526

 

$

5,194,769

 

Gross profit recognized

 

512,915

 

613,510

 

 

 

4,964,441

 

5,808,279

 

Less: billings to date

 

(4,993,080

)

(5,898,220

)

 

 

$

(28,639

)

$

(89,941

)

 

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

 

 

 

June 30,
2015

 

December 31,
2014

 

 

 

 

 

 

 

Costs and estimated earnings in excess of billings

 

$

109,537

 

$

68,654

 

Billings in excess of costs and estimated earnings

 

(138,176

)

(158,595

)

 

 

$

(28,639

)

$

(89,941

)

 

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Note 7 — Business Combinations

 

On February 28, 2015, the Company acquired Aevenia, Inc. (“Aevenia”) for $22.7 million, consisting of $22.3 million in cash and a payable of $0.4 million to the sellers. Aevenia has been re-branded as Primoris AV, Energy and Electrical Construction Corporation (“Primoris AV”), and operates as part of Primoris’ Energy segment.

 

The purchase was accounted for using the acquisition method of accounting. During the second quarter of 2015, the Company finalized its estimate of fair value of the acquired assets and liabilities of Primoris AV, which included $4.2 million in current assets, $2.1 million in current liabilities, plant and equipment of $11.2 million, intangible assets of $3.85 million and goodwill of $5.2 million. The change in value from those recorded in the first quarter 2015 included an increase of $0.2 million in current assets, a decrease of $0.2 million in current liabilities, an increase in intangible assets of $3.85 million, with a decrease of $4.2 million in goodwill.

 

The customer relationships were valued at $2.5 million utilizing the “excess earnings method” of the income approach. The estimated discounted cash flows associated with existing customers and projects were based on historical and market participant data. Such discounted cash flows were net of fair market returns on the various tangible and intangible assets that are necessary to realize the potential cash flows.

 

The fair value for the non-compete agreement of $1.35 million was based on a discounted “income approach model,” including estimated financial results with and without the non-compete agreement in place.  The agreement was analyzed based on the potential impact of competition that certain individuals could have on the financial results, assuming the agreement was not in place.  An estimate of the probability of competition was applied and the results were compared to a similar model assuming the agreement was in place.

 

Goodwill of $5.15 million largely consists of expected benefits from providing electrical construction expertise for the Company and the greater presence and convenient access to the central plains area of the United States.  Goodwill also includes the value of the assembled workforce of the Primoris AV business. Based on the current tax treatment, goodwill and other intangible assets will be deductible for income tax purposes over a fifteen-year period.

 

Supplemental Unaudited Pro Forma Information for the three months ended June 30, 2015 and 2014

 

The following pro forma information for the three and six months ended June 30, 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 and six months ended June 30, 2015 and the same period in 2014.

 

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 June 30,

 

Six months
ended June 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

483,545

 

537,753

 

879,323

 

1,022,277

 

Income before provision for income taxes

 

6,032

 

27,563

 

6,971

 

43,605

 

Net income attributable to Primoris

 

3,638

 

16,578

 

4,219

 

26,000

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

51,666

 

51,655

 

51,619

 

51,631

 

Diluted

 

51,815

 

51,804

 

51,770

 

51,759

 

 

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.07

 

$

0.32

 

$

0.08

 

$

0.50

 

Diluted

 

$

0.07

 

$

0.32

 

$

0.08

 

$

0.50

 

 

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Note 8—Intangible Assets

 

At June 30, 2015 and December 31, 2014, intangible assets totaled $39,860 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

 

June 30,

 

December 31,

 

 

 

Period

 

2015

 

2014

 

Tradename

 

3 to 10 years

 

$

16,582

 

$

18,194

 

Non-compete agreements

 

2 to 5 years

 

$

1,853

 

$

1,074

 

Customer relationships

 

5 to 15 years

 

$

21,425

 

$

20,313

 

Total

 

 

 

$

39,860

 

$

39,581

 

 

Amortization expense of intangible assets was $1,719 and $1,843 for the three months ended June 30, 2015 and 2014, respectively, and amortization expense for the six months ended June 30, 2015 and 2014 was $3,370 and $3,687, respectively.  Estimated future amortization expense for intangible assets is as follows:

 

For the Years Ending
December 31,

 

Estimated
Intangible
Amortization
Expense

 

2015 (remaining six months)

 

$

3,405

 

2016

 

6,460

 

2017

 

6,201

 

2018

 

5,719

 

2019

 

5,509

 

Thereafter

 

12,566

 

 

 

$

39,860

 

 

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Note 9—Accounts Payable and Accrued Liabilities

 

At June 30, 2015 and December 31, 2014, accounts payable included retention amounts of approximately $7,322 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:

 

 

 

June 30,
2015

 

December 31,
2014

 

 

 

 

 

 

 

Payroll and related employee benefits

 

$

36,616

 

$

37,261

 

Insurance, including self-insurance reserves

 

36,205

 

34,377

 

Reserve for estimated losses on uncompleted contracts

 

5,245

 

2,363

 

Corporate income taxes and other taxes

 

2,116

 

3,775

 

Accrued overhead cost

 

1,325

 

1,059

 

Other

 

4,453

 

4,566

 

 

 

$

85,960

 

$

83,401

 

 

Note 10—Credit Arrangements

 

Revolving Credit Facility

 

As of June 30, 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 $8,620 at June 30, 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 six months ended June 30, 2015, and available borrowing capacity at June 30, 2015 was $116,380.

 

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”).  On June 3, 2015, the Notes Agreement was amended to provide for the issuance of additional notes of up to $75 million over the next three year period ending June 3, 2018 (“Additional Senior Notes”).

 

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 $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.

 

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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 June 30, 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 June 30, 2015 and December 31, 2014, letters of credit outstanding totaled $2,497 and $2,563 in Canadian dollars, respectively.  At June 30, 2015, the available borrowing capacity was $5,503 in Canadian dollars.  The credit facility contains a working capital restrictive covenant for our Canadian subsidiary, OnQuest Canada, ULC. At June 30, 2015, OnQuest Canada, ULC was in compliance with the covenant.

 

Note 11 — 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 and six months ended June 30:

 

 

 

Three months
ended June 30,

 

Six months
ended June 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

108

 

 

108

 

940

 

Net income attributable to noncontrolling interests

 

54

 

 

54

 

432

 

 

Since Blythe is a partnership, no tax effect was recognized for the income.  Blythe made no distributions in 2015 and made distributions of $1,515 to the non-controlling interests and $1,515 to the Company during the six months ending June 30, 2014. There were no capital contributions made during the year ended December 31, 2014 or through the six months ended June 30, 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 June 30, 2015. The project has been completed, the project warranty expired in May 2015, final distributions (of approximately $59) and dissolution will be completed in the third quarter 2015.

 

Note 12 — 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 and $755 at June 30, 2015.

 

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 $1.4 million over a 3-year period, which had an estimated fair value of $1.0 million on the acquisition date and $1,057 as of June 30, 2015.  The Ram-Fab purchase included a $0.2 million contingent earnout based on estimated earnings of a six-month operating project.  Because the operating results for the Ram-Fab project were not met during the acquisition measurement period, the contingent earnout liability was reduced and the value of intangible assets of the acquisition was reduced by the same amount.

 

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Table of Contents

 

Note 13—Related Party Transactions

 

Primoris has entered into leasing transactions with Stockdale Investment Group, Inc. (“SIGI”).  Brian Pratt, our 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)

 

During the six months ended June 30, 2015 and 2014, the Company paid $408 and $441, 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 six months ended June 30, 2015 and 2014, Primoris paid $131 and $145, 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 six months ended June 30, 2015 and 2014, Primoris paid lease payments of $45 for both periods.  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 six months ended June 30, 2015 and 2014, the Company paid $132 in both periods in lease payments to Quality RE Partners. The lease expires in October 2022.  In addition, during the three months ended June 30, 2015, Q3C paid $16 for the month-to-month lease of construction equipment to Mr. Osborn.

 

Note 14—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.  At June 30, 2015, 50,000 Units were 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.  At June 30, 2015, none of these Units were vested.  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 June 30, 2015 and 2014, the Company recognized $ 262 for both periods in compensation expense. For the six months ended June 30, 2015 and 2014, the Company recognized compensation expense of $525 and $409, respectively.  At June 30, 2015, approximately $1.9 million of unrecognized compensation expense remains for the Units, which will be recognized over the next 1.8 years through April 30, 2017.

 

Vested Units accrue “Dividend Equivalents” (as defined in the Equity Plan) which will be accrued as additional Units.  At June 30, 2015, a total of 307 Dividend Equivalent Units were accrued.

 

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Note 15—Income Taxes

 

The effective tax rate for the six months ended June 30, 2015 for both income before taxes and noncontrolling interests and for income attributable to Primoris is 39.0%.  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 16—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.

 

·                  On May 1, 2015, the Company declared a cash dividend of $0.055 per common share, payable to stockholders of record on June 30, 2015.  The dividend, totaling $2,841, was paid on July 15, 2015.

 

The table below presents the computation of basic and diluted earnings per share for the three and six months ended June 30, 2015 and 2014:

 

 

 

Three months
ended June 30,

 

Six months
ended June 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

Numerator:

 

 

 

 

 

 

 

 

 

Net income attributable to Primoris

 

$

3,638

 

$

16,003

 

$

5,310

 

$

26,836

 

Denominator (shares in thousands):

 

 

 

 

 

 

 

 

 

Weighted average shares for computation of basic earnings per share

 

51,666

 

51,655

 

51,619

 

51,631

 

Dilutive effect of shares issued to independent directors

 

 

 

2

 

2

 

Dilutive effect of unvested restricted stock units (1)

 

149

 

149

 

149

 

126

 

Weighted average shares for computation of diluted earnings per share

 

51,815

 

51,804

 

51,770

 

51,759

 

 

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

$

0.07

 

$

0.31

 

$

0.10

 

$

0.52

 

Diluted earnings per share

 

$

0.07

 

$

0.31

 

$

0.10

 

$

0.52

 

 


(1)   Represents the dilutive effect of a grant of 148,512 shares of Units and 307 vested Dividend Equivalent Units.

 

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Note 17—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 14 — “Stock Based Compensation” , the Board of Directors has granted a total of 148,512 shares of Units under the Equity Plan and these Units have accrued 307 Dividend Equivalent Units.

 

Note 18—Commitments and Contingencies

 

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

 

Total lease expense during the three and six months ended June 30, 2015 was $5,506 and $10,391, respectively, compared to $3,529 and $7,166 for the same periods in 2014. The amounts for the three and six months ended June 30, 2015 included lease payments made to related parties of $361 and $720, respectively, compared to $383 and $763 for the same periods in 2014.

 

Letters of credit At June 30, 2015, the Company had letters of credit outstanding of $10,622 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 June 30, 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 a receivable balance due of $17.9 million.  At June 30, 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 $28 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.

 

Bonding— At June 30, 2015 and December 31, 2014, the Company had bid and completion bonds issued and outstanding totaling approximately $1,523,473 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 $1,283 through June 30, 2015.

 

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Table of Contents

 

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 $38 through June 30, 2015.

 

Contingent Consideration Earnouts related to acquisitions are discussed in Note 12 — “Contingent Earnout Liabilities” .

 

Note 19—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 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 PES 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.

 

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 June 30, 2015 and 2014 were as follows:

 

 

 

For the three months ended June 30,

 

 

 

2015

 

2014

 

Segment

 

Revenue

 

% of
Segment
Revenue

 

Revenue

 

% of
Segment
Revenue

 

 

 

 

 

 

 

 

 

 

 

West

 

$

239,999

 

49.6

%

$

224,391

 

43.5

%

East

 

154,887

 

32.0

%

118,554

 

23.0

%

Energy

 

88,659

 

18.4

%

172,346

 

33.5

%

Total

 

$

483,545

 

100.0

%

$

515,291

 

100.0

%

 

Revenue by segment for the six months ended June 30, 2015 and 2014 were as follows

 

 

 

For the six months ended June 30,

 

 

 

2015

 

2014

 

Segment

 

Revenue

 

% of
Segment
Revenue

 

Revenue

 

% of
Segment
Revenue

 

 

 

 

 

 

 

 

 

 

 

West

 

$

426,384

 

48.7

%

$

458,418

 

46.5

%

East

 

278,587

 

31.8

%

225,524

 

22.9

%

Energy

 

171,354

 

19.5

%

301,423

 

30.6

%

Total

 

$

876,325

 

100.0

%

$

985,365

 

100.0

%

 

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Table of Contents

 

Segment Gross Profit

 

Gross profit by segment for the three months ended June 30, 2015 and 2014 were as follows:

 

 

 

For the three months ended June 30,

 

 

 

2015

 

2014

 

Segment

 

Gross
Profit

 

% of
Segment
Revenue

 

Gross
Profit

 

% of
Segment
Revenue

 

 

 

 

 

 

 

 

 

 

 

West

 

$

30,444

 

12.7

%

$

37,809

 

16.8

%

East

 

9,115

 

5.9

%

8,727

 

7.4

%

Energy

 

6,937

 

7.8

%

14,658

 

8.5

%

Total

 

$

46,496

 

9.6

%

$

61,194

 

11.9

%

 

Gross profit by segment for the six months ended June 30, 2015 and 2014 were as follows:

 

 

 

For the six months ended June 30,

 

 

 

2015

 

2014

 

Segment

 

Gross
Profit

 

% of
Segment
Revenue

 

Gross
Profit

 

% of
Segment
Revenue

 

 

 

 

 

 

 

 

 

 

 

West

 

$

51,908

 

12.2

%

$

69,483

 

15.2

%

East

 

18,223

 

6.5

%

15,485

 

6.9

%

Energy

 

14,370

 

8.4

%

25,983

 

8.6

%

Total

 

$

84,501

 

9.6

%

$

110,951

 

11.3

%

 

Segment Goodwill

 

The following presents the amount of goodwill recorded by segment at June 30, 2015 and at December 31, 2014.

 

Segment

 

June 30,
2015

 

December 31,
2014

 

 

 

 

 

 

 

West

 

$

45,239

 

$

45,239

 

East

 

43,267

 

43,267

 

Energy

 

36,056

 

30,904

 

Total

 

$

124,562

 

$

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. At June 30, 2015, approximately 1% of total assets were located in Canada.

 

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Table of Contents

 

PRIMORIS SERVICES CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS

 

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

 

Forward Looking Statements

 

This Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2015 (“Second 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 Second 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 Second 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 Second 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 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 includes the previous Engineering segment).  All prior period amounts related to the segment change have been retrospectively reclassified throughout this Second 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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Table of Contents

 

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, completed in 2014, 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 PES 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

 

Primoris Energy Services Corporation (“PES”)

 

Energy

 

East

 

PES Industrial Division (formerly JCG Industrial Division)

 

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

 

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 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, the project warranty expired in May 2015 and final distributions of approximately $0.059 million and dissolution will be completed in the third quarter 2015.

 

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 June 30, 2015, a total of $13.6 million has been capitalized as property, plant and equipment, including the approximately $5 million acquisition cost.

 

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 $22.7 million, consisting of $22.3 million in cash and a payable of $0.4 million to the sellers. 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. 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.

 

For the year ended December 31, 2014, Primoris AV generated operating income of $4.2 million on revenues of $44.4 million. The fair value of the assets purchased and liabilities assumed on the acquisition date included $4.2 million in current assets, $2.1 million in current liabilities, plant and equipment of $11.2 million, $3.85 million in intangibles and $5.2 million in goodwill.

 

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
June 2015

 

Twelve Months Ended
December 2014

 

Twelve Months Ended
June 2014

 

 

 

 

 

 

 

 

 

Underground capital projects

 

16

%

17

%

22

%

Utility services

 

32

%

28

%

26

%

Industrial

 

19

%

27

%

26

%

Heavy Civil

 

26

%

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. Fluctuations in market prices of oil, gas and other fuel sources can affect demand for our services. The 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 continuing uncertainty resulting over the length of time that prices will remain depressed.  Oil prices are not expected to recover until the current oversupply eases or with an increase in the global demand for oil.  We believe the construction of gathering lines within the oil shale formations may remain at lower levels for an extended period. However, the need for pipeline infrastructure to allow midstream companies to bring low-priced oil and gas from the oil shale formations to processing facilities and to end customers in the southeastern United States is expected to result in a continuing need for our services for the next few years. The continuing changes in the regulatory environment also can affect the demand for our services, either by increasing our work or delaying projects. We believe that until alternative energy sources can supply a significant amount of uninterruptable power, regulated utility customers will continue to invest in construction of power plants and in the maintenance and replacement services that we provide.

 

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.

 

24



Table of Contents

 

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 they 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 and six months ended June 30, 2015 and 2014 were as follows:

 

 

 

Three Months Ended June 30,

 

 

 

2015

 

2014

 

 

 

(Thousands)

 

% of
Revenue

 

(Thousands)

 

% of
Revenue

 

Revenues

 

$

483,545

 

100.0

%

$

515,291

 

100.0

%

Gross profit

 

46,496

 

9.6

%

61,194

 

11.9

%

Selling, general and administrative expense

 

38,547

 

8.0

%

33,213

 

6.5

%

Operating income

 

7,949

 

1.6

%

27,981

 

5.4

%

Other expense

 

(1,917

)

(0.4

)%

(1,360

)

(0.2

)%

Income before income taxes

 

6,032

 

1.2

%

26,621

 

5.2

%

Income tax provision

 

(2,340

)

(0.4

)%

(10,618

)

(2.1

)%

Net income

 

$

3,692

 

0.8

%

$

16,003

 

3.1

%

Net income attributable to noncontrolling interests

 

(54

)

%

 

%

Net income attributable to Primoris

 

$

3,638

 

0.8

%

$

16,003

 

3.1

%

 

 

 

Six Months Ended June 30,

 

 

 

2015

 

2014

 

 

 

(Thousands)

 

% of
Revenue

 

(Thousands)

 

% of
Revenue

 

Revenues

 

$

876,325

 

100.0

%

$

985,365

 

100.0

%

Gross profit

 

84,501

 

9.6

%

110,951

 

11.3

%

Selling, general and administrative expense

 

72,307

 

8.3

%

62,925

 

6.4

%

Operating income

 

12,194

 

1.4

%

48,026

 

4.9

%

Other expense

 

(3,435

)

(0.4

)%

(3,050

)

(0.3

)%

Income before income taxes

 

8,759

 

1.0

%

44,976

 

4.6

%

Income tax provision

 

(3,395

)

(0.4

)%

(17,708

)

(1.8

)%

Net income

 

$

5,364

 

0.6

%

$

27,268

 

2.8

%

Net income attributable to noncontrolling interests

 

(54

)

%

(432

)

(0.1

)%

Net income attributable to Primoris

 

$

5,310

 

0.6

%

$

26,836

 

2.7

%

 

25



Table of Contents

 

Revenues

 

Revenues for the three and six months ended June 30, 2015 decreased by $31.7 million, or 6.2%, and $109.0 million, or 11.1%, respectively, compared to the same periods in 2014. The primary reason for the decrease was the impact of unusually severe wet weather during the six months of 2015, and especially in the second quarter. Rainfall statistics for the period April-June 2015 show the following:  for Lake Charles, LA, 26.8 inches, compared to a normal of 15.4 inches; for the Sugar Land, TX area, 33.4 inches compared to a normal of 13.0 inches; and for the Austin, TX area, 28.8 inches compared to a normal of 10.8 inches.

 

As a result of the heavy rainfall, the Company suspended operations on various projects and incurred additional costs to recover from the weather conditions. The rain affected the ability of our work crews from the JCG Infrastructure and Maintenance division and PES Industrial division to perform work on a large petrochemical project near Lake Charles, LA; from Rockford to perform work on a large capital pipeline project in the Sugar Land, TX area; and from the JCG Heavy Civil division to perform highway construction in the Belton, TX area.

 

From an end-market perspective, our end-market revenues during the second quarter of 2015 decreased by $21.0 million for underground capital projects and the industrial end-market revenues decreased by $92.1 million, as compared to the second quarter of 2014. Revenues increased for the second quarter 2015 in our heavy civil end-market by $39.1 million, in our underground utility end-market by $30.9 million, in the engineering end-market by $10.8 million and by $0.5 million in our other end-markets, as compared to the second quarter of 2014.

 

Gross Profit

 

For the three and six months ended June 30, 2015, gross profit decreased by $14.7 million, or 24.0%, and $26.5 million, or 23.8%, respectively, compared to the same periods in 2014, primarily due to the decrease in revenues and to inefficiencies associated with stopping and starting projects as a result of the weather delays. While there is no guaranty, some of the recovery and inefficiency costs due to the heavy rainfall may be recovered from the client in future periods. Gross profit as a percentage of revenue declined to 9.6% from 11.9% for the three months ended June 30, 2015 and from 11.3% to 9.6% for the six months ended June 30, 2015.

 

Selling, general and administrative expenses

 

Selling, general and administrative expenses (“SG&A”) increased $5.3 million, or 16.1%, for the three months ended June 30, 2015, compared to the same period in 2014. Of the increase, $1.1 million was from the acquisitions of Vadnais and Primoris AV. Legal costs increased $2.8 million primarily as a result of costs related to disputed receivables on two projects and 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.  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.  Additionally, SG&A expenses increased as a result of a valuation adjustment for the value of a long-term asset of $1.2 million which was recorded during the quarter. The remaining increases related to expenses associated with increased staffing levels during the quarter.

 

SG&A as a percentage of revenue for the three months ended June 30, 2015 increased to 8.0% compared to 6.4% for the corresponding period in 2014 as a result of increased expenses and the decrease in revenues for the quarter.

 

SG&A for the six months ended June 30, 2015, increased $9.4 million or 14.9%, compared to the same period in 2014.  Of the increase, $2.2 million was from the acquisitions of Vadnais and Primoris AV.  Legal costs increased $3.7 million as a result of costs related to disputed receivables on two projects and 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. A valuation adjustment for the value of a long-term asset of $1.2 million was recorded during the year, and the remaining increases related to expenses associated with increased staffing levels for the year.

 

SG&A as a percentage of revenue for the six months ended June 30, 2015 increased to 8.3% compared to 6.4% for the corresponding period in 2014 as a result of increased expenses and the decrease in revenues in 2015.

 

Other income and expense

 

Non-operating income and expense items for the three and six months ended June 30, 2015 and 2014 were as follows:

 

 

 

Three months ended June 30,

 

Six months ended June 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

 

 

(Thousands)

 

(Thousands)

 

Income from non-consolidated entities

 

$

 

$

 

$

 

$

14

 

Foreign exchange gain (loss)

 

(140

)

$

149

 

$

296

 

$

175

 

Other expense

 

(45

)

(327

)

(89

)

(441

)

Interest income

 

6

 

14

 

18

 

66

 

Interest expense

 

(1,738

)

$

(1,196

)

$

(3,660

)

$

(2,864

)

Total other income (expense)

 

$

1,917

 

$

(1,360

)

$

(3,435

)

$

(3,050

)

 

26



Table of Contents

 

For the three and six months ended June 30, 2015, foreign exchange gain or loss reflects currency exchange fluctuations of the United States dollar compared to the Canadian dollar.  Many of our contracts in Calgary, Canada are sold based on United States dollars, but a portion of the work is paid for with Canadian dollars creating a currency exchange difference.

 

Interest expense for the three and six months ended June 30, 2015 was $1.7 million and $3.7 million, respectively, compared to $1.2 million and $2.9 million for the same period in 2014.  The increase was due primarily to increased equipment debt financing.

 

Other expense represents the changes in the estimated fair value of the contingent earn-out liabilities.

 

Provision for income taxes

 

Our provision for income taxes decreased $8.3 million for the three months ended June 30, 2015 to $2.3 million compared to $10.6 million in the same period in 2014 primarily as a result of a reduction in income before taxes of $20.6 million.

 

Our provision for income taxes decreased $14.3 million for the six months ended June 30, 2015 to $3.4 million compared to $17.7 million in the same period in 2014 primarily as a result of a reduction in income before taxes of $36.2 million and a lower effective tax rate. The tax rate applied to income attributable to Primoris in the six months ended June 30, 2015 was 39.0%, compared to 39.8% for the same period in 2014. The 0.8% decrease in the effective tax rate resulted primarily from the variability of state taxes and the estimated reduction in hours to be worked which reduced the impact of the partial non-deductibility of 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 and six months ended June 30, 2015 and 2014 were as follows:

 

 

 

Three Months Ended June 30,

 

 

 

2015

 

2014

 

 

 

(Thousands)

 

% of
Revenue

 

(Thousands)

 

% of
Revenue

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

239,999

 

 

 

$

224,391

 

 

 

Gross profit

 

30,444

 

12.7

%

37,809

 

16.8

%

 

 

 

Six Months Ended June 30,

 

 

 

2015

 

2014

 

 

 

(Thousands)

 

% of
Revenue

 

(Thousands)

 

% of
Revenue

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

426,384

 

 

 

$

458,418

 

 

 

Gross profit

 

51,908

 

12.2

%

69,483

 

15.2

%

 

Revenue for the West segment increased by $15.6 million, or 7.0%, for the three months ended June 30, 2015, compared to the same period in 2014. Revenue increased by $27.0 million at Rockford, $9.7 million at Q3C, $6.1 million at the ARB Underground division and a combined $6.9 million at Vadnais and ARB Structures.  These increases were offset by a revenue decrease of $34.1 million at the ARB Industrial division, due primarily to the completion of two solar projects; one project, a solar plant in the Mojave Desert represented $19.7 million of the total decrease.

 

Revenue for the West segment decreased by $32 million, or 7.0%, for the six months ended June 30, 2015, compared to the same period in 2014. Revenues at the ARB Industrial division decreased by $98.5 million due primarily to the completion of two solar projects in 2014. One project, a solar plant in the Mojave Desert represented $79.5 million of the total decrease.  This large decrease was partially offset by increases of $40.0 million at Rockford, primarily from a large pipeline project, and increases of collectively $26.5 million contributed by Q3C, ARB Structures, Vadnais and the ARB Underground division.

 

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Table of Contents

 

Gross profit for the West segment decreased by $7.4 million, or 19.5%, during the three months ended June 30, 2015, compared to the same period in 2014. Primary components of the gross profit decrease were a decrease in gross profit of $3.4 million at Rockford reflecting the impact of the unusual wet weather in the second quarter of 2015 and a decrease at ARB of $1.7 million reflecting the lower combined revenue of the two divisions.  The Mojave solar project did not impact gross profit as it was recorded at zero gross margin in 2014.

 

Gross profit for the West segment decreased by $17.6 million, or 25.3%, during the six months ended June 30, 2015, compared to the same period in 2014. Decreases in gross profit were primarily at Rockford which decreased by $9.1 million reflecting both the adverse weather and completion of a close-out of a job in the first quarter of 2014; $5.2 million at Q3C reflecting weather related job shutdowns in the first quarter and $2.1 million at ARB reflecting the lower combined revenue of both divisions.  The Mojave solar project did not impact gross profit for the first six months as it was recorded at zero gross margin in 2014.

 

Gross profit as a percentage of revenue decreased to 12.7% during the three months ended June 30, 2015, from 16.8% in the same period in 2014 primarily as a result of the impact of the adverse weather at Rockford for which revenue increased and while gross profit decreased.

 

During the six months ended June 30, 2015, gross profit as a percentage of revenue decreased to 12.2% from 15.2% in the same period in 2014 primarily as a result of the decreased margins realized by Rockford.

 

East Segment

 

Revenue and gross profit for the East segment for the three and six months ended June 30, 2015 and 2014 were as follows:

 

 

 

Three Months Ended June 30,

 

 

 

2015

 

2014

 

 

 

(Thousands)

 

% of
Revenue

 

(Thousands)

 

% of
Revenue

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

154,887

 

 

 

$

118,554

 

 

 

Gross profit

 

9,115

 

5.9

%

8,727

 

7.4

%

 

 

 

Six Months Ended June 30,

 

 

 

2015

 

2014

 

 

 

(Thousands)

 

% of
Revenue

 

(Thousands)

 

% of
Revenue

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

278,587

 

 

 

$

225,524

 

 

 

Gross profit

 

18,223

 

6.5

%

15,485

 

6.9

%

 

East segment revenue increased by $36.3 million, or 30.6% for the three months ended June 30, 2015 compared to the same period in 2014.  JCG’s Infrastructure & Maintenance division revenue increased $42.5 million of which $39.2 million was from a large petrochemical project in Louisiana. Revenue at JCG’s Heavy Civil division decreased $3.3 million due primarily to a decrease to a TX DOT project of $1.8 million and due to completion of a project for a city in Texas resulting in a decrease of $8.9 million. These decreases were somewhat offset by Louisiana DOT revenue increases of $6.2 million to $16.2 million and the net of Arkansas and Mississippi transportation departments revenue increasing by $1.6 million. Revenue at Cardinal Contractors decreased $2.8 million mainly as a result of Texas projects nearing completion in 2015.

 

Revenue increased by $53.1 million, or 23.5% for the six months ended June 30, 2015 compared to the same period in 2014.  Revenue at the JCG Infrastructure & Maintenance division increased by $61.3 million aided by the large petrochemical project in Louisiana and increases in Florida work.  JCG’s Heavy Civil division revenue decreased by $5.1 million and increases of $11.4 million to $30.1 million from LA DOT projects were offset by a decrease of $2.9 million from Texas DOT to $87.5 million as other decreases at municipal projects. Revenue at Cardinal Contractors decreased $3.1 million as projects in Texas were nearing completion.

 

Gross Profit increased by $0.4 million, or 4.5% for the three months ended June 30, 2015 compared to the same period in 2014.  The gross profit increase at JCG’s Infrastructure & Maintenance division was $11.8 million due to the increased volume from a large petrochemical project in Louisiana. This increase was mostly offset by the $10.5 million gross profit decrease at JCG’s Heavy Civil division primarily related to the impact of weather delays on the TX DOT projects.

 

Gross profit increased by $2.7 million or 17.7% for the six months ended June 30, 2015. The gross profit increase at JCG’s Infrastructure and Maintenance division was $15.2 million as a result of increased revenues. This increase was partially offset by a decrease in JCG’s Heavy Civil division of $12.3 million, mainly related to the impact of the weather delays on the TX DOT projects.

 

28



Table of Contents

 

Gross profit as a percent of revenue decreased to 5.9% and 6.5% during the three and six months ended June 30, 2015, respectively, from 7.4% and 6.9% in the prior year periods, respectively, primarily as a result of decreased margins anticipated on the Texas Heavy Civil division jobs as a result of the delays associated with the adverse weather conditions in the second quarter of 2015.

 

Energy Segment

 

Revenue and gross profit for the Energy segment for the three and six months ended June 30, 2015 and 2014 were as follows:

 

 

 

Three Months Ended June 30,

 

 

 

2015

 

2014

 

 

 

(Thousands)

 

% of
Revenue

 

(Thousands)

 

% of
Revenue

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

88,659

 

 

 

$

172,346

 

 

 

Gross profit

 

6,937

 

7.8

%

14,658

 

8.5

%

 

 

 

Six Months Ended June 30,

 

 

 

2015

 

2014

 

 

 

(Thousands)

 

% of
Revenue

 

(Thousands)

 

% of
Revenue

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

171,354

 

 

 

$

301,423

 

 

 

Gross profit

 

14,370

 

8.4

%

25,983

 

8.6

%

 

Revenue for the Energy segment decreased by $83.7 million, or 48.6%, for the three months ended June 30, 2015, compared to the same period in 2014. The primary differences were reduced revenues of $52.1 million at the PES Industrial division and reduced revenues of $47.0 million at the PES Pipeline division.  For the Industrial division, the reduction included $51.8 million from completion of a fertilizer plant project in 2014, and the impact of the unusual rainy weather which limited revenues for their new chemical plant project in Louisiana to $3.8 million for the quarter.  For the Pipeline division, the revenue reduction from completion of a pipeline project in 2014 was $43.5 million; however, as a consequence of the uncertainties associated with the lower price of oil, the division has not been able to add a major capital pipeline project to its 2015 backlog. Revenues increased $10.8 million at OnQuest as increased revenue from a new LNG project in Florida helped offset a reduction in revenues from completion of an LNG project in Texas. Revenues for the companies acquired since June 30, 2014 were $10.4 million.

 

Revenue decreased by $130.1 million, or 43.2%, for the six months ended June 30, 2015, compared to the same period in 2014. The revenues were lower by $81.1 million at the PES Pipeline division, by $67.4 million at the PES Industrial division and by $15.2 million at the PES Saxon division. For the Industrial division, the reduction included $67.1 million from completion of a fertilizer plant project in 2014, and the impact of the unusual rainy weather which limited revenues for their new chemical plant project in Louisiana to $5.4 million for the six months. For the Pipeline division, the revenue reduction from completion of two pipeline project in 2014 was $87.6 million; of which one project represented $78.6 million. Revenues increased $19.7 million at OnQuest primarily from a new LNG project in Florida.  For the first six months of 2015, revenues from companies acquired after June 30, 2014 were $16.4 million.

 

Gross profit for the three months ended June 30, 2015 decreased by $7.7 million or 52.7%, compared to the same period in 2014. Gross profit at the PES Industrial division was reduced by $7.2 million as a result of decreased revenues and by $1.8 million at the PES Pipeline division as a result of reduced revenue, although the 2014 pipeline project that generated $43.5 million in the 2014 quarter was recorded at zero gross profit so it did not impact the change in gross profit. Gross profit at OnQuest was the same as the prior year as the new LNG project was still in the early phase of construction. Gross profit from companies acquired after June 30, 2014 was $1.2 million.

 

Gross profit for the six months ended June 30, 2015 decreased by $11.6 million or 44.7%, compared to the same period in 2014. Gross profit at the PES Industrial division was reduced by was reduced by $9.8 million as a result of decreased revenues and by $5.6 million at the PES Pipeline division at PES also primarily from the reduction in revenues as projects were completed in 2014. The pipeline project that generated revenues of $78.6 million was recorded at zero gross profit so it did not impact the change in gross profit. For OnQuest gross profit increased by $2.8 million due primarily to fees earned on a suspended project in the first quarter. Gross profit from companies acquired after June 30, 2014 was $1.5 million.

 

Gross profit as a percent of revenue decreased to 7.8% and 8.4% during the three and six months ended June 30, 2015, respectively, from 8.5% and 8.6 % in the prior year periods, respectively, as a result of the decrease in revenues which absorbed less of the indirect costs.

 

29



Table of Contents

 

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 such as 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 as of December 31, 2014 and June 30, 2015 and the changes in Fixed Backlog for the six months ended June 30, 2015 (in thousands) are as follows:

 

Segment

 

Beginning Fixed
Backlog at
December 31,
2014

 

Contract
Additions to
Fixed Backlog

 

Revenue
Recognized from
Fixed Backlog

 

Ending Fixed
Backlog
at June 30,
2015

 

Revenue
Recognized from
Non-Fixed Backlog
Projects

 

Total Revenue
for six months
ended June 30,
2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

West

 

$

237,349

 

$

564,868

 

$

223,431

 

$

578,786

 

$

202,953

 

$

426,384

 

East

 

1,009,645

 

193,760

 

273,074

 

930,331

 

5,513

 

278,587

 

Energy

 

300,961

 

109,162

 

151,817

 

258,306

 

19,537

 

171,354

 

Total

 

$

1,547,955

 

$

867,790

 

$

648,322

 

$

1,767,423

 

$

228,003

 

$

876,325

 

 

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 June 30, 2015, our total Fixed Backlog was $1.77 billion representing an increase of $219.5 million, or 14.2% from $1.55 billion as of December 31, 2014.  We expect that approximately 57% of the total Fixed Backlog at June 30, 2015, will be recognized as revenue over the next four quarters, with approximately $280 million expected for the West segment, $481 million for the East segment and $247 million for the Energy segment.

 

MSA Backlog

 

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

 

 

 

2015