Primoris Services Corporation
Primoris Services Corp (Form: 10-Q, Received: 05/08/2017 16:41:26)

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 March 31, 2017

 

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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth 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.

 

 

 

 

Emerging growth company  ☐

 

      If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

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

 

At May 8, 2017, 51,437,305 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 March 31, 2017 (Unaudited) and December 31, 2016  

 

3

 

 

 

—Condensed Consolidated Statements of Income for the three months ended March 31, 2017 and 2016 (Unaudited)  

 

4

 

 

 

— Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2017 and 2016 (Unaudited)  

 

5

 

 

 

—Notes to Condensed Consolidated Financial Statements (Unaudited)  

 

7

 

 

 

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

 

25

 

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk  

 

37

 

 

 

Item 4. Controls and Procedures  

 

38

 

 

 

Part II. Other Information  

 

 

 

 

 

Item 1. Legal Proceedings  

 

39

 

 

 

Item 1A. Risk Factors  

 

39

 

 

 

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

 

39

 

 

 

Item 3. Defaults Upon Senior Securities  

 

39

 

 

 

Item 4. (Removed and Reserved)  

 

39

 

 

 

Item 5. Other Information  

 

39

 

 

 

Item 6. Exhibits  

 

40

 

 

 

Signatures  

 

41

 

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PART I.  FINANCIAL INFORMATIO N

 

ITEM 1.  FINANCIAL STATEMENT S

 

PRIMORIS SERVICES CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEET S

(In Thousands, Except Share Amounts)

 

 

 

 

 

 

 

 

 

 

 

March 31, 

 

 

December 31, 

 

 

    

2017

    

2016

 

ASSETS

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

148,485

 

$

135,823

 

Customer retention deposits

 

 

377

 

 

481

 

Accounts receivable, net

 

 

369,775

 

 

388,000

 

Costs and estimated earnings in excess of billings

 

 

129,614

 

 

138,618

 

Inventory and uninstalled contract materials

 

 

45,130

 

 

49,201

 

Prepaid expenses and other current assets

 

 

17,804

 

 

19,258

 

Total current assets

 

 

711,185

 

 

731,381

 

Property and equipment, net

 

 

285,921

 

 

277,346

 

Intangible assets, net

 

 

31,114

 

 

32,841

 

Goodwill

 

 

127,226

 

 

127,226

 

Other long-term assets

 

 

2,151

 

 

2,004

 

Total assets

 

$

1,157,597

 

$

1,170,798

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

 

$

124,113

 

$

168,110

 

Billings in excess of costs and estimated earnings

 

 

150,771

 

 

112,606

 

Accrued expenses and other current liabilities

 

 

105,839

 

 

108,006

 

Dividends payable

 

 

2,829

 

 

2,839

 

Current portion of capital leases

 

 

107

 

 

188

 

Current portion of long-term debt

 

 

58,087

 

 

58,189

 

Total current liabilities

 

 

441,746

 

 

449,938

 

Long-term capital leases, net of current portion

 

 

14

 

 

15

 

Long-term debt, net of current portion

 

 

195,230

 

 

203,381

 

Deferred tax liabilities

 

 

9,830

 

 

9,830

 

Other long-term liabilities

 

 

9,141

 

 

9,064

 

Total liabilities

 

 

655,961

 

 

672,228

 

Commitments and contingencies

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

 

 

Common stock—$.0001 par value; 90,000,000 shares authorized; 51,437,305 and 51,576,442 issued and outstanding at March 31, 2017 and December 31, 2016

 

 

 5

 

 

 5

 

Additional paid-in capital

 

 

159,518

 

 

162,128

 

Retained earnings

 

 

340,073

 

 

335,218

 

Non-controlling interest

 

 

2,040

 

 

1,219

 

Total stockholders’ equity

 

 

501,636

 

 

498,570

 

Total liabilities and stockholders’ equity

 

$

1,157,597

 

$

1,170,798

 

 

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

 

 

March 31, 

 

 

2017

    

2016

 

Revenues

$

561,502

 

$

430,446

 

Cost of revenues

 

506,449

 

 

391,169

 

Gross profit

 

55,053

 

 

39,277

 

Selling, general and administrative expenses

 

39,854

 

 

32,658

 

Operating income

 

15,199

 

 

6,619

 

Other income (expense):

 

 

 

 

 

 

Foreign exchange gain (loss)

 

23

 

 

359

 

Interest income

 

69

 

 

39

 

Interest expense

 

(2,262)

 

 

(2,268)

 

Income before provision for income taxes

 

13,029

 

 

4,749

 

Provision for income taxes

 

(4,517)

 

 

(1,833)

 

Net income

$

8,512

 

$

2,916

 

 

 

 

 

 

 

 

Less net income attributable to noncontrolling interests

$

(821)

 

$

(223)

 

 

 

 

 

 

 

 

Net income attributable to Primoris

$

7,691

 

$

2,693

 

Earnings per share:

 

 

 

 

 

 

Basic

$

0.15

 

$

0.05

 

Diluted

$

0.15

 

$

0.05

 

 

 

 

 

 

 

 

Weighted average common shares outstanding:

 

 

 

 

 

 

Basic

 

51,594

 

 

51,725

 

Diluted

 

51,851

 

 

51,881

 

 

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)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31, 

 

 

    

2017

    

2016

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net income

 

$

8,512

 

$

2,916

 

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

 

 

 

 

 

 

 

Depreciation

 

 

14,134

 

 

15,281

 

Amortization of intangible assets

 

 

1,727

 

 

1,624

 

Stock-based compensation expense

 

 

459

 

 

262

 

Gain on sale of property and equipment

 

 

(1,308)

 

 

(736)

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

Customer retention deposits

 

 

104

 

 

(241)

 

Accounts receivable

 

 

18,225

 

 

(20,513)

 

Costs and estimated earnings in excess of billings

 

 

9,004

 

 

(24,155)

 

Other current assets

 

 

5,525

 

 

(3,265)

 

Other long-term assets

 

 

(147)

 

 

(395)

 

Accounts payable

 

 

(43,997)

 

 

11,978

 

Billings in excess of costs and estimated earnings

 

 

38,165

 

 

(14,217)

 

Accrued expenses and other current liabilities

 

 

(1,392)

 

 

(3,469)

 

Other long-term liabilities

 

 

77

 

 

(678)

 

Net cash provided by (used in) operating activities

 

 

49,088

 

 

(35,608)

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Purchase of property and equipment

 

 

(19,222)

 

 

(12,255)

 

Proceeds from sale of property and equipment

 

 

1,984

 

 

3,306

 

Cash paid for acquisitions

 

 

 —

 

 

(4,108)

 

Net cash used in investing activities

 

 

(17,238)

 

 

(13,057)

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Repayment of capital leases

 

 

(82)

 

 

(268)

 

Repayment of long-term debt

 

 

(12,416)

 

 

(11,977)

 

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

 

 

1,148

 

 

1,439

 

Repurchase of common stock

 

 

(4,999)

 

 

 —

 

Dividends paid

 

 

(2,839)

 

 

(2,842)

 

Net cash used in financing activities

 

 

(19,188)

 

 

(13,648)

 

Net change in cash and cash equivalents

 

 

12,662

 

 

(62,313)

 

Cash and cash equivalents at beginning of the period

 

 

135,823

 

 

161,122

 

Cash and cash equivalents at end of the period

 

$

148,485

 

$

98,809

 

 

See Accompanying Notes to Condensed Consolidated Financial Statements

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SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

 

    

2017

    

2016

 

 

 

(Unaudited)

 

Cash paid:

 

 

 

 

 

 

 

Interest

 

$

2,262

 

$

2,172

 

 

 

 

 

 

 

 

 

Income taxes, net of refunds received

 

$

1,872

 

$

995

 

 

SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

 

    

2017

    

2016

 

 

 

(Unaudited)

 

Obligations incurred for the acquisition of property

 

$

4,163

 

$

 —

 

 

 

 

 

 

 

 

 

Dividends declared and not yet paid

 

$

2,829

 

$

2,847

 

 

 

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 — Through the end of the year 2016, the Company segregated its business into three reportable segments: the Energy segment, the East Construction Services segment and the West Construction Services segment. In the first quarter 2017, the Company changed its reportable segments in connection with a realignment of the Company’s internal organization and management structure. The segment changes during the quarter reflect the focus of our Chief Executive Officer and our Chief Operating Officer on the range of services we provide to our end user markets. Our Chief Operating Officer regularly reviews the operating and financial performance of our business units based on these segments.

 

The current reportable segments include the Power, Industrial and Engineering segment (“PI&E segment”), the Pipeline and Underground segment (“P&U segment”), the Utilities and Distribution segment (“U&D segment”), and the Civil segment.  Segment information for prior periods have been restated.  See Note 18 – “Reportable Segments” for a brief description of the reportable segments and their operations.

 

The classification of our business unit revenues and gross profit for segment reporting purposes can at times require judgment on the part of management. Our business units may perform services across industries or perform joint services for customers in multiple industries. To determine reportable segment gross profit, certain allocations, including allocations of shared and indirect costs, such as facility costs, equipment costs and indirect operating expenses were made.

 

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The following table lists the Company’s primary business units and their reportable segment:

 

 

 

 

 

 

 

Subsidiary

    

Reportable Segment

    

Prior Operating Segment

 

ARB Industrial (a division of ARB, Inc.)

 

PI&E

 

West

 

ARB Structures, Inc.

 

PI&E

 

West

 

Primoris Power (formerly PES Saxon division)

 

PI&E

 

Energy

 

Primoris Renewable Energy (a division of Primoris Aevenia, Inc.)

 

PI&E

 

Energy

 

Primoris Industrial Constructors (formerly PES Industrial Division)

 

PI&E

 

Energy

 

Primoris Fabrication (a division of PES)

 

PI&E

 

Energy

 

Primoris Mechanical Contractors (a combination of a division of PES and Cardinal Contractors, Inc.)

 

PI&E

 

Energy

 

OnQuest, Inc.

 

PI&E

 

Energy

 

OnQuest Canada, ULC

 

PI&E

 

Energy

 

Primoris Design and Construction (“PD&C”); created 2017

 

PI&E

 

NA

 

Rockford Corporation (“Rockford”)

 

P&U

 

West

 

Vadnais Trenchless Services, Inc. (“Vadnais”)

 

P&U

 

West

 

Primoris Field Services (a division of PES Primoris Pipeline)

 

P&U

 

Energy

 

Primoris Pipeline (a division of PES Primoris Pipeline)

 

P&U

 

Energy

 

ARB Underground (a division of ARB, Inc.)

 

U&D

 

West

 

Q3 Contracting (“Q3C”)

 

U&D

 

West

 

Primoris Aevenia, Inc. ("Aevenia")

 

U&D

 

Energy

 

Primoris Heavy Civil (formerly JCG Heavy Civil Division)

 

Civil

 

East

 

Primoris I&M (formerly JCG Infrastructure & Maintenance Division)

 

Civil

 

East

 

BW Primoris, LLC ("BW Primoris")

 

Civil

 

East

 

 

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

 

On January 29, 2016, the Company acquired the net assets of Mueller Concrete Construction Company (“Mueller”) for $4.1 million, and on November 18, 2016, the Company acquired the net assets of Northern Energy & Power (“Northern”) for $6.9 million.  Both Mueller and Northern operate as divisions of Aevenia.  See Note7— “ 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 month periods ended March 31, 2017 and 2016 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

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February 28, 2017, which contains the Company’s audited consolidated financial statements for the year ended December 31, 2016, have been omitted. 

 

This First Quarter 2017 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 no margin, where revenue is no greater than 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 can also be caused by non-customer-caused changes, such as weather delays or rain.  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 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 and recognized as an “accrued loss provision” which 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.

 

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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)  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 comprises the top ten customers varies from year to year.

 

During the three months ended March 31, 2017, revenues generated by the top ten customers were approximately $384 million, which represented 68.4% of total revenues during the period. During the period, two large pipeline projects represented 28.5% of total revenues.

 

During the three months ended March 31, 2016, revenues generated by the top ten customers were $269 million, which represented 62.6% of total revenues during the period.  During the period, Texas Department of Transportation (“TXDOT”) represented 13.5% of total revenues and a Louisiana petrochemical project represented 13.6% of total revenues.

 

At March 31, 2017, approximately 12.0% of the Company’s accounts receivable were due from one customer, and that customer provided 9.5% of the Company’s revenues for the three months ended March 31, 2017. In addition, of total accounts receivable, approximately 8.9% are from one customer with whom the Company is currently in dispute resolution. See Note 17 – “ Commitments and Contingencies ”.

 

At March 31, 2016, approximately 19.5% of the Company’s accounts receivable were due from one customer, and that customer provided 13.6% of the Company’s revenues for the three months ended March 31, 2016. In addition,

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approximately 14.9% of total accounts receivable at March 31, 2016 were in dispute resolution. See Note 17 — “ Commitments and Contingencies ”.

 

Multiemployer plans    Various subsidiaries 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.

 

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 at net realizable value. Uninstalled contract materials are certain job specific materials not yet installed, primarily for highway construction projects, which are valued using the specific identification method relating the cost incurred to a specific project. In most cases, the Company is able to invoice a state agency for the materials, but title has not yet passed to the state agency until the materials are installed.

 

Note 3—Recent Accounting Pronouncements

 

In May 2014, the FASB issued ASU No. 2014-09, “ Revenue from Contracts with Customers (Topic 606) ”, with several clarifying updates issued during 2016. The new standard is effective for reporting periods beginning after December 15, 2017. The new standard will supersede all current revenue recognition standards and guidance.  Revenue recognition will occur when promised goods or services are transferred to customers in amounts that reflect the consideration to which the company expects to be entitled to in exchange for those goods or services. The mandatory 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 standard permits two implementation approaches at the beginning of 2018: the “full retrospective method” which requires restatement of prior years, and the “modified retrospective method”, which requires prospective application of the new standard as a cumulative-effect adjustment. The Company expects to adopt this new standard using the modified retrospective method that will result in a cumulative-effect adjustment to retained earnings as of the date of adoption.  The adoption will only apply to customer contracts that are not substantially complete as of January 1, 2018.

 

The Company is currently evaluating the impact of adopting the standard on the Company’s financial position, results of operations, cash flows and related disclosures.  Although it is early in our evaluation process, we do not expect Topic 606 to have a material impact on our financial statements, though internal documentation and record keeping may be significantly impacted.  The impact to our results is not believed to be material because Topic 606 generally supports the recognition of revenue over time under the cost-to-cost method for the majority of our contracts, which is consistent with our current percentage of completion revenue recognition model.  In most of our fixed price contracts, the customer typically controls the work in process as evidenced either by contractual termination clauses or by our rights to payment for work performed to date to deliver services that do not have an alternative use to the Company. 

 

The Company does not expect the new standard to materially affect the total revenue that can be recognized over the life of a construction project; however, the revenue recognized on a quarterly basis during the construction period may change. We believe that Topic 606 is likely to be more impactful to certain of our lump sum projects as a result of the following potential changes from our current practices:

 

§

Performance obligations – Topic 606 requires a review of contracts and contract modifications to determine whether there are multiple performance obligations.  Each separate performance obligation must be accounted for as a distinct project, which could impact the timing of revenue recognition.  There is a potential that some of our contracts may have multiple performance obligations which may affect the timing of revenue recognition.

 

§

Variable consideration – In accordance with Topic 606, revenue recognition must account for variable consideration, including potential liquidated damages and customer discounts. Currently, we assess the

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impact of liquidated damages as an estimated cost of the project.  The adoption of the new standard may affect the timing of the recognition of revenue for both liquidated damages and discounts. 

 

§

Mobilization costs – Mobilization costs typically include costs to provide labor, equipment and facilities to a project site and they are recorded currently as project costs as incurred.  Topic 606 requires these costs to be capitalized as an asset and amortized over the duration of the project.

 

§

Significant components – For some projects, we may purchase equipment from a third party, such as micro–LNG equipment, and install the equipment at the project site.  Under today’s standard, the Company recognizes the associated revenue and profit for the equipment.  Depending on the terms of the contract, under the new standard, revenue may be recognized without profit.   

 

We do not expect Topic 606 to have a material impact on our consolidated balance sheets, though we expect certain reclassifications among financial statement accounts to align with the new standard.  We also expect significant expanded disclosures relating to revenue recognized during each period.

 

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 is reviewing the impact of the ASU and 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. The Company adopted the ASU as of January 1, 2017, which did not have a material impact 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 March 31, 2017 and December 31, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 March 31, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

148,485

 

$

148,485

 

 —

 

 

 —

 

Liabilities as of March 31, 2017: 

 

 

 

 

 

 

 

 

 

 

 

 

    None

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets as of December 31, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

135,823

 

$

135,823

 

 —

 

 

 —

 

Liabilities as of December 31, 2016: 

 

 

 

 

 

 

 

 

 

 

 

 

    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. 

 

Note 5—Accounts Receivable

 

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

 

 

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31, 

 

 

 

2017

 

2016

 

Contracts receivable, net of allowance for doubtful accounts of $1,654 at March 31, 2017 and $1,030 at December 31, 2016, respectively

 

$

303,963

 

$

340,871

 

Retention receivable

 

 

64,552

 

 

46,394

 

 

 

 

368,515

 

 

387,265

 

Other accounts receivable

 

 

1,260

 

 

735

 

 

 

$

369,775

 

$

388,000

 

 

 

Note 6—Costs and Estimated Earnings on Uncompleted Contracts

 

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

 

 

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31, 

 

 

 

2017

 

2016

 

Costs incurred on uncompleted contracts

 

$

4,278,858

 

$

5,391,124

 

Gross profit recognized

 

 

320,700

 

 

456,871

 

 

 

 

4,599,558

 

 

5,847,995

 

Less: billings to date

 

 

(4,620,715)

 

 

(5,821,983)

 

 

 

$

(21,157)

 

$

26,012

 

 

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

 

 

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31, 

 

 

 

2017

 

2016

 

Costs and estimated earnings in excess of billings

 

$

129,614

 

$

138,618

 

Billings in excess of cost and estimated earnings

 

 

(150,771)

 

 

(112,606)

 

 

 

$

(21,157)

 

$

26,012

 

 

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Note 7 — Business Combinations

 

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.

 

On November 18, 2016, the Company’s subsidiary, Aevenia, acquired certain assets and liabilities of Northern Energy & Power for $6.9 million.  The acquired business unit name was changed to Primoris Renewable Energy (“PRE”).  PRE serves the renewable energy sector with a specific focus on solar photovoltaic installations in the United States.  The purchase was accounted for using the acquisition method of accounting.  The purchase consisted of intangible assets of $3.0 million; goodwill of $3.8 million; and working capital of $0.1 million.  The Company expects to complete its acquisition accounting during the second quarter of 2017 on completion of negotiations with Northern over amounts escrowed at the time of the purchase.

 

Supplemental Unaudited Pro Forma Information for the three months ended March 31, 2017 and 2016

 

The following pro forma information for the three months ended March 31, 2017 and 2016 presents the results of operations of the Company as if the Mueller and PRE acquisitions had occurred at the beginning of 2016. 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 months ended March 31, 2017 and the same period in 2016.

 

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

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1, 2016.  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 PRE acquisition.

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

 

 

2017

    

2016

 

 

 

(unaudited)

 

(unaudited)

 

Revenues

 

$

561,502

 

$

438,449

 

Income before provision for income taxes

 

$

13,029

 

$

6,199

 

Net income attributable to Primoris

 

$

7,691

 

$

3,563

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

Basic

 

 

51,594

 

 

51,725

 

Diluted

 

 

51,851

 

 

51,881

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

Basic

 

$

0.15

 

$

0.07

 

Diluted

 

$

0.15

 

$

0.07

 

 

 

Note 8—Goodwill and Intangible Assets

 

Goodwill by segment was recorded as follows:

 

 

 

 

 

 

 

 

 

 

    

March 31, 

 

December 31, 

 

Reporting Segment

 

2017

 

2016

 

PI&E

 

$

24,512

 

$

24,512

 

P&U

 

 

42,252

 

 

42,252

 

U&D

 

 

20,312

 

 

20,312

 

Civil

 

 

40,150

 

 

40,150

 

Total Goodwill

 

$

127,226

 

$

127,226

 

 

At March 31, 2017 and December 31, 2016, intangible assets totaled $31,114 and $32,841, 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:

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization

 

March 31, 

 

December 31, 

 

 

    

Period

    

2017

    

2016

 

Tradename

 

3 to 10 years

 

$

11,000

 

$

11,754

 

Customer relationships

 

3 to 15 years

 

 

19,270

 

 

20,136

 

Non-compete agreements

 

2 to 5 years

 

 

844

 

 

951

 

 

 

 

 

$

31,114

 

$

32,841

 

 

Amortization expense of intangible assets was $1,727 and $1,624 for the three months ended March 31, 2017 and 2016, respectively. Estimated future amortization expense for intangible assets is as follows:

 

 

 

 

 

 

 

    

Estimated

 

 

 

Intangible

 

For the Years Ending

 

Amortization

 

December 31, 

 

Expense

 

2017 (remaining nine months)

 

$

4,961

 

2018

 

 

6,464

 

2019

 

 

6,318

 

2020

 

 

3,641

 

2021

 

 

2,543

 

Thereafter

 

 

7,187

 

 

 

$

31,114

 

 

 

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Note 9—Accounts Payable and Accrued Liabilities

 

At March 31, 2017 and December 31, 2016, accounts payable were $124,113 and $168,110, respectively.  These balances included retention amounts for the same periods of approximately $9,266 and $10,562, 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:

 

 

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31, 

 

 

 

2017

 

2016

 

Payroll and related employee benefits

 

$

38,278

 

$

42,718

 

Insurance, including self-insurance reserves

 

 

42,614

 

 

42,546

 

Reserve for estimated losses on uncompleted contracts

 

 

13,161

 

 

12,801

 

Corporate income taxes and other taxes

 

 

6,033

 

 

3,368

 

Accrued administrative cost

 

 

5,619

 

 

3,791

 

Other

 

 

134

 

 

2,782

 

 

 

$

105,839

 

$

108,006

 

 

 

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 August 13, 2017 to October 14, 2021. The notes are secured by certain construction equipment of the Company.

 

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.

 

During the quarter ended March 31, 2017, the Company acquired three properties from a related party and assumed mortgage notes secured by the properties totaling $4.2 million.

 

Revolving Credit Facility

 

As of March 31, 2017, 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.

 

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Commercial letters of credit outstanding were $11,070 at March 31, 2017 and $16,182 at December 31, 2016.  Other than commercial letters of credit, there were no borrowings under this line of credit during the three months ended March 31, 2017, and available borrowing capacity at March 31, 2017 was $113,930.

 

Senior Secured Notes and Shelf Agreement

 

On December 28, 2012, the Company entered into a $50 million Senior Secured Notes purchase agreement (“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.

 

The Company was in compliance with the covenants for the Credit Agreement and Notes Agreement at March 31, 2017.

 

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 March 31, 2017 and December 31, 2016, there were no letters of credit outstanding.  At March 31, 2017, the available borrowing capacity was $8,000 in Canadian dollars.  The credit facility contains a working capital restrictive covenant for our Canadian subsidiary, OnQuest Canada, ULC.  At March 31, 2017, OnQuest Canada, ULC was in compliance with the covenant.

 

 

Note 11 — Noncontrolling Interests

 

The Company is currently involved in two joint ventures, each of which has been determined to be a variable interest entity (“VIE”) with the Company as the primary beneficiary as a result of its significant influence over the joint venture operations.

 

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Each joint venture is a partnership, and consequently, no tax effect was recognized for the income.  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.

 

Carlsbad Joint Venture

 

The Carlsbad joint venture operating activities began in 2015 and are included in the Company’s consolidated statements of income for the three months ended:

 

 

 

 

 

 

 

 

 

 

March 31, 

 

March 31, 

 

 

    

2017

    

2016

 

Revenues

 

$

10,800

 

$

3,518

 

Net income attributable to noncontrolling interests

 

 

368

 

 

155

 

 

The Carlsbad joint venture made no distributions to the partners and the Company made no capital contributions to the Carlsbad joint venture during the three months ended March 31, 2017. 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:

 

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31, 

 

 

 

2017

 

2016

 

Cash

 

$

16,864

 

$

4,630

 

Accounts receivable

 

$

16,577

 

$

 —

 

Costs and estimated earnings in excess of billings

 

$

124

 

$

124

 

Billings in excess of costs and estimated earnings

 

$

24,550

 

$

3,426

 

Accounts payable

 

$

730

 

$

286

 

Due to Primoris

 

$

6,553

 

$

46

 

 

Wilmington Joint Venture

 

The Wilmington joint venture operating activities began in October 2015 and are included in the Company's consolidated statements of income for the three months ended:

 

 

 

 

 

 

 

 

 

 

March 31, 

 

March 31, 

 

 

 

2017

    

2016

 

Revenues

 

$

12,310

 

$

1,959

 

Net income attributable to noncontrolling interests

 

 

453

 

 

68

 

 

The Wilmington joint venture made no distributions to the partners and the Company made no capital contributions to the Wilmington joint venture during the three months ended March 31, 2017. 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:

 

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31, 

 

 

 

2017

 

2016

 

Cash

 

$

4,067

 

$

2,415

 

Accounts receivable

 

$

7,908

 

$

4,242

 

Billings in excess of costs and estimated earnings

 

$

1,688

 

$

2,572

 

Accounts payable

 

$

914

 

$

602

 

Due to Primoris

 

$

7,019

 

$

2,035

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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Summary – Joint Venture Balance Sheets

 

The following table summarizes the total balance sheet amounts for the two joint ventures which are included in the Company’s condensed consolidated balance sheets:

 

 

 

 

 

 

 

 

 

 

Joint Venture

 

Consolidated

 

At March 31, 2017

 

Amounts

 

Amounts

 

Cash

 

$

20,931

 

$

148,485

 

Accounts receivable

 

$

24,485

 

$

369,775

 

Costs and estimated earnings in excess of billings

 

$

124

 

$

129,614

 

Accounts payable

 

$

1,645

 

$

124,113

 

Billings in excess of costs and estimated earnings

 

$

26,238

 

$

150,771

 

 

 

 

 

 

 

 

 

At December 31, 2016

 

 

 

 

 

 

 

Cash

 

$

7,045

 

$

135,823

 

Accounts receivable

 

$

4,242

 

$

388,000

 

Costs and estimated earnings in excess of billings

 

$

124

 

$

138,618

 

Accounts payable

 

$

888

 

$

168,110

 

Billings in excess of costs and estimated earnings

 

$

5,998

 

$

112,606

 

 

Note 12—Related Party Transactions

 

Primoris entered into leasing transactions with Stockdale Investment Group, Inc. (“SIGI”).  Our Chairman of the Board of Directors and our largest stockholder, Brian Pratt and his family, holds a majority interest of SIGI.  The leases were for three properties used by the Company in California, with various expiration dates.  During the three months ended March 31, 2017 and 2016, the Company paid $212 and $210, respectively, in lease payments to SIGI for the use of these properties.

 

In March 2017, the Company exercised a right of first refusal and purchased the SIGI properties.  The purchase was approved by the Company’s Board of Directors for $12.8 million.  The Company assumed three mortgage notes totaling $4.2 million with the remainder paid in cash.

 

Primoris leases properties from other individuals that are current employees.  The amounts leased are not material and each arrangement was approved by the Board of Directors.

 

Note 13—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 March 31, 2017, a total of 123,512 Units were vested.  The vesting schedule for the remaining Units are as follows:

 

 

 

 

 

Number of Units

For the Years Ending December 31,

 

to Vest

2017  (remaining nine months)

 

50,138

2018

 

25,138

2019

 

48,219

2020

 

2,058

 

 

125,553

 

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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 the three months ended March 31, 2017 and 2016, the Company recognized $458 and $262, respectively, in compensation expense.  At March 31, 2017, approximately $1.7 million of unrecognized compensation expense remained for the Units, which will be recognized over the next 3 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 March 31, 2017, a total of 1,990 Dividend Equivalent Units were accrued.

 

Note 14—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 three months ended March 31, 2017 was 34.7%. The effective tax rate on income attributable to Primoris (excluding noncontrolling interests) was 37.0%.  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 to 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 2011 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 15—Dividends and Earnings Per Share

 

The Company has paid or declared cash dividends during 2016 and 2017 as follows:

 

 

 

 

 

 

 

 

 

 

Declaration Date

 

Record Date

    

Payable Date

    

Amount Per Share

 

February 22, 2016

 

March 31, 2016

 

April 15, 2016

 

$

0.055

 

May 2, 2016

 

June 30, 2016

 

July 15, 2016

 

$

0.055

 

August 3, 2016

 

September 30, 2016

 

October 14, 2016

 

$

0.055

 

November 2, 2016

 

December 31, 2016

 

January 16, 2017

 

$

0.055

 

March 21, 2017

 

March 31, 2017

 

April 15, 2017

 

$

0.055

 

 

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

 

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The table below presents the computation of basic and diluted earnings per share for the three months ended March 31, 2017 and 2016.

 

 

 

 

 

 

 

 

 

    

2017

    

2016

 

Numerator:

 

 

 

 

 

 

 

Net income attributable to Primoris

 

$

7,691

 

$

2,693

 

 

 

 

 

 

 

 

 

Denominator (shares in thousands):

 

 

 

 

 

 

 

Weighted average shares for computation of basic earnings per share

 

 

51,594

 

 

51,725

 

Dilutive effect of shares issued to independent directors

 

 

 7

 

 

 6

 

Dilutive effect of restricted stock units (1)

 

 

250

 

 

150

 

Weighted average shares for computation of diluted earnings per share

 

 

51,851

 

 

51,881

 

 

 

 

 

 

 

 

 

Earnings per share attributable to Primoris:

 

 

 

 

 

 

 

Basic

 

$

0.15

 

$

0.05

 

Diluted

 

$

0.15

 

$

0.05

 


(1)

Represents the dilutive effect of a grant of 249,065 Units and 1,990 vested Dividend Equivalent Units.

 

Note 16—Stockholders’ Equity

 

Common stock — The Company issued 65,429 shares of common stock in February 2017 and 85,907 shares of common stock in February 2016 under the Company’s long-term retention plan (“LTR Plan”). The shares were purchased by the participants in the LTR Plan with payment made to the Company of $1,148 in February 2017 and $1,439 in February 2016. The Company’s 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 February 2017 were for bonus amounts earned in 2016, and the number of shares was calculated at 75% of the average closing market price of January 2017.

 

In February 2017 and 2016, the Company issued 11,784 shares and 10,450 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 13 — “Stock–Based Compensation” , as of March 31, 2017, the Board of Directors has granted a total of 249,065 shares of Units under the Equity Plan and these Units have accrued 1,990 Dividend Equivalent Units.

 

Share repurchase plan — In February 2017, the Company's Board of Directors authorized a $5 million share repurchase program under which the Company may, from time to time and depending on market conditions, share price and other factors, acquire shares of its common stock on the open market or in privately negotiated transactions up to an aggregate purchase price of $5 million. During the period from March 23 through March 28, 2017, the Company purchased and cancelled 216,350 shares of stock for $4,999 at an average cost of $23.10 per share.

 

Note 17—Commitments and Contingencies

 

Leases  — The Company leases certain property and equipment under non-cancellable operating leases which expire at various dates through 2023. The leases require the Company to pay all taxes, insurance, maintenance and utilities and are classified as operating leases in accordance with ASC Topic 840 “Leases”.

 

Total lease expense during the three months ended March 31, 2017 and 2016 was $6,100 and $5,319, respectively, including amounts paid to related parties of $372 and $368, respectively. 

 

Letters of credit  — At March 31, 2017, the Company had letters of credit outstanding of $11,070, and at December 31, 2016, the Company had letters of credit outstanding of $16,182. The outstanding amounts include the U.S. dollar equivalents for letters of credit issued in Canadian dollars.

 

Bonding — At March 31, 2017 and December 31, 2016, the Company had bid and completion bonds issued and outstanding totaling approximately $1.51 billion and $1.53 billion, respectively.

 

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NTTA settlement — On February 7, 2012, the Company was sued in an action entitled North Texas Tollway Authority (“NTTA”), Plaintiff v. James Construction Group, LLC, and KBR, Inc., Defendants, v. Reinforced Earth Company, Third-Party Defendant (the “Lawsuit”). 

 

On February 25, 2015 the Lawsuit was settled for an expected cost to the Company of $9 million.  One of the defendants paid the Company $8 million to remove all of their liability. A second defendant agreed to provide up to $5.4 million to pay for the total expected remediation cost of approximately $22.4 million. The Company will use the $17 million to pay for a third-party contractor approved by the NTTA. At March 31, 2017, the remaining accrual balance was $14.3 million. In the event that the total remediation costs exceed the estimated amount, the second defendant would pay 20% of the excess amount and the Company would pay for 80% of the excess amount.

 

Legal proceedings — The Company has been engaged in dispute resolution to collect money it believes it is owed for one construction project completed  in 2014.  Because of uncertainties associated with the project, including uncertainty of the amounts that would be collected, the Company used a zero profit margin approach to recording revenues during the construction period for the project. 

 

For the project, a cost reimbursable contract, the Company recorded a receivable of $32.9 million with a reserve of approximately $17.9 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 dispute resolution for the receivable initially required international arbitration; however, in the first half of 2016, the owner sought bankruptcy protection in U.S. bankruptcy court. The Company has initiated litigation against the sureties who have provided lien and stop payment release bonds for the total amount owed.  A trial date has been set for the fourth quarter of 2017.

 

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 defenses 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.

 

SEC Inquiry — The Company has been cooperating with an inquiry by the staff of the Securities and Exchange Commission, which appears to be focused on certain percentage-of-completion contract revenue recognition practices of the Company during the time period 2013 and 2014.  The Company is continuing to respond to the staff’s inquiries in connection with this matter.  At this stage, the Company is unable to predict when the staff’s inquiry will conclude or the outcome.

 

Withdrawal liability for multiemployer pension plan  — In November 2011, members of the Pipe Line Contractors Association “PLCA”, including ARB, Rockford and Q3C (prior to the Company’s acquisition in 2012), withdrew from the Central States, Southeast and Southwest Areas Pension Fund multiemployer pension plan (“Plan”) in order to mitigate additional liability in connection with the significantly underfunded Plan.  During the first quarter of 2016, the Company received a final payment schedule for its withdrawal liability.  Based on this schedule, the liability recorded at March 31, 2017 was $5,384. The Company has no plans to withdraw from any other agreements.

 

Note 18—Reportable Segments

 

Through the end of the year 2016, the Company segregated its business into three reportable segments: the Energy segment, the East Construction Services segment and the West Construction Services segment. In the first quarter 2017, the Company changed its reportable segments in connection with a realignment of the Company’s internal organization and management structure. The segment changes during the quarter reflect the focus of our Chief Executive Officer and Chief Operating Officer on the range of services we provide to our end user markets. Our Chief Operating Officer regularly reviews the operating and financial performance of our business units based on these segments.

 

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The current reportable segments include the Power, Industrial, and Engineering segment (“PI&E segment”), the Pipeline and Underground segment (“P&U segment”), the Utilities and Distribution segment (“U&D segment”), and the Civil segment.  Segment information for prior periods have been restated.

 

The classification of our business unit revenues and gross profit for segment reporting purposes can at times require judgment on the part of management. Our business units may perform services across industries or perform joint services for customers in multiple industries. To determine reportable segment gross profit, certain allocations, including allocations of shared and indirect costs, such as facility costs, equipment costs and indirect operating expenses were made.

 

The following is a brief description of the reportable segments and their business units and operations.

 

The Power division of the PI&E segment includes ARB Industrial, Primoris Power, ARB Structures, and Primoris Renewable Energy. This division operates primarily in our California markets, with select projects performed nationwide. The Industrial division of this segment includes Primoris Industrial Constructors, Primoris Fabrication, and Primoris Mechanical Contractors. These groups are headquartered in and around Houston, TX and focus on the Southern region of the United States. The Engineering division of this segment includes OnQuest Inc., with offices in California, OnQuest Canada, ULC with offices in Calgary, and Primoris Design and Construction (“PD&C”), located in Tyler, TX.

 

The P&U segment includes Rockford, Vadnais, Primoris Field Services, and Primoris Pipeline. Rockford operates throughout the United States. Vadnais provides specialized trenchless solutions in California and other select areas. Presently, both Primoris Field Services and Primoris Pipeline operate in Texas and surrounding states.

 

The U&D segment is comprised of ARB Underground, Q3C, and Aevenia.  ARB Underground operates primarily in California, while Q3C and Aevenia are present throughout the Midwest region of the United States.

 

The Civil segment includes Primoris Heavy Civil, Primoris I&M, and BW Primoris, LLC. These business units are located primarily in the Southeastern and Gulf Coast regions of the United States.

 

Each of the four segments specializes in a range of services that include engineering, designing, building/installing, replacing, repairing/rehabilitating, and providing management services for construction and construction-related projects. Our services include:

 

·

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

·

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

·

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

·

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

·

Providing construction of highways and bridges; and

·

Providing industrial and environmental construction.

 

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

 

 

 

 

 

 

 

 

 

 

 

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Segment Revenues

 

Revenue by segment for the three months ended March 31, 2017 and 2016 were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended March 31, 

 

 

 

2017

 

2016

 

 

 

 

 

 

% of

 

 

 

 

% of

 

 

 

 

 

 

Total

 

 

 

 

Total

 

Reportable Segment

    

Revenue

    

Revenue

    

Revenue

    

Revenue

 

PI&E

 

$

131,240

 

23.4%

 

$

138,638

 

32.2%

 

P&U

 

 

183,445

 

32.7%