Primoris Services Corporation
Primoris Services Corp (Form: 10-Q, Received: 11/08/2016 06:33:34)

Table of Contents  

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

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

 

For the quarterly period ended September 30, 2016

 

OR

 

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 ☒  No ☐

 

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  ☒ No ☐

 

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  ☒

    

Accelerated filer  ☐

 

 

 

Non-accelerated filer  ☐

 

Smaller reporting company  ☐

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 ☐  No ☒

 

At November 7, 2016, 51,784,242 shares of the registrant’s common stock, par value $0.0001 per share, were outstanding.

 

 

 

 


 

Table of Contents  

PRIMORIS SERVICES CORPORATION

 

INDEX

 

 

    

Page No.

 

 

 

Part I. Financial Information  

 

 

 

 

 

 

 

 

 

 

 

—Condensed Consolidated Balance Sheets at September 30, 2016 (Unaudited) and December 31, 2015  

 

 

 

 

—Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2016 and 2015 (Unaudited)  

 

 

 

 

— Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2016 and 2015 (Unaudited)  

 

 

 

 

—Notes to Condensed Consolidated Financial Statements (Unaudited)  

 

 

 

 

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

 

26 

 

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk  

 

41 

 

 

 

Item 4. Controls and Procedures  

 

42 

 

 

 

Part II. Other Information  

 

 

 

 

 

Item 1. Legal Proceedings  

 

43 

 

 

 

Item 1A. Risk Factors  

 

43 

 

 

 

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

 

43 

 

 

 

Item 3. Defaults Upon Senior Securities  

 

43 

 

 

 

Item 4. (Removed and Reserved)  

 

43 

 

 

 

Item 5. Other Information  

 

44 

 

 

 

Item 6. Exhibits  

 

45 

 

 

 

Signatures  

 

46 

 

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Table of Contents  

PART I.  FINANCIAL INFORMATIO N

 

ITEM 1.  FINANCIAL STATEMENT S

 

PRIMORIS SERVICES CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEET S

(In Thousands, Except Share Amounts)

 

 

 

 

 

 

 

 

 

 

 

September 30, 

 

 

December 31, 

 

 

    

2016

    

2015

 

ASSETS

 

 

(Unaudited)

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

148,667

 

$

161,122

 

Customer retention deposits and restricted cash

 

 

3,049

 

 

2,598

 

Accounts receivable, net

 

 

293,495

 

 

320,588

 

Costs and estimated earnings in excess of billings

 

 

156,391

 

 

116,455

 

Inventory and uninstalled contract materials

 

 

55,294

 

 

67,796

 

Prepaid expenses and other current assets

 

 

16,965

 

 

18,265

 

Total current assets

 

 

673,861

 

 

686,824

 

Property and equipment, net

 

 

286,886

 

 

283,545

 

Deferred tax asset - long-term

 

 

1,075

 

 

1,075

 

Intangible assets, net

 

 

31,423

 

 

36,438

 

Goodwill

 

 

123,445

 

 

124,161

 

Other long-term assets

 

 

2,174

 

 

211

 

Total assets

 

$

1,118,864

 

$

1,132,254

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

 

$

134,486

 

$

124,450

 

Billings in excess of costs and estimated earnings

 

 

98,291

 

 

139,875

 

Accrued expenses and other current liabilities

 

 

111,473

 

 

93,596

 

Dividends payable

 

 

2,848

 

 

2,842

 

Current portion of capital leases

 

 

353

 

 

974

 

Current portion of long-term debt

 

 

53,632

 

 

54,436

 

Total current liabilities

 

 

401,083

 

 

416,173

 

Long-term capital leases, net of current portion

 

 

17

 

 

22

 

Long-term debt, net of current portion

 

 

213,790

 

 

219,853

 

Other long-term liabilities

 

 

12,790

 

 

12,741

 

Total liabilities

 

 

627,680

 

 

648,789

 

Commitments and contingencies

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

 

 

Common stock—$.0001 par value; 90,000,000 shares authorized; 51,784,242 and 51,676,140 issued and outstanding at September 30, 2016 and December 31, 2015

 

 

5

 

 

5

 

Additional paid-in capital

 

 

166,662

 

 

163,344

 

Retained earnings

 

 

323,594

 

 

319,899

 

Non-controlling interest

 

 

923

 

 

217

 

Total stockholders’ equity

 

 

491,184

 

 

483,465

 

Total liabilities and stockholders’ equity

 

$

1,118,864

 

$

1,132,254

 

 

See Accompanying Notes to Condensed Consolidated Financial Statements

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PRIMORIS SERVICES CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOM E

(In Thousands, Except Per Share Amounts)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30, 

 

September 30, 

 

 

    

2016

    

2015

    

2016

    

2015

 

Revenues

 

$

507,828

 

$

555,945

 

$

1,395,085

 

$

1,432,270

 

Cost of revenues

 

 

457,699

 

 

484,298

 

 

1,262,394

 

 

1,276,122

 

Gross profit

 

 

50,129

 

 

71,647

 

 

132,691

 

 

156,148

 

Selling, general and administrative expenses

 

 

35,994

 

 

38,545

 

 

101,150

 

 

110,852

 

Impairment of goodwill

 

 

2,716

 

 

 —

 

 

2,716

 

 

 —

 

Operating income

 

 

11,419

 

 

33,102

 

 

28,825

 

 

45,296

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange gain (loss)

 

 

(92)

 

 

(721)

 

 

288

 

 

(425)

 

Other income (expense)

 

 

(278)

 

 

361

 

 

(278)

 

 

272

 

Interest income

 

 

31

 

 

4

 

 

122

 

 

22

 

Interest expense

 

 

(2,246)

 

 

(1,903)

 

 

(6,754)

 

 

(5,563)

 

Income before provision for income taxes

 

 

8,834

 

 

30,843

 

 

22,203

 

 

39,602

 

Provision for income taxes

 

 

(4,078)

 

 

(11,764)

 

 

(9,244)

 

 

(15,159)

 

Net income

 

$

4,756

 

$

19,079

 

$

12,959

 

$

24,443

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less net income attributable to noncontrolling interests

 

 

(252)

 

 

(72)

 

$

(706)

 

 

(126)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to Primoris

 

$

4,504

 

$

19,007

 

$

12,253

 

$

24,317

 

Earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.09

 

$

0.37

 

$

0.24

 

$

0.47

 

Diluted

 

$

0.09

 

$

0.37

 

$

0.24

 

$

0.47

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

51,780

 

 

51,672

 

 

51,759

 

 

51,637

 

Diluted

 

 

52,034

 

 

51,824

 

 

51,978

 

 

51,789

 

 

See Accompanying Notes to Condensed Consolidated Financial Statements

 

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PRIMORIS SERVICES CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW S

(In Thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

September 30, 

 

 

    

2016

    

2015

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net income

 

$

12,959

 

$

24,443

 

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

 

 

 

 

 

 

 

Depreciation

 

 

46,430

 

 

43,452

 

Amortization of intangible assets

 

 

5,015

 

 

5,082

 

Impairment of goodwill

 

 

2,716

 

 

 —

 

Gain on sale of property and equipment

 

 

(3,361)

 

 

(901)

 

Stock-based compensation expense

 

 

1,169

 

 

787

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

Customer retention deposits and restricted cash

 

 

(451)

 

 

(1,583)

 

Accounts receivable

 

 

27,093

 

 

(45,968)

 

Costs and estimated earnings in excess of billings

 

 

(39,936)

 

 

(47,561)

 

Other current assets

 

 

13,865

 

 

(5,453)

 

Accounts payable

 

 

10,036

 

 

4,669

 

Billings in excess of costs and estimated earnings

 

 

(41,584)

 

 

(14,657)

 

Contingent earnout liabilities

 

 

 —

 

 

(5,271)

 

Accrued expenses and other current liabilities

 

 

18,580

 

 

31,712

 

Other long-term assets

 

 

(1,963)

 

 

(2,385)

 

Other long-term liabilities

 

 

49

 

 

(3,067)

 

Net cash provided by (used in) operating activities

 

 

50,617

 

 

(16,701)

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Purchase of property and equipment

 

 

(52,137)

 

 

(52,440)

 

Proceeds from sale of property and equipment

 

 

7,763

 

 

6,139

 

Sale of short-term investments

 

 

 —

 

 

30,992

 

Cash paid for acquisitions

 

 

(4,108)

 

 

(22,302)

 

Net cash used in investing activities

 

 

(48,482)

 

 

(37,611)

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Proceeds from issuance of long-term debt

 

 

30,000

 

 

42,328

 

Repayment of capital leases

 

 

(626)

 

 

(1,086)

 

Repayment of long-term debt

 

 

(36,867)

 

 

(31,597)

 

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

 

 

1,439

 

 

1,621

 

Dividends paid

 

 

(8,536)

 

 

(6,966)

 

Cash distribution to non-controlling interest holder

 

 

 —

 

 

(29)

 

Net cash provided by (used in) financing activities

 

 

(14,590)

 

 

4,271

 

Net change in cash and cash equivalents

 

 

(12,455)

 

 

(50,041)

 

Cash and cash equivalents at beginning of the period

 

 

161,122

 

 

139,465

 

Cash and cash equivalents at end of the period

 

$

148,667

 

$

89,424

 

 

See Accompanying Notes to Condensed Consolidated Financial Statements

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SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 

 

 

    

2016

    

2015

 

 

 

(Unaudited)

 

Cash paid during the year for:

 

 

 

 

 

 

 

Interest

 

$

6,654

 

$

5,652

 

 

 

 

 

 

 

 

 

Income taxes, net of refunds received

 

$

2,079

 

$

10,527

 

 

SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 

 

 

    

2016

    

2015

 

 

 

(Unaudited)

 

 

 

 

 

 

 

 

 

Dividends declared and not yet paid

 

$

2,848

 

$

2,842

 

 

See Accompanying Notes to Condensed Consolidated Financial Statements

 

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PRIMORIS SERVICES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENT S

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

(Unaudited)

 

Note 1—Nature of Business

 

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

 

Reportable Segments — As discussed in Note 19 — “Reportable Segments”, the Company segregates its business into three reporting segments: the West Construction Services segment (“West segment”), the East Construction Services segment (“East segment”) and the Energy segment (“Energy segment”). 

 

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

 

 

 

 

 

Subsidiary

    

Reportable Segment

 

ARB, Inc. (“ARB”)

 

West

 

ARB Structures, Inc.

 

West

 

Q3 Contracting, Inc. (“Q3C”)

 

West

 

Rockford Corporation (“Rockford”)

 

West

 

Vadnais Trenchless Services, Inc. (“Vadnais”)

 

West

 

Cardinal Contractors, Inc.

 

East

 

BW Primoris, LLC (“BWP”)

 

East

 

James Construction Group, LLC (“JCG”):

 

East

 

JCG Heavy Civil Division

 

East

 

JCG Infrastructure and Maintenance Division

 

East

 

Primoris Energy Services Corporation (“PES”)

 

Energy

 

PES Pipeline Services

 

Energy

 

PES Industrial Division

 

Energy

 

OnQuest, Inc.

 

Energy

 

  OnQuest Canada, ULC

 

Energy

 

Primoris Aevenia, Inc. (“Aevenia”); acquired February 28, 2015

 

Energy

 

 

The Company owned 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 have been included as part of the West segment. The project has been completed, the project warranty expired in May 2015 and dissolution of the joint venture was completed in the third quarter 2015.

 

The Company owns a 50% interest in two separate joint ventures, both formed in 2015 to engineer and construct gas-fired power generation facilities:  Carlsbad Power Constructors joint venture (“Carlsbad”) and ARB Inc. & B&M Engineering Co. joint venture (“Wilmington”). Both projects are located in the Southern California area and both are expected to be completed in 2018. The joint venture operations are included as part of the West segment. As a result of determining that the Company is the primary beneficiary of the two variable interest entities (“VIE’s”), the results of the Carlsbad and Wilmington joint ventures are consolidated in the Company’s financial statements. Financial information for the joint ventures is presented in Note 11— “Noncontrolling Interests”.

 

On February 28, 2015, the Company acquired the net assets of Aevenia, Inc. for $22.3 million in cash, and established a new entity, Primoris Aevenia, Inc. (“Aevenia”), which operates as part of the Company’s Energy segment.  Aevenia is an energy and electrical construction company that specializes in overhead and underground line work, substations, telecom/fiber, and certain other client-specific on-demand call out services. The majority of their work is delivered under unit-price Master Services Agreements (“MSAs”). Aevenia has operations in Minnesota, North Dakota,

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South Dakota and Iowa.  On January 29, 2016, the Company acquired the net assets of Mueller Concrete Construction Company (“Mueller”) for $4.1 million. Mueller operates as a division of Aevenia.  See Note 7 — “Business Combinations”.

 

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 nine month periods ended September 30, 2016 and 2015 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 February 29, 2016, which contains the Company’s audited consolidated financial statements for the year ended December 31, 2015, have been omitted. 

 

This Third Quarter 2016 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 contract values, estimated cost at completion 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 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.

 

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.  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

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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, 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 current liabilities amount on the balance sheet. For fixed price contracts, 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 or project milestone, (b)  amounts arising from routine lags in billing, or (c) 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 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 used 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 comprises the top ten customers varies from year to year.

 

During the three and nine months ended September 30, 2016, revenues generated by the top ten customers were approximately $272 million and $805 million, respectively, which represented 53.5% and 57.7%, respectively, of total revenues during the periods. During these respective periods, a Louisiana petrochemical project represented 10.3% and 11.6% of total revenues, respectively, and the Texas Department of Transportation (“TX DOT”) represented 7.9% and 10.4% of total revenues, respectively.

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During the three and nine months ended September 30, 2015, revenues generated by the top ten customers were approximately $325 million and $848 million, respectively, which represented 58.5% and 59.2%, respectively, of total revenues during the periods. During these periods, a large pipeline operator represented 6.7% and 10.3% of total revenues and TX DOT represented 9.9% and 10.0% of total revenues, respectively.

 

At September 30, 2016, approximately 15.4% of the Company’s accounts receivable were due from one customer, and that customer provided 11.6% of the Company’s revenues for the nine months ended September 30, 2016. In addition, of total accounts receivable, approximately 11.2% are currently in dispute resolution. See Note 18 – “ Commitments and Contingencies ”.

 

At September 30, 2015, approximately 6.6% of the Company’s accounts receivable were due from one customer, and that customer provided 7.9% of the Company’s revenues for the nine months ended September 30, 2015. In addition, approximately 13.2% of total accounts receivable at September 30, 2015 were 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 Generally Accepted Accounting Principles (“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.

 

Deferred tax classification on the statement of financial position —  Deferred tax assets and liabilities are classified as non-current in a statement of financial position, reflecting a recent change required by ASU 2015-17 “Balance Sheet Classification of Deferred Taxes” adopted by the Company at December 31, 2015. This change eliminates the need to analyze temporary differences to determine if deferred taxes should be reported as current or noncurrent. Past practice did not typically align with the time period in which deferred taxes were expected to be recovered or settled. For this reason, effective December 31, 2015 the Company classified all deferred tax assets and liabilities as a net non-current deferred tax asset.

 

Note 3—Recent Accounting Pronouncements

 

In May 2014, the FASB issued ASU No. 2014-09, “ Revenue from Contracts with Customers (Topic 606)” , which has also had several clarifying updates issued during 2016. The new standard is effective for reporting periods beginning after December 15, 2017 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 will 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, the “full retrospective method” that requires restatement of prior years and the “modified retrospective method” that requires prospective application of the new standard as a cumulative-effect adjustment as of the date of adoption.  The Company is currently evaluating the impact of adopting the ASU on the Company’s financial position, results of operations, cash flows and related disclosures.  The Company expects to adopt this new standard using the modified retrospective method that will result in a cumulative-effect adjustment as of the date of adoption.

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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.  The Company will adopt this guidance effective January 1, 2017.

 

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. As of January 1, 2016, the Company adopted this ASU, which did not have a material impact on the Company’s consolidated financial statements.

 

In February 2016, the FASB issued ASU 2016-02 “ Leases (Topic 842) ”. The ASU will require recognition of operating leases with lease terms of more than twelve months on the balance sheet as both assets for the rights and liabilities for the obligations created by the leases. The ASU will require disclosures that provide qualitative and quantitative information for the lease assets and liabilities recorded in the financial statements. The guidance is effective for fiscal years beginning after December 15, 2018. The Company will establish procedures to adopt the ASU.

 

In March 2016, the FASB issued ASU 2016-09 “Compensation — Stock Compensation (Topic 718) — Improvements to Employee Share-Based Payment Accounting” . The ASU modifies the accounting for excess tax benefits and tax deficiencies associated with share-based payments by requiring that excess tax benefits or deficiencies be included in the income statement rather than in equity.  Additionally, the tax benefits for dividends on share-based payment awards will also be reflected in the income statement. As a result of these modifications, the ASU requires that the tax-related cash flows resulting from share-based payments will be shown on the cash flow statement as operating activities rather than as financing activities. This guidance is effective for annual periods beginning after December 15, 2016, with early adoption permitted. Adoption of this ASU is not expected to have a material effect on the Company’s consolidated financial statements.

 

Note 4—Fair Value Measurements

 

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

 

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

 

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The following table presents, for each of the fair value hierarchy levels identified under ASC Topic 820, the Company’s financial assets and liabilities that are required to be measured at fair value at September 30, 2016 and December 31, 2015:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements at Reporting Date

 

 

    

 

 

    

 

 

    

Significant

    

 

 

 

 

 

Amount

 

Quoted Prices

 

Other

 

Significant

 

 

 

Recorded

 

in Active Markets

 

Observable

 

Unobservable

 

 

 

on Balance

 

for Identical Assets

 

Inputs

 

Inputs

 

 

 

Sheet

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Assets as of September 30, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

148,667

 

$

148,667

 

 —

 

 

 —

 

Goodwill

 

$

123,445

 

$

 —

 

 —

 

$

123,445

 

Liabilities as of September 30, 2016: 

 

 

 

 

 

 

 

 

 

 

 

 

    None

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets as of December 31, 2015:

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

161,122

 

$

161,122

 

 —

 

 

 —

 

Goodwill

 

$

126,161

 

$

 —

 

 —

 

$

126,161

 

Liabilities as of December 31, 2015: 

 

 

 

 

 

 

 

 

 

 

 

 

    None

 

 

 

 

 

 

 

 

 

 

 

 

 

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.

 

As discussed in Note 8 — “ Goodwill and Intangible Assets ”, during the third quarter 2016, the Company recorded a goodwill impairment operating charge of $2,716 as a result of the Company’s plan to divest the Texas heavy civil business unit.  The impairment is a Level 3 adjustment, since it is valued based on significant unobservable inputs, which are based primarily on discounted cash flow estimates for the JCG reporting unit.

 

Other than the impairment of goodwill and the remaining goodwill balances, there were no other Level 3 amounts as of September 30, 2016 and December 31, 2015; however, the following table provides changes to the Company’s contingent consideration liability Level 3 fair value measurements during the nine months ended September 30, 2016 and 2015:

 

 

 

 

 

 

 

 

 

 

 

Significant Unobservable Inputs

 

 

 

(Level 3)

 

 

    

2016

    

2015

 

Contingent Consideration Liability

 

 

 

 

 

 

 

Beginning balance, January 1, 2016 and 2015

 

$

 —

 

$

6,922

 

Additions to contingent consideration liability:

 

 

 

 

 

 

 

Change in fair value of contingent consideration liability during year

 

 

 —

 

 

125

 

Reductions in the contingent consideration liability:

 

 

 

 

 

 

 

Payment to Q3C sellers for meeting performance targets

 

 

 —

 

 

(5,000)

 

Reduction due to non-attainment of performance target – Ram Fab and Vadnais

 

 

 —

 

 

(596)

 

Ending balance, September 30, 2016 and 2015

 

$

 —

 

$

1,451

 

 

During each quarter in 2015, the Company assessed the estimated fair value of the contractual obligation to pay the contingent consideration and any changes in estimated fair value were recorded as other non-operating expense or income in the Company’s statement of income for that period.  Fluctuations in the fair value of contingent consideration were 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.

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Note 5—Accounts Receivable

 

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

 

 

 

 

 

 

 

 

 

 

    

September 30, 

    

December 31, 

 

 

 

2016

 

2015

 

Contracts receivable, net of allowance for doubtful accounts of $490 at September 30, 2016 and $480 at December 31, 2015, respectively

 

$

259,561

 

$

288,300

 

Retention receivable

 

 

32,878

 

 

31,396

 

 

 

 

292,439

 

 

319,696

 

Other accounts receivable

 

 

1,056

 

 

892

 

 

 

$

293,495

 

$

320,588

 

 

 

Note 6—Costs and Estimated Earnings on Uncompleted Contracts

 

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

 

 

 

 

 

 

 

 

 

 

    

September 30, 

    

December 31, 

 

 

 

2016

 

2015

 

Costs incurred on uncompleted contracts

 

$

4,833,755

 

$

5,413,224

 

Gross profit recognized

 

 

395,630

 

 

625,280

 

 

 

 

5,229,385

 

 

6,038,504

 

Less: billings to date

 

 

(5,171,285)

 

 

(6,061,924)

 

 

 

$

58,100

 

$

(23,420)

 

 

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

 

 

 

 

 

 

 

 

 

 

 

    

September 30, 

    

December 31, 

 

 

 

2016

 

2015

 

Costs and estimated earnings in excess of billings

 

$

156,391

 

$

116,455

 

Billings in excess of cost and estimated earnings

 

 

(98,291)

 

 

(139,875)

 

 

 

$

58,100

 

$

(23,420)

 

 

 

Note 7 — Business Combinations

 

On February 28, 2015, the Company acquired the net assets of Aevenia, Inc. for $22.3 million in cash, and established a new entity, Primoris Aevenia, Inc. (“Aevenia”).  The acquisition provides electrical construction expertise for the Company and provides a greater presence and convenient access to the central plains area of the United States.  The purchases were accounted for using the acquisition method of accounting. The assets were purchased for their estimated fair value and included current assets, current liabilities, plant and equipment, intangible assets and goodwill.

 

On January 29, 2016, the Company’s subsidiary, Aevenia, acquired certain assets and liabilities of Mueller Concrete Construction Company ("Mueller") for $4.1 million. The purchase was accounted for using the acquisition method of accounting.  During the second quarter of 2016, the Company finalized its estimate of fair value of the acquired assets of Mueller, which included $2.0 million of fixed assets, $2.0 million of goodwill and $0.1 million of inventory. Mueller operates as a division of Aevenia.  Goodwill largely consists of expected benefits from providing foundation expertise for Aevenia’s construction efforts in underground line work, substations and telecom/fiber.  Goodwill also includes the value of the assembled workforce that the Mueller acquisition provides to the Aevenia business.  Based on the current tax treatment, goodwill and other intangible assets will be deductible for income tax purposes over a fifteen-year period.

 

On June 24, 2016, the Company’s subsidiary, Vadnais, purchased property, plant and equipment from Pipe Jacking Unlimited, Inc., consisting of specialty directional drilling and tunneling equipment for $13.4 million in cash. The Company determined this purchase did not meet the definition of a business as defined under ASC 805. The estimated fair value of the equipment was equal to the purchase price.  The Company believes the purchase of the equipment will aid in the Company’s pipeline construction projects and enhance the work provided to our utility clients.

 

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Supplemental Unaudited Pro Forma Information for the three and nine months ended September 30, 2016 and 2015

 

The following pro forma information for the three and nine months ended September 30, 2016 and 2015 presents the results of operations of the Company as if the 2016 Mueller acquisition and the 2015 Aevenia acquisition had occurred at the beginning of 2015. 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; and

 

·

the pro forma tax effect of both the income before income taxes and the pro forma adjustments, calculated using a tax rate of 40.0% for the three and nine months ended September 30, 2016 and the same period in 2015.

 

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, 2015.  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 Mueller or Aevenia acquisition.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 

 

Nine Months Ended September 30, 

 

 

 

2016

    

2015

    

2016

    

2015

 

 

 

(unaudited)

 

(unaudited)

 

(unaudited)

 

(unaudited)

 

Revenues

 

$

507,828

 

$

557,020

 

$

1,395,443

 

$

1,438,493

 

Income before provision for income taxes

 

$

8,834

 

$

30,903

 

$

22,274

 

$

38,539

 

Net income attributable to Primoris

 

$

4,504

 

$

19,043

 

$

12,297

 

$

23,669

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

51,780

 

 

51,672

 

 

51,759

 

 

51,637

 

Diluted

 

 

52,034

 

 

51,824

 

 

51,978

 

 

51,789

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.09

 

$

0.37

 

$

0.24

 

$

0.46

 

Diluted

 

$

0.09

 

$

0.37

 

$

0.24

 

$

0.46

 

 

 

Note 8—Goodwill and Intangible Assets

 

Goodwill was recorded as follows:

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

September 30, 

    

December 31,

 

Reporting Unit

 

Segment

 

2016

 

2015

 

Rockford

 

West

 

$

32,079

 

$

32,079

 

Q3C

 

West

 

 

13,160

 

 

13,160

 

JCG

 

East

 

 

40,150

 

 

42,866

 

PES

 

Energy

 

 

28,463

 

 

28,463

 

OnQuest Canada, ULC

 

Energy

 

 

2,441

 

 

2,441

 

Aevenia

 

Energy

 

 

7,152

 

 

5,152

 

 

 

 

 

 

 

 

 

 

 

Total Goodwill

 

 

 

$

123,445

 

$

124,161

 

 

As discussed in Note 20 — “ Planned Divestiture of Texas Heavy Civil Business Unit ”, during the third quarter 2016, the Company made a decision to divest its Texas heavy civil business unit, a division of JCG within the East Construction Services segment.  The Company will continue to operate the division while actively seeking a buyer.  In accordance with the provisions of ASC 350, the planned divestiture required a valuation of the goodwill recorded on the JCG books.  The analysis of goodwill in the JCG reporting unit resulted in a pretax, non-cash goodwill impairment charge of approximately $2.7 million.

 

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At September 30, 2016 and December 31, 2015, intangible assets totaled $31,423 and $36,438, respectively, net of amortization.  The table below summarizes the intangible asset categories, amounts and the average amortization periods, which are on a straight-line basis, as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization

 

September 30, 

 

December 31, 

 

 

    

Period

    

2016

    

2015

 

Tradename

 

3 to 10 years

 

$

12,518

 

$

15,019

 

Non-compete agreements

 

2 to 5 years

 

 

1,054

 

 

1,424

 

Customer relationships

 

3 to 15 years

 

 

17,851

 

 

19,995

 

 

 

 

 

$

31,423

 

$

36,438

 

 

Amortization expense of intangible assets was $1,766 and $1,712 for the three months ended September 30, 2016 and 2015, respectively, and amortization expense for the nine months ended September 30, 2016 and 2015 was $5,015 and $5,082, respectively. Estimated future amortization expense for intangible assets is as follows:

 

 

 

 

 

 

 

    

Estimated

 

 

 

Intangible

 

For the Years Ending

 

Amortization

 

December 31, 

 

Expense

 

2016 (remaining three months)

 

$

1,607

 

2017

 

 

6,165

 

2018

 

 

5,719

 

2019

 

 

5,511

 

2020

 

 

3,112

 

Thereafter

 

 

9,309

 

 

 

$

31,423

 

 

 

Note 9—Accounts Payable and Accrued Liabilities

 

At September 30, 2016 and December 31, 2015, accounts payable amounted to $134,486 and $124,450, respectively.  These balances included retention amounts for the same periods of approximately $9,919 and $8,375, respectively.  The retention 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:

 

 

 

 

 

 

 

 

 

 

    

September 30, 

    

December 31, 

 

 

 

2016

 

2015

 

Payroll and related employee benefits

 

$

36,499

 

$

33,358

 

Insurance, including self-insurance reserves

 

 

46,003

 

 

44,695

 

Reserve for estimated losses on uncompleted contracts

 

 

15,487

 

 

7,261

 

Corporate income taxes and other taxes

 

 

6,097

 

 

2,447

 

Accrued administrative cost

 

 

2,975

 

 

1,415

 

Other

 

 

4,412

 

 

4,420

 

 

 

$

111,473

 

$

93,596

 

 

 

Note 10—Credit Arrangements

 

Long-term debt and credit facilities consist of the following:

 

Commercial Notes Payable and Mortgage Notes Payable

 

From time to time, the Company enters into commercial equipment notes payable with various equipment finance companies and banks. Interest rates range from 1.78% to 3.51% per annum and maturity dates range from November 30, 2016 to September 24, 2021. The notes are secured by certain construction equipment of the Company.

 

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The Company also entered into two secured mortgage notes payable to a bank in December 2015, with interest rates of 4.3% per annum and maturity dates of January 1, 2031. The mortgage notes are secured by two buildings.

 

Revolving Credit Facility

 

As of September 30, 2016, 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 agreed 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 $17,118 at September 30, 2016 and $12,105 at December 31, 2015.  Other than commercial letters of credit, there were no borrowings under this line of credit during the nine months ended September 30, 2016, and available borrowing capacity at September 30, 2016 was $107,882.

 

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 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.

 

On November 9, 2015, the Company drew $25 million available under the Additional Senior Notes Agreement. The notes are due November 9, 2025 and bear interest at an annual rate of 4.6%, paid quarterly in arrears. Seven annual principal payments of $3.6 million are required from November 9, 2019, with a final payment due on November 9, 2025.

 

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

 

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

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The Company was in compliance with the covenants for the Credit Agreement and Notes Agreement at September 30, 2016.

 

Canadian Credit Facility

 

The Company has a demand 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 September 30, 2016 and December 31, 2015, letters of credit outstanding totaled $1,624 and $2,179 in Canadian dollars, respectively.  At September 30, 2016, the available borrowing capacity was $6,376 in Canadian dollars.  The credit facility contains a working capital restrictive covenant for our Canadian subsidiary, OnQuest Canada, ULC.  At September 30, 2016, OnQuest Canada, ULC was in compliance with the covenant.

 

 

Note 11 — Noncontrolling Interests

 

The Company owns a 50% interest in two separate joint ventures, each of which has been determined to be a variable interest entity (“VIE”), and the Company was determined to be the primary beneficiary in each as a result of its significant influence over the joint venture operations.

 

Each joint venture is a partnership, and consequently, no tax effect was recognized for the income attributable to the noncontrolling interests. The net assets of the joint ventures are restricted for use by the specific project and are not available for general operations of the Company.

 

The Carlsbad joint venture operating activities began in September 2015 and are included in the Company’s consolidated statements of income as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Three Months Ended

 

Nine Months Ended

 

 

 

September 30, 

 

September 30, 

 

 

 

2016

    

2015

    

2016

    

2015

 

Revenues

 

$

608

 

$

1,020

 

$

7,276

 

$

1,020

 

Net income attributable to noncontrolling interests

 

 

367

 

 

67

 

 

653

 

 

67

 

 

The Carlsbad joint venture made no distributions to the partners and the Company made no capital contributions to the Carlsbad joint venture during the nine months ending September 30, 2016. The project is expected to be completed in 2018.

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

 

 

 

 

 

 

 

 

 

 

    

September 30, 

    

December 31, 

 

 

 

2016

 

2015

 

 

 

 

 

 

 

 

 

Cash

 

$

4,631

 

$

1,952

 

Accounts receivable

 

$

 

$

955

 

Costs and estimated earnings in excess of billings

 

$

124

 

$

 

Current liabilities

 

$

3,757

 

$

2,562

 

 

The Wilmington joint venture operating activities began in October 2015 and are included in the Company's consolidated statements of income as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Three months ended 

 

Nine months ended

 

 

 

September 30, 

 

September 30, 

 

 

 

2016

    

2015

    

2016

    

2015

 

Revenues

 

$

6,140

 

$

 —

 

$

11,057

 

$

 —

 

Net income attributable to noncontrolling interests

 

 

590

 

 

 —

 

 

758

 

 

 —

 

 

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The Wilmington joint venture made no distributions to the partners and the Company made no capital contributions to the Wilmington joint venture during the nine months ending September 30, 2016. The project is expected to be completed in 2018.

 

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

 

 

 

 

 

 

 

 

 

 

    

September 30, 

    

December 31, 

 

 

 

2016

 

2015

 

 

 

 

 

 

 

 

 

Cash

 

$

4,667

 

$

2,339

 

Accounts receivable

 

$

1,435

 

$

2,003

 

Current liabilities

 

$

5,249

 

$

4,247

 

 

 

Note 12 — Contingent Earnout Liabilities

 

In March 2015, the Company paid $5,000 to the sellers of Q3C based on achievement of an operating performance target for the 2014 calendar year, as outlined in the purchase agreement.

 

The June 2014 acquisition of Vadnais Company included an earnout of $900, with $450 payable in September 2015 and $450 payable in September 2016, contingent upon meeting a certain performance targets for each of the two periods. The estimated fair value of the contingent consideration on the acquisition date was $679. In September 2015, the Company determined that the operations of Vadnais did not meet the September 2015 performance targets. As a result, the contingent consideration balance of $396 was credited to non-operating income at September 30, 2015. In December 2015, the Company determined that the September 2016 target was not likely to be achieved, and the remaining balance of $368 was credited to non-operating income.

 

The purchase of Surber in July 2014 provided a contingent earnout amount of up to $1.4 million that could be earned during the period 2014 through 2016. The estimated fair value for the contingent earnout was $1.0 million on the acquisition date. In the fourth quarter 2015, the seller and the Company agreed that none of the targets for the Surber operations were likely to be achieved, and the remaining balance of $1,083 was credited to non-operating income.

 

The August 2014 purchase of Ram-Fab provided for a contingent earnout amount of $0.2 million which could be earned 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 in June 2015 and the value of intangible assets of the acquisition was reduced by the same amount.

 

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 nine months ended September 30, 2016 and 2015, the Company paid $635 and $621, respectively, in lease payments to SIGI for the use of these properties.

 

Primoris leases a property from Roger Newnham, a former owner and current employee of our subsidiary, OnQuest Canada, ULC. The property is located in Calgary, Canada. During the nine months ended September 30, 2016 and 2015, Primoris paid $190 and $193, respectively, in lease payments.  The current term of the lease is through December 31, 2017.

 

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Primoris leased a property from Lemmie Rockford, one of the Rockford sellers, which commenced November 1, 2011.  The property is located in Toledo, Washington.  During the nine months ended September 30, 2016 and 2015, Primoris paid $23 and $68, respectively, in lease payments.  The lease terminated on March 31, 2016.

 

Primoris leases a property from Quality RE Partners, owned by three of the Q3C selling shareholders, of whom one is a current employee, Jay Osborn, an operations president in the West segment. The property is located in Little Canada, Minnesota.  During the nine months ended September 30, 2016 and 2015, the Company paid $198 in both periods in lease payments to Quality RE Partners.  The lease expires in October 2022.

 

Primoris leases certain equipment and property from the sellers of the Mueller acquisition, on a month-to-month basis. The property is located in Iowa. During the nine months ended September 30, 2016, the Company paid $18 in lease payments to the sellers.

 

Note 14—Stock-Based Compensation

 

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

 

The Company’s Board of Directors has granted 249,065 Restricted Stock Units (“Units”) to executives under the Equity Plan.  The grants were documented in RSU Award Agreements which provide for a vesting schedule and require continuing employment of the executive.  The Units are subject to earlier acceleration, termination, cancellation or forfeiture as provided in the underlying RSU Award Agreement. 

 

At September 30, 2016, a total of 99,256 Units were vested.  The vesting schedule for the remaining Units follows:

 

 

 

 

 

 

 

Number of

 

 

 

Units

 

For the Years Ending December 31,

 

to Vest

 

2016 (remaining three months)

 

 —

 

2017

 

74,394

 

2018

 

25,138

 

2019

 

48,219

 

2020

 

2,058

 

 

 

149,809

 

 

Under guidance of ASC Topic 718 “ Compensation — Stock Compensation ”, stock-based compensation cost is measured at the date of grant, 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 both the nine months ended September 30, 2016 and 2015, the Company recognized $1,169 and $787, respectively, in compensation expense.  At September 30, 2016, approximately $2.6 million of unrecognized compensation expense remains for the Units, which will be recognized over the next 3.5 years through April 1, 2020.

 

Vested Units accrue “Dividend Equivalent Units” (as defined in the Equity Plan) which will be accrued as additional Units.  At September 30, 2016, a total of 1,450 Dividend Equivalent Units were accrued.

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Note 15—Income Taxes

 

The Company determines its best current estimate of the annual effective tax rate using expected pre-tax earnings, statutory tax rates, and available tax planning opportunities. 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.

 

The effective tax rate on income including noncontrolling interests for the nine months ended September 30, 2016 was 42.1%. The effective tax rate on income attributable to Primoris (excluding noncontrolling interests) was 43.0%.  The rates differ from the U.S. federal statutory rate of 35% primarily due to state income taxes, the Domestic Production Activity Deduction, and partially nondeductible meals and incidental per diem expenses common to the construction industry.

 

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 generally vary between 3 to 5 years. Accordingly, the tax years 2010 through 2015 remain open to examination by the other taxing jurisdictions in which the Company operates.

 

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 in the years in which those temporary differences are expected to reverse. The effects of remeasurement of deferred tax assets and liabilities resulting from changes in tax rates are recognized in income in the period of enactment.

 

Note 16—Dividends and Earnings Per Share

 

The Company has paid or declared cash dividends during 2015 and 2016 as follows:

 

 

 

 

 

 

 

 

 

 

Declaration Date

 

Record Date

    

Payable Date

    

Amount Per Share

 

February 24, 2015

 

March 31, 2015

 

April 15, 2015

 

$

0.040

 

May 1, 2015

 

June 30, 2015

 

July 15, 2015

 

$

0.055

 

August 4, 2015