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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

 

For the quarterly period ended September 30, 2013

 

OR

 

 

For the transition period from                    to                      .

 

Commission file number 0001-34145

 

Primoris Services Corporation

(Exact name of registrant as specified in its charter)

 

Delaware		20-4743916
(State or Other Jurisdiction of		(I.R.S. Employer
Incorporation or Organization)		Identification No.)
2100 McKinney Avenue, Suite 1500
Dallas, Texas		75201
(Address of Principal Executive Offices)		(Zip Code)

 

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

 

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

 

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

 

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

 

 

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

 

At November 6, 2013, 51,571,394 shares of the registrant’s common stock were outstanding.

 

 

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PRIMORIS SERVICES CORPORATION

INDEX

 

	Page No.
Part I. Financial Information
Item 1. Financial Statements:
—Condensed Consolidated Balance Sheets at September 30, 2013 and December 31, 2012	3
—Condensed Consolidated Statements of Income for the three months and nine months ended September 30, 2013 and 2012	4
— Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2013 and 2012	5
—Notes to Condensed Consolidated Financial Statements	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	39
Item 4. Controls and Procedures	39
Part II. Other Information
Item 1. Legal Proceedings	40
Item 1A. Risk Factors	40
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	40
Item 3. Defaults Upon Senior Securities	40
Item 4. (Removed and Reserved)	40
Item 5. Other Information	40
Item 6. Exhibits	41
Signatures	42

 

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PART I.  FINANCIAL INFORMATION

 

ITEM 1.  FINANCIAL STATEMENTS

 

PRIMORIS SERVICES CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(In Thousands, Except Share Amounts)

(Unaudited)

 

		September 30, 2013			December 31, 2012
ASSETS
Current assets:
Cash and cash equivalents		$	174,034		$	157,551
Short term investments		3,179			3,441
Customer retention deposits and restricted cash		15,377			35,377
Accounts receivable, net		284,497			268,095
Costs and estimated earnings in excess of billings		80,434			41,701
Inventory and uninstalled contract materials		43,616			37,193
Deferred tax assets		10,477			10,477
Prepaid expenses and other current assets		12,830			10,800
Total current assets		624,444			564,635
Property and equipment, net		220,179			184,840
Investment in non-consolidated entities		6,546			12,813
Intangible assets, net		48,002			51,978
Goodwill		118,626			116,941
Other long-term assets		1,214			—
Total assets		$	1,019,011		$	931,207
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	119,882		$	151,546
Billings in excess of costs and estimated earnings		147,464			158,892
Accrued expenses and other current liabilities		101,881			76,152
Dividends payable		1,805			—
Current portion of capital leases		3,928			3,733
Current portion of long-term debt		26,910			19,446
Current portion of contingent earnout liabilities		8,763			10,900
Total current liabilities		410,633			420,669
Long-term capital leases, net of current portion		2,760			3,831
Long-term debt, net of current portion		188,713			128,367
Deferred tax liabilities		20,018			20,018
Long-term contingent earnout liabilities, net of current portion		6,083			12,531
Other long-term liabilities		13,243			13,153
Total liabilities		641,450			598,569
Commitments and contingencies
Stockholders’ equity
Common stock—$.0001 par value, 90,000,000 shares authorized, 51,571,394 and 51,403,686 issued and outstanding at September 30, 2013 and December 31, 2012		5			5
Additional paid-in capital		159,058			155,605
Retained earnings		217,540			175,517
Noncontrolling interests		958			1,511
Total stockholders’ equity		377,561			332,638
Total liabilities and stockholders’ equity		$	1,019,011		$	931,207

 

See Accompanying Notes to Condensed Consolidated Financial Statements

 

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PRIMORIS SERVICES CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In Thousands, Except Per Share Amounts)

(Unaudited)

 

		Three Months Ended						Nine months Ended
		September 30,						September 30,
		2013			2012			2013			2012
Revenues		$	551,333		$	431,842		$	1,406,341		$	1,060,851
Cost of revenues		475,868			375,551			1,225,243			922,960
Gross profit		75,465			56,291			181,098			137,891
Selling, general and administrative expenses		36,478			26,014			96,657			69,684
Operating income		38,987			30,277			84,441			68,207
Other income (expense):
Income (loss) from non-consolidated entities		113			(159		)	169			895
Foreign exchange gain (loss)		91			18			3			(30		)
Other expense		(376		)	(382		)	(809		)	(961		)
Interest income		32			96			95			143
Interest expense		(1,579		)	(937		)	(4,501		)	(3,044		)
Income before provision for income taxes		37,268			28,913			79,398			65,210
Provision for income taxes		(14,075		)	(10,965		)	(30,272		)	(24,875		)
Net income		$	23,193		$	17,948		$	49,126		$	40,335
Less net income attributable to noncontrolling interests		(1,348		)	(432		)	(1,947		)	(600		)
Net income attributable to Primoris		$	21,845		$	17,516		$	47,179		$	39,735
Earnings per share:
Basic		$	0.42		$	0.34		$	0.92		$	0.77
Diluted		$	0.42		$	0.34		$	0.91		$	0.77
Weighted average common shares outstanding:
Basic		51,568			51,398			51,529			51,387
Diluted		51,671			51,404			51,595			51,402

 

See Accompanying Notes to Condensed Consolidated Financial Statements

 

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PRIMORIS SERVICES CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)

(Unaudited)

 

		Nine months Ended
		September 30,
		2013			2012
Cash flows from operating activities:
Net income		$	49,126		$	40,335
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		31,003			20,719
Amortization of intangible assets		5,576			4,669
Gain on sale of property and equipment		(1,176		)	(2,396		)
Income from non-consolidated entities		(169		)	(895		)
Impairment expense for non-consolidated entities		3,250			—
Non-consolidated entity distributions		3,186			1,260
Stock—based compensation expense		229			—
Changes in assets and liabilities:
Customer retention deposits and restricted cash		20,000			(3,324		)
Accounts receivable		(16,402		)	(64,933		)
Costs and estimated earnings in excess of billings		(38,733		)	(21,089		)
Other current assets		(8,665		)	475
Accounts payable		(32,551		)	20,433
Billings in excess of costs and estimated earnings		(11,428		)	7,329
Contingent earnout liabilities		(9,287		)	(2,489		)
Accrued expenses and other current liabilities		26,626			20,688
Other long-term liabilities		90			(1,510		)
Net cash provided by operating activities		20,675			19,272
Cash flows from investing activities:
Purchase of property and equipment		(68,749		)	(23,720		)
Proceeds from sale of property and equipment		6,554			7,683
Purchase of short-term investments		(5,620		)	(6,380		)
Sale of short-term investments		5,882			23,000
Cash paid for acquisitions		(2,273		)	(38,110		)
Net cash used in investing activities		(64,206		)	(37,527		)
Cash flows from financing activities:
Proceeds from issuance of long-term debt		97,035			16,671
Repayment of capital leases		(3,399		)	(8,018		)
Repayment of long-term debt		(29,225		)	(12,177		)
Repayment of subordinated debt		—			(17,501		)
Proceeds from issuance of common stock purchased by management under long-term incentive plan		1,455			1,240
Dividends paid		(3,352		)	(4,611		)
Payment of accumulated earnings to non-controlling interest holder		(2,500		)	—
Repurchase of common stock		—			(1,001		)
Net cash provided by (used in) financing activities		60,014			(25,397		)
Net change in cash and cash equivalents		16,483			(43,652		)
Cash and cash equivalents at beginning of the period		157,551			120,306
Cash and cash equivalents at end of the period		$	174,034		$	76,654

 

See Accompanying Notes to Condensed Consolidated Financial Statements

 

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SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

 

		Nine months Ended
		September 30,
		2013			2012
		(Unaudited)
Cash paid during the period for:
Interest		$	3,369		$	2,282
Income taxes, net of refunds received		$	32,379		$	18,082

 

SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES

 

		Nine months Ended
		September 30,
		2013			2012
		(Unaudited)
Obligations incurred for the acquisition of property and equipment		$	2,523		$	1,854
Dividends declared and not yet paid		$	1,805		$	1,542

 

See Accompanying Notes to Condensed Consolidated Financial Statements

 

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PRIMORIS SERVICES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)

 

Note 1—Nature of Business

 

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

 

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

 

Subsidiary		Operating Segment
ARB, Inc. (“ARB”)		West Construction Services
ARB Structures, Inc.		West Construction Services
Q3 Contracting, Inc. (“Q3C”); acquired 2012		West Construction Services
Rockford Corporation (“Rockford”)		West Construction Services
Stellaris, LLC.		West Construction Services
OnQuest, Inc.		Engineering
OnQuest, Canada, ULC (Born Heaters Canada, ULC prior to 2013)		Engineering
Cardinal Contractors, Inc.		East Construction Services
Force Specialty Services, Inc. (“FSSI”); acquired 2013		East Construction Services
James Construction Group, LLC (“JCG”)		East Construction Services
Sprint Pipeline Services, L.P. (“Sprint”); acquired 2012		East Construction Services
Silva Group (“Silva”); acquired 2012		East Construction Services
The Saxon Group (“Saxon”); acquired 2012		East Construction Services

 

The Company is a party to the Blythe Power Constructors joint venture (“Blythe”) for the installation of a parabolic trough solar field and steam generation system in California.

 

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 and nine-month periods ended September 30, 2013 and 2012 have been prepared in accordance with Rule 10-01 of Regulation S-X of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). As such, certain disclosures, which would substantially duplicate the disclosures contained in the Company’s Annual Report on Form 10-K, filed on March 7, 2013, which contains the Company’s audited consolidated financial statements for the year ended December 31, 2012, have been omitted.

 

This Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2013 (the “Third Quarter 2013 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 unaudited 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 using the percentage-of-completion method, which may result in uneven and irregular results. In the percentage-of-completion method, estimated revenues and resulting contract income are calculated based on the total costs incurred to date as a percentage of total estimated costs. If an estimate of total contract cost indicates a loss on a contract, the projected loss is recognized in full at the time of the estimate.  The loss amount is recognized as an “accrued loss provision” and is included in the accrued expenses and other liabilities amount on the balance sheet.  As the percentage-of-completion method is used to calculate revenues, the accrued loss provision is changed so that the gross profit for the contract is zero.

 

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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.

 

Other contract forms — The Company also uses unit-price, time and material, and cost reimbursable plus fee contracts.  For these jobs, revenue is recognized based on contractual terms.  For example, time and material contract revenues are recognized based on purchasing and employee time records.  Similarly, unit price contracts recognize revenue based on completion of specific units at a specified unit price.

 

For all of its contracts, the Company includes any provision for estimated losses on uncompleted contracts in accrued expenses. 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.

 

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

 

The Company considers unapproved change orders to be contract variations for which it has customer approval for a change in scope but for which it does not have an agreed upon price change.  Costs associated with unapproved change orders are included in the estimated cost to complete the contracts and are treated as project costs as incurred. The Company recognizes revenue equal to costs incurred on unapproved change orders when realization of price approval is probable.  Unapproved change orders involve the use of estimates, and it is reasonably possible that revisions to the estimated costs and recoverable amounts may be required in future reporting periods to reflect changes in estimates or final agreements with customers.

 

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

 

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

 

For projects that were in process in the prior year, but are either completed or continue to be in process during the current year, there can be a difference in revenues and profits recognized to the prior year, had current year estimates of costs to complete been known in the prior year.

 

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Customer Concentration — The Company operates in multiple industry segments encompassing the construction of commercial, industrial and public works infrastructure assets throughout the United States. Typically, the top ten customers in any one calendar year generate revenues in excess of 50% of total revenues and consist of a different group of customers in each year.

 

During the three months and nine months ending September 30, 2013, revenues generated by the top ten customers were $274 million and $717 million, respectively, which represented 49.7% and 51.0%, respectively, of total revenues during the periods.  During the three and nine month periods ending September 30, 2013, a large gas and electric utility represented 8.8% and 8.3%, respectively, of total revenues and a large pipeline company represented 9.7% and 6.8%, respectively, of total revenues.

 

During the three and nine months ending September 30, 2012, revenues generated by the top ten customers were $243.6 million and $607.8 million, respectively, which represented 56.4% and 57.3%, respectively, of total revenues during the periods.  During the three and nine month periods ending September 30, 2012, the Louisiana Department of Transportation represented 11.9% and 12.7%, respectively, of total revenues and a large gas and electric utility represented 16.1% and 13.6%, respectively, of total revenues.

 

At September 30, 2013, approximately 13.1% of the Company’s accounts receivable were due from one customer, and that customer provided 7.4% of the Company’s revenues for the nine months ended September 30, 2013.  At September 30, 2012, approximately 10.8% of the Company’s accounts receivable were due from one customer, and that customer provided 13.6% of the Company’s revenues for the nine months ended September 30, 2012.

 

Multiemployer Plans — Various subsidiaries in the West Construction Services 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 will incur a withdrawal obligation.  The potential withdrawal obligation may be significant.  Any withdrawal liability would be recorded when it is probable that a liability exists and can be reasonably estimated, in accordance with generally accepted accounting principles (“GAAP”).  In November 2011, the Company withdrew from the Central States Southeast and Southwest Areas Pension Fund multiemployer pension plan.  The Company has no plans to withdraw from any other agreements.  See Note 19 — Commitments and Contingencies.

 

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 include certain job specific materials not yet installed which are valued using the specific identification method relating the cost incurred to a specific project.

 

Note 3—Recent Accounting Pronouncements

 

In January 2013, the FASB issued ASU 2013-01, which clarifies which instruments and transactions are subject to the offsetting disclosure requirements established by ASU 2011-11 , “Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities” .  The ASU was effective for the fiscal years and interim periods beginning January 1, 2013.  Retrospective application is required for any period presented that begins before the entity’s initial application of the new requirements.  The adoption of this guidance did not have a material impact on the Company’s financial statements.

 

In February 2013, the FASB issued ASU 2013-04, “Liabilities (Topic 405): Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date (a consensus of the FASB Emerging Issues Task Force)”  (“ASU 2013-04”).  ASU 2013-04 provides guidance for the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of this guidance is fixed at the reporting date. This ASU is an update to FASB ASC Topic 405, “ Liabilities” .  The amendments in this ASU are effective for fiscal years, and interim periods, beginning after December 15, 2013.  The adoption of this guidance is not expected to have a material impact on the Company’s financial statements.

 

Note 4—Fair Value Measurements

 

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

 

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ASC Topic 820 also establishes three reporting levels for fair value measurements.  Fair values determined by Level 1 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 an asset or liability and include situations where there is little, if any, market activity for the asset or liability.

 

The following table presents, for each of the fair value hierarchy levels identified under ASC Topic 820, the Company’s financial assets and liabilities that are required to be measured at fair value at September 30, 2013 and December 31, 2012:

 

					Fair Value Measurements at Reporting Date
		Amount Recorded on Balance Sheet			Quoted Prices in Active Markets for Identical Assets (Level 1)			Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets as of September 30, 2013:
Cash and cash equivalents		$	174,034		$	174,034		—		—
Short-term investments		$	3,179		$	3,179		—		—
Liabilities as of September 30, 2013:
Contingent consideration		$	14,846		—			—		$	14,846
Assets as of December 31, 2012:
Cash and cash equivalents		$	157,551		$	157,551		—		—
Short-term investments		$	3,441		$	3,441		—		—
Liabilities as of December 31, 2012:
Contingent consideration		$	23,431		—			—		$	23,431

 

Short-term investments consist primarily of Certificates of Deposit (“CDs”) purchased through the CDARS (Certificate of Deposit Account Registry Service) process and U.S. Treasury bills with various financial institutions that are backed by the federal government.

 

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

 

The following table provides changes to the Company’s contingent consideration liability Level 3 fair value measurements during the nine months ended September 30, 2013:

 

Contingent Consideration
Balance at December 31, 2012		$	23,431
Additions:
FSSI acquisition on March 11, 2013		702
Change in fair value of contingent consideration		1,613
Reductions:
Payment to Rockford sellers		(6,900		)
Payment to Sprint sellers		(4,000		)
Balance at September 30, 2013		$	14,846

 

On a quarterly basis, the Company assesses the estimated fair value of the contractual obligation to pay the contingent consideration and any changes in estimated fair value are recorded as other non-operating expense or income in the Company’s statement of operations.  Fluctuations in the fair value of contingent consideration are impacted by two unobservable inputs, management’s estimate of the probability (which range from 33% to 100%) of the acquired company meeting the contractual operating performance target and the 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 significantly 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 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, 2013			December 31, 2012
Contracts receivable, net of allowance for doubtful accounts of $535 at September 30, 2013 and $432 at December 31, 2012		$	235,302		$	227,548
Retention		48,768			39,710
		284,070			267,258
Other accounts receivable		427			837
		$	284,497		$	268,095

 

Note 6—Costs and Estimated Earnings on Uncompleted Contracts

 

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

 

		September 30, 2013			December 31, 2012
Costs incurred on uncompleted contracts		$	4,256,810		$	3,882,968
Reserve for estimated losses on uncompleted contracts		2,018			764
Gross profit recognized		516,451			448,928
		4,775,279			4,332,660
Less: billings to date		(4,842,309		)	(4,449,851		)
		$	(67,030	)	$	(117,191	)

 

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

 

		September 30, 2013			December 31, 2012
Costs and estimated earnings in excess of billings		$	80,434		$	41,701
Billings in excess of costs and estimated earnings		(147,464		)	(158,892		)
		$	(67,030	)	$	(117,191	)

 

Note 7—Equity Method Investments

 

WesPac Energy LLC and WesPac Midstream LLC

 

On July 1, 2010, the Company acquired a 50% membership interest in WesPac Energy LLC, a Nevada limited liability company (“WesPac”), from Kealine Holdings, LLC (“Kealine”), a Nevada limited liability company.  Kealine held the remaining 50% membership interest in WesPac.  WesPac developed pipeline and terminal projects in the United States, Canada and Mexico.

 

On September 30, 2013, WesPac, Kealine and the Company entered into a contribution agreement (the “Agreement”) with Highstar Capital IV, LP (“Highstar”), to form a new entity, WesPac Midstream LLC, a Delaware limited liability company (“WesPac-Midstream”), owned collectively by Highstar, Kealine and the Company.  WesPac contributed certain project assets to WesPac-Midstream.  Highstar contributed $6.1 million in cash for an 85% ownership interest in certain developmental projects.  Of this amount, $3.04 million was distributed to the Company and accounted for as a reduction of the carrying value of the WesPac investment.  Highstar also obtained a 75% interest in two of WesPac-Midstream’s more mature projects.  Highstar may make additional payments to Kealine and the Company for the two projects contingent on completion of certain milestones as follows:

 

1.               When the first project reaches “commercial acceptance” (as that term is defined in the Agreement), a payment of $4.5 million will be made ($2.25 million to the Company), and an additional payment of $4.5 million when the project goes into production ($2.25 million to the Company).

 

2.               If the second project successfully reaches “commercial acceptance” prior to January 31, 2014, a payment of $4.5 million ($2.25 million to the Company) will be made and a similar payment when the project goes into production.  If “commercial acceptance” is not received prior to July 1, 2014, no contingent payments will be made for this project.

 

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Highstar will fund WesPac-Midstream’s operations over the next two years.  The Company is not required to fund any of WesPac-Midstream’s activities and retains one of five board seats.

 

During the third quarter 2013 and prior to the Agreement, WesPac recorded a third quarter loss of $0.2 million and the Company recorded its 50% share of the loss of $0.1 million.  After recording the loss, the carrying value of the WesPac investment prior to the sale to Highstar, was $11.5 million.

 

In July 2010, the Company recorded a $5 million amount greater than its pro-rata share of the WesPac equity as part of its original investment (“basis difference”).  In December 2011, as a result of certain events impacting WesPac, the Company recorded a reduction of $1.7 million of its $5 million basis difference.  As a result of the Agreement, the Company eliminated the remaining basis difference of $3.25 million to recognize an other than temporary decrease in the value of its basis difference.  The non-cash impairment charge was recorded as a Selling, General and Administrative expense.  The Company’s remaining $4.76 million investment represents the Company’s pro-rata equity ownership in both the WesPac and WesPac-Midstream entities.

 

The following is a summary of the financial position and results as of and for the periods ended:

 

		September 30, 2013			December 31, 2012
WesPac & WesPac-Midstream
Balance sheet data
Assets		$	18,856		$	16,896
Liabilities		1,067			1,063
Net assets		$	17,789		$	15,833
Company’s equity investment		$	4,757		$	11,463

 

		Three months ended September 30,						Nine months ended September 30,
		2013			2012			2013			2012
Earnings data:
Revenue		$	10		$	—		$	99		$	511
Expenses		$	235		$	358		$	754		$	1,002
Earnings before taxes		$	(225	)	$	(358	)	$	(655	)	$	(491	)
Company’s equity in earnings		$	(113	)	$	(178	)	$	(328	)	$	(245	)

 

St.—Bernard Levee Partners

 

The Company purchased a 30% interest in St.—Bernard Levee Partners (“Bernard”) in 2009 for $300 and accounts for this investment using the equity method.  Bernard engaged in construction activities in Louisiana, and all work was completed in January 2013. The Company’s share of Bernard distributions for the nine months ended September 30, 2013 and 2012, was $145 and $1,260, respectively.  The following is a summary of the financial position and results as of and for the periods ended:

 

		September 30, 2013			December 31, 2012
St. — Bernard Levee Partners
Balance sheet data
Assets		$	22		$	592
Liabilities		22			86
Net assets		$	—		$	506
Company’s equity investment		$	—		$	150

 

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		Three months ended September 30,						Nine months ended September 30,
		2013			2012			2013			2012
Earnings data:
Revenue		$	—		$	36		$	—		$	3,970
Expenses		$	—		$	(36	)	$	16		$	162
Earnings before taxes		$	—		$	72		$	(16	)	$	3,808
Company’s equity in earnings		$	—		$	19		$	(5	)	$	1,140

 

Alvah, Inc.

 

As part of the acquisition of Q3C, the Company acquired a 49% membership interest in Alvah, Inc., a California corporation (“Alvah”).  Alvah is engaged in electrical contracting activities, primarily in Northern California and worked as a subcontractor for ARB both prior to and subsequent to the Q3C acquisition.  In December 2012, the company received $98 from a distribution by Alvah.  During the three and nine months ending September 30, 2013, payments made by ARB to Alvah were $2,154 and $5,064, respectively, and payments made by Q3C were $2 and $214, respectively.  For the same periods in the prior year, ARB made payments of $1,609 and $3,762, respectively and Q3C made payments of $120 and $353, respectively.

 

The following is a summary of the financial position and results as of and for the period ended:

 

		September 30, 2013			December 31, 2012
Balance sheet data
Assets		$	3,849		$	2,177
Liabilities		1,677			1,208
Net assets		$	2,172		$	969
Company’s equity investment in venture		$	1,789		$	1,200

 

		Three months ended September 30,						Nine months ended September 30,
		2013			2012			2013			2012
Earnings data:
Revenue		$	4,824		$	—		$	10,832		$	—
Expenses		$	4,185		$	—		$	9,630		$	—
Earnings after taxes		$	639		$	—		$	1,202		$	—
Company’s equity in earnings		$	313		$	—		$	589		$	—

 

Because Alvah was not acquired until November 2012, no activity is shown for the prior year.

 

Note 8 — Business Combinations

 

2013 Acquisition - FSSI

 

On March 11, 2013, the Company’s subsidiary, Primoris Energy Services (“PES”), purchased the assets of Force Specialty Services Inc. (“FSSI”) which specializes in turn-around work at refineries and chemical plants in the Gulf Coast area.  Based in the greater Houston, Texas area, FSSI’s location provides a presence and convenient access to refineries in south Texas, the Houston ship channel and Louisiana.

 

The fair value of the consideration for the acquisition was $2,377.  Consideration consisted of cash totaling $1,675, of which $1,025 was paid at closing and $650 was paid in the second quarter 2013.  The agreement provides for three future potential payments, contingent upon FSSI meeting certain operating performance targets for the remainder of calendar year 2013 and calendar years 2014 and 2015.

 

The contingent consideration is as follows:  (1) $500 in cash for the achievement of pretax income of at least $553 for the remainder of the year ending December 31, 2013; (2) a payment of $500 in cash if pretax income for the year 2014 is at least $2,502; and (3), a payment of $500 in cash if pretax income for the year 2015 is at least $4,227.  The estimated fair value of the potential contingent consideration on the acquisition date was $702 and at September 30, 2013 was $741.

 

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The purchase agreement also included a provision that PES make an up-front payment of $1,000 for a five-year employment, non-competition and non-solicitation agreement with a key employee.  If the employee terminates his employment or violates the agreement prior to the end of the five-year period, he is required to repay the unamortized amount of the $1,000 payment.  This agreement has been accounted for as a prepaid asset and is being amortized equally over the five-year period.

 

At closing the Company received $302 in small tools inventory, $448 in property, plant and equipment, and recorded accounts payable of $1,060.

 

The acquisition was accounted for using the acquisition method of accounting.  The assets acquired and liabilities assumed were measured at their estimated fair value at the acquisition date Since its March 11, 2013 acquisition date, FSSI contributed revenues of $670 and $4,143 and gross profit of $14 and $325, for the three and nine months ended September 30, 2013, respectively.

 

During the second quarter 2013, the Company finalized its estimates of the fair value of the contingent consideration, intangible assets and goodwill for the acquisition.  The final revision resulted in a change from the estimated values recorded at March 31, 2013, including a decrease in the fair value of the contingent consideration of $136, increases in intangible assets of $800 and a decrease of $936 for goodwill

 

The customer relationships were valued at $950 utilizing the “excess earnings method” of the income approach.  The estimated discounted cash flows associated with existing customers and projects were based on historical and market participant data.  Such discounted cash flows were net of fair market returns on the various tangible and intangible assets that are necessary to realize the potential cash flows.

 

The fair value of the tradename of $550 was determined based on the “relief from royalty” method.  A royalty rate was selected based on consideration of several factors, including external research of third party tradename licensing agreements and their royalty rate levels, and management estimates.  The useful life was estimated at five years based on management’s expectation for continuing value of the tradename in the future.

 

The fair value for the non-compete agreement of $100 was based on a discounted “income approach” model, including estimated financial results with and without the non-compete agreement in place.  The agreement was analyzed based on the potential impact of competition that certain individuals could have on the financial results, assuming the agreement was not in place.  An estimate of the probability of competition was applied and the results were compared to a similar model assuming the agreement was in place.

 

Goodwill of $1,087 largely consists of expected benefits from the greater presence and convenient access to south Texas, the Houston ship channel and Louisiana and FSSI’s expertise in turn-around work for refineries and chemical plants.  Goodwill also includes the value of the assembled workforce of the FSSI business.  Based on the current tax treatment, goodwill and other intangible assets will be deductible for income tax purposes over a fifteen-year period.

 

2012 Acquisition - Sprint Pipeline Services, L.P.

 

The March 12, 2012 acquisition of Sprint was accounted for using the acquisition method of accounting.  The fair value of the consideration totaled $28,377, which included cash payments of $21,197, Company stock valued at $980 (or 62,052 shares of restricted common stock) and contingent consideration of $6,200.

 

The contingent consideration was as follows:  if income before interest, taxes, depreciation and amortization (“EBITDA”) for 2012, as defined in the purchase agreement, was at least $7,000, we would pay $4,000 in cash to the sellers. The earnout target was achieved in 2012 and was paid in April 2013.

 

The 2013 earnout target provides for an additional cash payment of $4,000 to the sellers if 2013 EBITDA is at least $7,750.  The estimated fair value of the 2013 contingent consideration as of the acquisition date was $2,745 and at September 30, 2013 and December 31, 2012, the estimated fair value of the contingent consideration was $3,300 and $3,020, respectively.

 

2012 Acquisition - Silva Companies

 

The May 30, 2012 acquisition of Silva was accounted for using the acquisition method of accounting.  The fair value of the consideration was $14,090.

 

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2012 Acquisition - The Saxon Group

 

The September 28, 2012 acquisition of Saxon was accounted for using the acquisition method of accounting.  The fair value of the consideration was $550 in cash, payment of a banknote for $2,429, and contingent consideration valued at $1,950 for total consideration of $4,929.

 

The contingent consideration included an earnout where the Company would pay $2,500 to the sellers, contingent upon Saxon meeting one of the following two targets:  (1) EBITDA for the fifteen month period ending December 31, 2013 of at least $4,000 or; (2) EBITDA for the twenty-one month period ending September 30, 2014 of at least $4,750.  The estimated fair value of the contingent consideration on the acquisition date was $1,950.  The estimated fair value of the contingent consideration was $2,269 and $2,028 at September 30, 2013 and December 31, 2012, respectively.

 

2012 Acquisition — Q3 Contracting

 

Using the acquisition method of accounting, the fair value of the consideration for the November 17, 2012 acquisition of Q3C totaled $56,592.  At closing we made a cash payment of $48,116 and recorded a contingent earnout with a fair value of $7,448 and a liability for a future payment of $430 in Company common stock.

 

The contingent earnout requires the Company to pay additional cash to the sellers, contingent on Q3C meeting certain EBITDA targets (as that term is defined in the stock purchase agreement).  The targets are as follows:

 

1.                                    For the period November 18, 2012 through December 31, 2013, if EBITDA is at least $17,700, the Company will pay an additional $3,750.  The payment amount increases by $1,250, to $5,000, if EBITDA exceeds $19,000.

 

2.                                    For calendar year 2014, if EBITDA is at least $19,000, the Company will pay an additional $3,750.  The payment amount increases by $1,250, to $5,000, if EBITDA exceeds $22,000.

 

As of the purchase date, the estimated fair value of the contingent consideration was $7,448.  The fair value estimate is based on management’s evaluation of the probability of Q3C meeting the financial performance targets for the two periods, discounted at the Company’s estimated average cost of capital.  The estimated fair value at September 30, 2013 and December 31, 2012 was $8,536 and $7,490, respectively (which includes the expectation that the 2013 target, item 1 above, will be met, with the fair value of $5,000 at September 30, 2013).

 

In January 2013, we issued 29,273 shares of unregistered stock.  In August 2013, we paid $598 in cash to the sellers as part of tax-related elections that were made under the terms of the purchase agreement.

 

During the third quarter of 2013, the Company finalized its estimate of the fair value of the acquired assets and liabilities for the acquisition, resulting in no change to the initial estimate.  Additionally, under the purchase agreement, the Company made a final true-up of the purchase amount during the third quarter 2013, resulting in an additional payment to the sellers of $598.  This increased goodwill as of September 30, 2013, an increase in the original estimated goodwill value that had been recorded at December 31, 2012, March 31, 2013 and June 30, 2013.

 

Summary of Cash Paid for Acquisitions for the nine months ended September 30, 2013 and 2012

 

The following table summarizes the cash paid for acquisitions for the nine months ended September 30, 2013 and 2012.  The Q3C acquisition was made on November 17, 2012 and included a cash payment of $48,116.  The Company made an additional post-closing payment to the sellers in August 2013, which is included below:

 

		Nine Months ended September 30,
		2013			2012
Sprint — Purchased March 12, 2012		$	—		$	21,197
Silva — purchased May 30, 2012		—			13,934
Saxon — purchased September 28, 2012		—			2,979
FSSI — purchased March 11, 2013		1,675			—
Additional cash paid August 2013 — Q3C — purchased November 17, 2012		598			—
		$	2,273		$	38,110

 

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Supplemental Unaudited Pro Forma Information for the three and nine months ended September 30, 2013 and 2012

 

In accordance with ASC Topic 805 we are combining the pro forma information for the FSSI, Sprint, Silva, Saxon and Q3C acquisitions (“the Acquisitions”).  The following pro forma information for the three and nine months ended September 30, 2013 and 2012 presents the combined results of operations of the Acquisitions combined, as if the Acquisitions had each occurred at the beginning of 2012. The supplemental pro forma information has been adjusted to include:

 

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

 

·                                           the pro forma impact of the expense associated with the amortization of the discount for the fair value of the contingent consideration for potential earnout liabilities that may be achieved in 2013 for the Sprint and FSSI acquisitions and 2013 or 2014 for the Saxon, Q3C and FSSI acquisitions;

 

·                                           the pro forma tax effect of both the income before income taxes and the pro forma adjustments, calculated using a tax rate of 39.0% for the three and nine months ended September 30, 2012 and the same periods in 2013; and

 

·                                           the pro forma increase in weighted average shares outstanding including 62,052 unregistered shares of common stock issued as part of the Sprint acquisition and 29,273 shares of unregistered common stock issued as part of the Q3C acquisition.

 

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 Acquisitions been completed on January 1, 2012.  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 combined companies.

 

		Three months ended September 30,						Nine months ended September 30,
		2013			2012			2013			2012
Revenues		551,333			476,570			1,409,140			1,192,167
Income before provision for income taxes		37,268			31,967			79,283			65,395
Net income attributable to Primoris		21,845			19,379			47,109			39,848
Weighted average common shares outstanding:
Basic		51,568			51,427			51,530			51,433
Diluted		51,671			51,433			51,594			51,448
Earnings per share:
Basic		$	0.42		$	0.38		$	0.91		$	0.77
Diluted		$	0.42		$	0.38		$	0.91		$	0.77

 

Note 9—Intangible Assets

 

At September 30, 2013 and December 31, 2012, intangible assets totaled $48,002 and $51,978, respectively, net of amortization.  The September 30, 2013 balance includes the effect of the FSSI acquisition (See Note 8).  The table below summarizes the intangible asset categories, amounts and the average amortization periods, which are generally on a straight-line basis, as follows:

 

		Amortization		September 30,			December 31,
		Period		2013			2012
Tradename		3 to 10 years		$	21,808		$	23,586
Non-compete agreements		2 to 5 years		$	2,991		$	4,130
Customer relationships		5 to 15 years		$	23,203		$	24,212
Backlog		0.75 years		$	—		$	50
Total				$	48,002		$	51,978

 

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Amortization expense of intangible assets was $1,891 and $1,476 for the three months ended September 30, 2013 and 2012, respectively, and amortization expense for the nine months ended September 30, 2013 and 2012 was $5,576 and $4,669, respectively. Estimated future amortization expense for intangible assets is as follows:

 

For the Years Ending December 31,		Estimated Intangible Amortization Expense
2013 (remaining three months)		$	1,891
2014		7,454
2015		6,404
2016		6,029
2017		5,909
Thereafter		20,315
		$	48,002

 

Note 10—Accounts Payable and Accrued Liabilities

 

At September 30, 2013 and December 31, 2012, accounts payable included retention amounts of approximately $8,359 and $15,946, respectively.  These amounts are due to subcontractors but have been retained pending contract completion and customer acceptance of jobs.

 

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

 

		September 30, 2013			December 31, 2012
Payroll and related employee benefits		$	51,354		$	33,086
Insurance, including self-insurance reserves		35,233			22,982
Reserve for estimated losses on uncompleted contracts		2,018			764
Corporate income taxes and other taxes		2,396			3,779
Accrued overhead cost		1,326			2,007
Other		9,554			13,534
		$	101,881		$	76,152

 

Note 11—Credit Arrangements

 

Revolving Credit Facility

 

As of September 30, 2013, the Company had a revolving credit facility (the “Credit Agreement”). The Credit Agreement was entered into by and among the Company, 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 (the “Lenders”). The Credit Agreement is a $75 million revolving credit facility whereby the lenders agree to make loans on a revolving basis from time to time and to issue letters of credit for up to the $75 million committed amount. The Credit Agreement also provides for an incremental facility of up to $50 million. 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), or (ii) the Base Rate (which is the greater of (a) the Federal Funds Rate plus 0.5% or (b) the prime rate as announced by the Administrative Agent). Quarterly non-use fees, letter of credit fees and administrative agent fees are payable at rates specified in the Credit Agreement.

 

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

 

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

 

Commercial letters of credit were $4,808 at September 30, 2013 and $4,808 at December 31, 2012.  Other than commercial letters of credit, there were no borrowings under this line of credit during the nine months ended September 30, 2013, leaving available borrowing capacity at $70,192 at September 30, 2013.

 

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