Primoris Services Corp - Quarter Report: 2012 June (Form 10-Q)

Table of Contents

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

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

 

For the quarterly period ended June 30, 2012

 

OR

 

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

 

For the transition period from                    to                      .

 

Commission file number 0001-34145

 

Primoris Services Corporation

(Exact name of registrant as specified in its charter)

 

 

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 August 7, 2012, 51,388,406 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 June 30, 2012 and December 31, 2011	3
—Condensed Consolidated Statements of Income for the three months and six months ended June 30, 2012 and 2011	4
— Condensed Consolidated Statements of Cash Flows for the three months and six months ended June 30, 2012 and 2011	5
—Notes to Condensed Consolidated Financial Statements	7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	21
Item 3. Quantitative and Qualitative Disclosures About Market Risk	32
Item 4. Controls and Procedures	32
Part II. Other Information
Item 1. Legal Proceedings	33
Item 1A. Risk Factors	33
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	33
Item 3. Defaults Upon Senior Securities	33
Item 4. (Removed and Reserved)	33
Item 5. Other Information	33
Item 6. Exhibits	34
Signatures	35

 

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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)

 

		June 30, 2012			December 31, 2011
ASSETS
Current assets:
Cash and cash equivalents		$	119,286		$	120,306
Short term investments		—			23,000
Customer retention deposits and restricted cash		40,168			31,490
Accounts receivable, net		175,082			187,378
Costs and estimated earnings in excess of billings		45,473			41,866
Inventory and uninstalled contract materials		34,881			31,926
Deferred tax assets		10,659			10,659
Prepaid expenses and other current assets		10,715			13,252
Total current assets		436,264			459,877
Property and equipment, net		151,345			129,649
Investment in non-consolidated entities		12,481			12,687
Intangible assets, net		32,428			32,021
Goodwill		103,569			94,179
Total assets		$	736,087		$	728,413
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	107,752		$	106,725
Billings in excess of costs and estimated earnings		131,688			137,729
Accrued expenses and other current liabilities		66,292			59,923
Dividends payable		1,542			1,532
Current portion of capital leases		3,535			6,623
Current portion of long-term debt		15,244			13,870
Current portion of subordinated debt		3,223			15,167
Current portion of contingent earnout liabilities		9,755			3,450
Total current liabilities		339,031			345,019
Long-term capital leases, net of current portion		4,089			4,047
Long-term debt, net of current portion		58,970			55,852
Long-term subordinated debt, net of current portion		1,777			7,334
Deferred tax liabilities		21,079			21,079
Long-term contingent earnout liabilities, net of current portion		2,842			9,268
Other long-term liabilities		8,813			10,882
Total liabilities		436,601			453,481
Commitments and contingencies
Stockholders’ equity
Common stock—$.0001 par value, 90,000,000 shares authorized, 51,388,406 and 51,059,132 issued and outstanding at June 30, 2012 and December 31, 2011		5			5
Additional paid-in capital		155,417			150,003
Retained earnings		144,064			124,924
Total stockholders’ equity		299,486			274,932
Total liabilities and stockholders’ equity		$	736,087		$	728,413

 

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						Six Months Ended
		June 30,						June 30,
		2012			2011			2012			2011
Revenues		$	337,436		$	351,956		$	629,009		$	711,601
Cost of revenues		293,432			310,550			547,409			629,565
Gross profit		44,004			41,406			81,600			82,036
Selling, general and administrative expenses		23,396			20,477			43,670			40,322
Operating income		20,608			20,929			37,930			41,714
Other income (expense):
Income (loss) from non-consolidated entities		(171		)	4,400			886			5,226
Foreign exchange loss		(6		)	(72		)	(48		)	(36		)
Other expense		(371		)	(306		)	(579		)	(603		)
Interest income		25			100			47			258
Interest expense		(1,006		)	(1,353		)	(2,107		)	(2,724		)
Income before provision for income taxes		19,079			23,698			36,129			43,835
Provision for income taxes		(7,346		)	(9,236		)	(13,910		)	(17,095		)
Net income		$	11,733		$	14,462		$	22,219		$	26,740
Earnings per share:
Basic		$	0.23		$	0.28		$	0.43		$	0.53
Diluted		$	0.23		$	0.28		$	0.43		$	0.52
Weighted average common shares outstanding:
Basic		51,435			51,044			51,386			50,363
Diluted		51,435			51,154			51,386			51,111

 

See Accompanying Notes to Condensed Consolidated Financial Statements

 

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PRIMORIS SERVICES CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)

(Unaudited)

 

		Six Months Ended
		June 30,
		2012			2011
Cash flows from operating activities:
Net income		$	22,219		$	26,740
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		13,557			12,043
Amortization of intangible assets		3,193			5,532
Gain on sale of property and equipment		(1,776		)	(37		)
Income from non-consolidated entities		(886		)	(5,226		)
Non-consolidated entity distributions		1,260			5,997
Changes in assets and liabilities:
Customer retention deposits and restricted cash		(8,678		)	(5,001		)
Accounts receivable		20,813			53,023
Costs and estimated earnings in excess of billings		(2,983		)	(16,309		)
Other current assets		206			(1,466		)
Accounts payable		(2,056		)	1,303
Billings in excess of costs and estimated earnings		(6,455		)	(33,723		)
Contingent earnout liabilities		(2,871		)	603
Accrued expenses and other current liabilities		6,397			10,743
Other long-term liabilities		(2,237		)	(2,285		)
Net cash provided by operating activities		39,703			51,937
Cash flows from investing activities:
Purchase of property and equipment		(12,409		)	(10,810		)
Proceeds from sale of property and equipment		6,731			997
Purchase of short-term investments		—			(23,000		)
Sale of short-term investments		23,000			26,000
Cash paid for acquisitions		(35,131		)	—
Net cash used in investing activities		(17,809		)	(6,813		)
Cash flows from financing activities:
Proceeds from issuance of long-term debt		12,776			2,500
Repayment of capital leases		(7,075		)	(2,680		)
Repayment of long-term debt		(8,284		)	(7,900		)
Repayment of subordinated debt		(17,501		)	(13,474		)
Proceeds from issuance of common stock		1,240			822
Purchase of Unit Purchase Option		—			(2,030		)
Dividends paid		(3,069		)	(2,510		)
Repurchase of common stock		(1,001		)	—
Net cash used in financing activities		(22,914		)	(25,272		)
Net change in cash and cash equivalents		(1,020		)	19,852
Cash and cash equivalents at beginning of the period		120,306			115,437
Cash and cash equivalents at end of the period		$	119,286		$	135,289

 

See Accompanying Notes to Condensed Consolidated Financial Statements

 

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SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

 

		Six Months Ended
		June 30,
		2012			2011
		(Unaudited)
Cash paid during the period for:
Interest		$	1,588		$	2,724
Income taxes, net of refunds received		$	11,081		$	12,693
Components of cash paid for acquisitions:
Fair value of assets acquired — Sprint		$	28,377		$	—
Fair value of assets acquired — Silva		14,109
Cash payment due sellers		(175		)
Contingent liabilities		(6,200		)	—
Common stock issued for acquisition		(980		)	—
Cash paid for acquisitions		$	35,131		$	—

 

SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES

 

		Six Months Ended
		June 30,
		2012			2011
		(Unaudited)
Obligations incurred for the acquisition of property and equipment		$	1,046		$	—
Accrued dividends declared		$	1,542		$	1,276

 

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—Business Activity

 

Organization and operations — Primoris Services Corporation and its wholly-owned subsidiaries ARB, Inc. (“ARB”), ARB Structures, Inc., All Day Electric Company, Inc., Onquest, Inc., Born Heaters Canada, ULC, Cardinal Contractors, Inc., GML Coatings, LLC, Stellaris, LLC, James Construction Group LLC (“JCG”) and Rockford Corporation, collectively, are engaged in various construction and product engineering activities. 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 in 2011 moved its corporate headquarters from Lake Forest, California to 2100 McKinney Avenue, Suite 1500, Dallas, Texas 75201.

 

On March 12, 2012, the Company executed an asset purchase agreement with Sprint Pipeline Services, L.P. (“Sprint”).  Headquartered in Pearland (near Houston), Texas, Sprint provides a comprehensive range of pipeline construction, maintenance, upgrade, fabrication and specialty services primarily in the southeastern United States.  The Company formed Primoris Energy Services Corporation, a Texas corporation, to facilitate the acquisition.  The purchase agreement allows the Company to use the Sprint name for three years.

 

On May 30, 2012, the Company executed an asset purchase agreement with Silva Contracting Company, Inc., Tarmac Materials, LLC and C3 Interests, LLC (collectively “Silva”).  Based outside of Houston, Texas, Silva provides transportation infrastructure maintenance, asphalt paving, and material sales in the Gulf Coast region of the United States.

 

Unless specifically noted otherwise, as used throughout these condensed consolidated financial statements, “Primoris”, or “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 June 30, 2012 and 2011 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 latest audited consolidated financial statements, have been omitted. This Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2012 (the “Second Quarter 2012 Report”) should be read in concert with the Company’s Annual Report on Form 10-K, filed on March 5, 2012, which contains the Company’s audited consolidated financial statements for the year ended December 31, 2011.

 

The interim financial information for the three-month and six-month periods ended June 30, 2012 and 2011 has been prepared on the same basis as the audited consolidated financial statements; however, the financial statements contained in this Second Quarter 2012 Report do not include all of the information and disclosures required by accounting principles generally accepted in the United States of America (“GAAP”) for audited financial statements. 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 — The Company typically structures contracts as unit-price, time and material, fixed-price or cost reimbursable plus fee. Revenue is recognized on the cost-on-total-cost percentage-of-completion method for fixed price contracts.  In the percentage-of-completion method, estimated revenues and resulting contract income is calculated based on the total costs incurred to date as a percentage of total estimated costs. Total estimated costs, and thus contract revenues and income, can be impacted by changes in any of the following: 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. 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 caption “Costs and estimated earnings in excess of billings” represents the excess of contract revenues recognized under the percentage-of-completion method over billings to date. For those contracts in which billings exceed contract revenues recognized to date, such excesses are included in the caption “Billings in excess of costs and estimated earnings”.

 

Revenues on cost-plus and time and materials contracts are recognized as the related work is completed.

 

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In accordance with applicable terms of construction contracts, certain retainage amounts may be withheld by customers until completion and acceptance of the project. Final payments of the majority of such amounts are expected to be receivable in the following operating cycle.

 

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 the revenue to be recognized. Total estimated costs, and thus contract income, are impacted by many factors.

 

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 related to the prior year, had current year estimates of costs to complete been known in the prior year.

 

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

 

During the three-months and six-months ending June 30, 2012, revenues generated by the top ten customers were $184.8 million and $364.2 million, respectively, which represented 54.8% and 57.9%, respectively of total revenues during the periods.  During the three and six month periods ending June 30, 2012, the Louisiana DOT represented 11.6% and 13.3%, respectively, of total revenues and a large gas and electric utility represented 12.1% and 11.9%, respectively, of total revenues. During the three and six months ending June 30, 2011, revenues generated by Rockford under the Ruby contract were $89.5 million and $216.4 million, respectively, which represented 25.4% and 30.4%, respectively, of total revenues during the periods.  The Ruby contract was part of a large project for the construction of a natural gas pipeline from Wyoming to Oregon for which field work was substantially completed by the end of the third quarter 2011.

 

At June 30, 2012, approximately 6.8% of the Company’s accounts receivable were due from one customer, and that customer provided 4.1% of the Company’s revenues for the six months ended June 30, 2012.  At June 30, 2011, approximately 4.9% of the Company’s accounts receivable were due from one customer, and that customer provided 30.4% of the Company’s revenues for the six months ended June 30, 2011

 

Multiemployer plans — The Company participates and contributes to a number of multiemployer benefit plans for its union employees at rates determined by the various collective bargaining agreements.  Each plan’s trustees determine the eligibility and allocations of contributions and benefit amounts, determine the types of benefits and administer the plan.  The potential withdrawal obligation may be significant.  Any withdrawal liability would be recorded when it is probable that a liability exists and can be reasonably estimated, in accordance with GAAP.  In November 2011, the Company withdrew from the Central States Southeast and Southwest Areas Pension Fund multiemployer pension plan and recorded a $5 million withdrawal liability as of December 31, 2011.  At this time, the Company has no plans to withdraw from any other agreements.

 

Inventory and uninstalled contract materials — Inventory consists of expendable construction materials and small tools that will be used in construction projects and is valued at the lower of cost, using first-in, first-out method, or market.  Uninstalled contract materials include certain job specific materials not yet installed which are valued using the specific identification method.

 

Note 3—Recent Accounting Pronouncements

 

Fair Value Disclosures

 

In May 2011, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2011-04, Fair Value Measurement: Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS, which provides amendments to FASB ASC Topic 820, Fair Value Measurement. The objective of ASU 2011-04 is to create common fair value measurement and disclosure requirements between GAAP and International Financial Reporting Standards (“IFRS”). The amendments clarify existing fair value measurement and disclosure requirements and make changes to particular principles or requirements for measuring or disclosing information about fair value measurements.  The Company adopted ASU 2011-04 on January 1, 2012, which did not have a material impact on its consolidated financial statements.

 

Goodwill Impairment Testing

 

In September 2011, the FASB issued ASU 2011-08, Intangibles — Goodwill and Other (Topic 350): Testing Goodwill or Impairment (“ASU 2011-08”). ASU 2011-08 provides an option to assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If an entity determines that the fair value is not less than its carrying amount, then it is not necessary to perform the two-step impairment test.  An entity can choose to perform the qualitative assessment on none, some or all of its reporting units.  An entity can also bypass the qualitative assessment for any reporting unit in any period and proceed directly to step one of the impairment test, and then resume performing the qualitative assessment in any subsequent period.  ASU 2011-08 also includes new qualitative indicators that replace those currently used to determine whether an interim goodwill impairment test is required to be performed. The Company adopted this standard on January 1, 2012 which did not have a material impact on the Company’s financial position, results of operations or cash flows.

 

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Intangible Asset Impairment Testing

 

In July 2012, the FASB issued ASU 2012-02, Intangibles — Goodwill and Other (Topic 350):  Testing Indefinite-Lived Intangible Assets for Impairment (“ASU 2012-02”).  ASU 2012-02 allows an organization the option of first assessing qualitative factors to determine if a quantitative impairment test of the indefinite-lived intangible asset is necessary.  If the qualitative assessment reveals that it is “more likely than not” that the asset is impaired, a calculation of the asset’s fair value is required.  Otherwise, no quantitative calculation, as outlined in Subtopic 350-30 is necessary.  ASU 2012-02 is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012.  The Company will adopt this standard on October 1, 2012.  The adoption of ASU 2012-02 is not expected to have a material impact on the Company’s financial position, results of operations or cash flows.

 

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

 

The following table presents, for each of the fair value hierarchy levels identified under ASC Topic 820, the Company’s financial assets that are required to be measured at fair value at June 30, 2012 and December 31, 2011:

 

					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 at June 30, 2012:
Cash and cash equivalents		$	119,286		$	119,286		—		—
Assets at December 31, 2011:
Cash and cash equivalents		$	120,306		$	120,306		—		—
Short-term investments		$	23,000		$	23,000		—		—

 

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 FDIC program.

 

Other financial instruments of the Company 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 at the dates shown:

 

		June 30, 2012			December 31, 2011
Contracts receivable, net of allowance for doubtful accounts of $ 411 for June 30, 2012 and $363 for December 31, 2011		$	155,454		$	166,298
Retention		18,315			20,378
		173,769			186,676
Other accounts receivable		1,313			702
		$	175,082		$	187,378

 

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Note 6—Costs and Estimated Earnings on Uncompleted Contracts

 

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

 

		June 30, 2012			December 31, 2011
Costs incurred on uncompleted contracts		$	2,828,550		$	2,977,535
Reserve for estimated losses on uncompleted contracts		337			917
Gross profit recognized		283,374			303,634
		3,112,261			3,282,086
Less: billings to date		(3,198,476		)	(3,377,949		)
		$	(86,215	)	$	(95,863	)

 

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

 

		June 30, 2012			December 31, 2011
Costs and estimated earnings in excess of billings		$	45,473		$	41,866
Billings in excess of costs and estimated earnings		(131,688		)	(137,729		)
		$	(86,215	)	$	(95,863	)

 

Note 7—Equity Method Investments

 

WesPac Energy 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 holds the remaining 50% membership interest in WesPac. We have no future obligation to make any additional investments into WesPac. All key investment, management and operating decisions of WesPac will require unanimous approval from a management committee equally represented by Kealine and us.  The Company believes the ownership interest in WesPac will broaden our exposure to a variety of pipeline, terminal and energy-related infrastructure opportunities across North America.

 

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

 

		June 30, 2012			December 31, 2011
WesPac Energy, LLC
Balance sheet data
Assets		$	17,891		$	20,147
Liabilities		288			1,820
Net assets		$	17,603		$	18,327
Company’s equity investment		$	12,348		$	12,415

 

		Three months ended June 30,						Six months ended June 30,
		2012			2011			2012			2011
Earnings data:
Revenue		$	111		$	—		$	511		$	—
Expenses		$	428		$	11		$	644		$	138
Earnings before taxes		$	(317	)	$	(11	)	$	(133	)	$	(138	)
Company’s equity in earnings		$	(159	)	$	(6	)	$	(67	)	$	(69	)

 

At the end of 2011, a major oil refining third party terminated two potential projects.  WesPac expensed $5.4 million.  In March 2012, the third party reimbursed WesPac for its share of the terminated project costs.

 

In December 2011, the Company recorded its 50% share of expenses required by the equity method of accounting.  The Company also reduced its $5.0 million basis difference by $1.7 million to recognize an estimate for an other than temporary decrease in the value of its basis difference between the Company’s original investment and its pro-rata share of the WesPac equity.

 

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St.—Bernard Levee Partners

 

The Company purchased a 30% interest in St.—Bernard Levee Partners (“Bernard”) in the fourth quarter 2009 for $300 and accounts for this investment under the equity method. Bernard engages in construction activities in Louisiana.  Bernard distributed $4,200 and $22,892 to its equity holders during the six months ended June 30, 2012 and 2011, respectively, of which, the Company’s share, as calculated under the joint venture agreement, was $1,260 and $5,880 for the same periods in 2012 and 2011, respectively.  The following is a summary of the financial position and results as of and for the periods ended:

 

		June 30, 2012			December 31, 2011
St. — Bernard Levee Partners
Balance sheet data
Assets		$	483		$	5,677
Liabilities		40			4,771
Net assets		$	443		$	906
Company’s equity investment		$	133		$	272

 

		Three months ended June 30,						Six months ended June 30,
		2012			2011			2012			2011
Earnings data:
Revenue		$	499		$	27,674		$	3,934		$	55,710
Expenses		$	126		$	8,757		$	198		$	33,433
Earnings before taxes		$	373		$	18,917		$	3,736		$	22,277
Company’s equity in earnings		$	112		$	4,406		$	1,121		$	5,189

 

Note 8 — Business Combinations

 

Sprint Pipeline Services, L.P.

 

On March 12, 2012, the Company executed an asset purchase agreement with Sprint Pipeline Services, L.P. (“Sprint”).  Headquartered in Pearland (near Houston), Texas, Sprint provides a comprehensive range of pipeline construction, maintenance, upgrade, fabrication and specialty services primarily in the southeastern United States.  The Company formed Primoris Energy Services Corporation, a Texas corporation, to facilitate the acquisition.  The purchase agreement allows the Company to use the Sprint name for three years.

 

The fair value of the consideration transferred to selling shareholders consisted of the following:

 

Cash consideration		$	21,197
Company common stock		980
Earnout consideration		6,200
Total consideration		$	28,377

 

On the closing date, we paid the sellers $19,228 in cash and in the second quarter paid an additional $1,969 once a final valuation of the net book value of assets purchased was completed.

 

We issued the sellers 62,052 shares of our common stock with a contractually agreed upon value of $1,000 based on the average closing price of our common stock for the 20 business days prior to the closing date.  The fair value of the stock issued was $980 based on the stock price on the closing date.

 

As part of the acquisition, the Company agreed to issue additional cash to the sellers, contingent upon Sprint meeting certain operating performance targets for the remainder of 2012 and for the twelve months ending December 31, 2013.  As discussed in Note 12 — “Contingent Earnout Liabilities”, the estimated fair value of the contingency was $6,200 on the acquisition date and $6,422 as of June 30, 2012.

 

The acquisition of Sprint was accounted for using the acquisition method of accounting.  Accordingly, the assets acquired and liabilities assumed were measured at their estimated fair value at the acquisition date.  Sprint’s results of operations have been included in the Company’s consolidated financial statements from March 12, 2012.

 

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The following table summarizes the fair value of the assets acquired and the liabilities assumed:

 

Accounts receivable		$	7,614
Costs and estimated earnings in excess of billings		601
Inventory and other assets		251
Property, plant and equipment		12,078
Intangible assets		3,600
Goodwill		9,389
Accounts payable		(1,458		)
Capital lease obligations		(2,983		)
Other accrued liabilities		(715		)
Net assets acquired		$	28,377

 

The significant identifiable tangible assets acquired include primarily accounts receivable and property, plant and equipment.  The Company determined that the book value of accounts receivable reflected fair value of those assets.  The Company estimated the fair value of fixed assets on the effective date of the acquisition based on comparable market values for equipment of similar condition and age.

 

We requested the assistance of an independent third-party to determine the fair value of the intangible assets acquired for the acquisition.

 

During the second quarter 2012, the Company finalized its estimates of the fair value of the acquired assets and liabilities of Sprint.  The final revision resulted in a change from the values recorded at March 31, 2012, including a decrease in consideration paid to the sellers of $147, an increase in capital lease obligations of $920, an increase of $830 in property, plant and equipment, and a net decrease in working capital of $57.

 

The fair value measurements of the intangible assets were based primarily on significant unobservable inputs and thus represent a Level 3 measurement as defined in Note 3 — “Fair Value Measurements”. Based on the Company’s assessment, the acquired intangible assets categories, fair value and average amortization periods, on a straight-line basis, are as follows:

 

		Amortization		Estimated
		Period		Fair Value
Tradename		3 years		$	700
Non-compete agreements		5 years		$	450
Customer relationship		10 years		$	2,450
Total				$	3,600

 

The fair value of the tradename was determined based on the “relief from royalty” method, which was selected based on external research of third party trade name licensing agreements and their royalty rate levels and management estimates.  The useful life was based on the agreement providing for the use of the Sprint tradename for three years.

 

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

 

The customer relationships were valued 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.

 

Goodwill largely consists of expected benefits from the geographic expansion and presence of Sprint in the Gulf Coast of the United States and its energy-related opportunities for specialized pipeline construction and related services.  Goodwill also includes the value of the assembled workforce of the Sprint business.  Based on the current tax treatment of the Sprint acquisition, goodwill and other intangible assets are deductible for income tax purposes over a fifteen-year period.

 

Silva Companies

 

On May 30, 2012, the Company executed an asset purchase agreement with Silva Contracting Company, Inc., Tarmac Materials, LLC and C3 Interests, LLC (collectively “Silva”).  Based outside of Houston, Texas, Silva provides transportation infrastructure maintenance, asphalt paving and material sales in the Gulf Coast region of the United States.

 

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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 and such estimates are preliminary and subject to change.  The final determination of the fair value of the assets acquired and liabilities assumed has not been completed because of the short period of time from the date of the Silva acquisition to the end of the quarter.  Silva’s results of operations have been included in the Company’s consolidated financial statements from May 30, 2012.  On the closing date, we paid the sellers $13,934 and will pay an additional $175 in the third quarter 2012, for which we received $14,675 in property, plant and equipment, $903 in accounts and retention receivables and accounts payable of $1,469.

 

Supplemental Unaudited Pro Forma Information for the three and six months ended June 30, 2011

 

In accordance with ASC 805 we are combining the Sprint and the Silva acquisition information.  The following pro forma information for the three and six months ended June 30, 2011 presents the results of operations of both the Sprint and Silva acquisitions combined,  as if the acquisitions had both occurred at the beginning of 2011. 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 2012 and 2013 for the Sprint acquisition;
·	the pro forma tax effect of both the income before income taxes for Sprint and Silva and the pro forma adjustments, calculated using a tax rate of 39.0% for the three and six months ended June 30, 2011; and
·	the pro forma increase in weighted average shares outstanding includes 62,052 shares of common stock issued as part of the Sprint 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 Sprint and Silva transactions been completed on January 1, 2011.  The pro forma results do not reflect any operating efficiencies and associated cost savings that the Company may have achieved with respect to the combined companies.

 

		Three months ended June 30,						Six months ended June 30,
		2012			2011			2012			2011
Revenues		340,749			381,408			644,573			754,153
Income before provision for income taxes		18,598			23,495			34,142			36,975
Net income		11,440			14,338			21,007			22,556
Weighted average common shares outstanding:
Basic		51,435			51,106			51,411			50,425
Diluted		51,435			51,216			51,411			51,173
Earnings per share:
Basic		$	0.22		$	0.28		$	0.41		$	0.45
Diluted		$	0.22		$	0.28		$	0.41		$	0.44

 

Note 9—Intangible Assets

 

At June 30, 2012 and December 31, 2011, intangible assets totaled $32,428 and $32,021, respectively, net of amortization.  The June 30, 2012 balance includes the effect of the Sprint 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		June 30,			December 31,
		Period		2012			2011
Tradename		3 to 10 years		$	18,276		$	18,791
Non-compete agreements		5 years		$	4,388		$	4,695
Customer relationships		5 to 10 years		$	9,764		$	8,181
Backlog		0.75 to 2.25 years		$	—		$	354
Total				$	32,428		$	32,021

 

Amortization expense of intangible assets was $1,447 and $2,767 for the three months ended June 30, 2012 and 2011, respectively, and amortization expense for the six months ended June 30, 2012 and 2011 was $3,193 and $5,532, respectively.  Estimated future amortization expense for intangible assets is as follows:

 

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For the Years Ending December 31,		Estimated Intangible Amortization Expense
2012 (remaining six months)		$	2,951
2013		5,233
2014		5,198
2015		3,935
2016		3,539
Thereafter		11,572
		$	32,428

 

Note 10—Accounts Payable and Accrued Liabilities

 

At June 30, 2012 and December 31, 2011, accounts payable included retention amounts of approximately $18,315 and $13,980, respectively.  These amounts due to subcontractors have been retained pending contract completion and customer acceptance of jobs.

 

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

 

		June 30, 2012			December 31, 2011
Payroll and related employee benefits		$	29,405		$	29,110
Insurance, including self-insurance reserves		19,295			18,732
Reserve for estimated expenses on completed contracts		4,850			524
Reserve for estimated losses on uncompleted contracts		337			917
Corporate income taxes and other taxes		1,812			1,546
Accrued overhead cost		2,202			1,819
Current liabilities of discontinued operations		733			733
Other		7,658			6,542
		$	66,292		$	59,923

 

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Note 11—Credit Arrangements

 

As of June 30, 2012, the Company had a Loan and Security Agreement (the “Agreement”) with The PrivateBank and Trust Company (the “Lender”) for a revolving line of credit in the total aggregate amount of $35,000.  The maturity dates, as amended, are as follows:

 

·                                          a revolving loan in the amount of $20,000 (the “Revolving Loan A”), with a maturity date of October 26, 2014; and

·                                          a revolving loan in the amount of $15,000 (the “Revolving Loan B”), with a maturity date of October 25, 2012.

 

Under the Agreement, the Lender agreed to issue letters of credit of up to $15,000 under Revolving Loan A.  As of June 30, 2012 and December 31, 2011, total commercial letters of credit outstanding under Revolving Loan A totaled $4,813 and $4,009, respectively.  Other than the commercial letters of credit, there were no borrowings under these two lines of credit during the period January 1, 2011 through June 30, 2012.  At June 30, 2012, available borrowing capacity under Revolving Loan A was $15,187 and under Revolving Loan B was $15,000.

 

The principal amount of each of Revolving Loan A and Revolving Loan B will bear interest at either: (i) LIBOR plus an applicable margin as specified in the Agreement, or (ii) the prime rate announced by the Lender plus an applicable margin as specified in the Agreement. The principal amount of any loan bearing interest at LIBOR plus an applicable margin may not be prepaid without being subject to certain penalties. There is no prepayment penalty for any loan bearing interest at the prime rate announced by the Lender plus an applicable margin.

 

All loans made by the Lender under the Agreement are secured by our assets, including, among others, our cash, inventory, equipment (excluding equipment subject to certain permitted liens) and accounts receivable. Certain of our subsidiaries have executed joint and several guaranties in favor of the Lender for all amounts under the Agreement.  The Agreement and the line of credit facilities contain various restrictive covenants, including, among others, restrictions on investments, capital expenditures, minimum tangible net worth and debt service coverage requirements.  The Company was in compliance with the bank covenants at June 30, 2012.

 

The Company has a credit facility with a Canadian bank for purposes of issuing commercial letters of credit in Canada, for an amount of up to $10,000 in Canadian dollars. 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 requires 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. As of June 30, 2012 and December 31, 2011, total commercial letters of credit outstanding under this credit facility totaled $1,564 and $4,036 in Canadian dollars, respectively.  As of June 30, 2012, the available borrowing capacity under this credit facility was $8,436 in Canadian dollars. The credit facility contains a working capital restrictive covenant for our Canadian subsidiary, Born Heaters Canada.  At June 30, 2012, the Company was in compliance with the bank covenant.

 

In 2011, the Company entered into an agreement with Bank of the West whereby the Company agrees to maintain a cash balance at the bank equal to the full amount of certain commercial letters of credit.  At both June 30, 2012 and December 31, 2011, the amount of letters of credit with a maturity of twelve months and the related restricted cash amounted to $3,823, and is included as part of customer retention deposits and restricted cash on the balance sheet.

 

Subordinated promissory note — Rockford .  In connection with the acquisition of Rockford, the Company executed an unsecured promissory note (the “Rockford Note”) on November 12, 2010 in favor of the sellers of Rockford with an initial principal amount of $16,712.  The principal amount of the Rockford Note was divided into two portions.  Approximately $9,669 of the Rockford Note was designated as “Note A,” and approximately $7,043 of the note was designated as “Note B.”  Note B was paid in full on March 10, 2011.

 

Note A is due and payable on October 31, 2013 and bears interest at different rates until maturity, averaging 6.67% over its life. During the first 12 months, Note A bore interest at a rate equal to 5%.  For months 13 through 24, it bears interest at a rate equal to 7%. Thereafter and until maturity, Note A bears interest at a rate equal to 8%.  Payments of principal and interest are payable monthly in an amount of $269 principal plus interest over 36 months.  At June 30, 2012, a total of $5,000 was outstanding.

 

In November 2011, the Company placed $5 million in an interest bearing escrow account in lieu of making future payments of that amount to the holders of Rockford’s Note A.  As permitted by the terms of the Rockford Agreement, the amount will remain in escrow until resolution of a dispute related to a certain liability at the time of the closing of the transaction.  The Company has included this escrow amount on its June 30, 2012 balance sheet as “customer retention deposits and restricted cash”.

 

Note A may be prepaid in whole or in part at any time.  If we complete an equity financing while Note A is outstanding, we have agreed to use 15% of the net proceeds in excess of $10 million to prepay a portion or all of Note A.  In addition, we have agreed to use 33% of any cash proceeds raised in connection with incurrence of any indebtedness (other than under a bank line of credit or to finance operating expenses, equipment and capital expenditures) to prepay a portion or all of Note A.

 

While any amount is outstanding under Note A, we have agreed not to take certain actions without the prior written consent of the Rockford Note holders’ representative.  We have agreed not to: (i) incur any obligations for seller financing associated with the acquisition of a business without subordinating it to the Rockford Note, (ii) make any payment on outstanding indebtedness that has been subordinated to the Rockford Note, (iii) make any distribution or declare or pay any dividends (except for regular, quarterly dividends), and (iv) consummate any transaction that would require prepayment under the Rockford Note, if we are not permitted to do so by our senior lender and/or surety companies.

 

The sellers have entered into subordination agreements with our senior lender and bonding agencies, pursuant to which the Rockford Note is subordinated to amounts owed to our senior lender and bonding agencies.

 

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Subordinated promissory note — JCG .  In connection with the acquisition of JCG, the Company executed an unsecured, subordinated promissory note (the “JCG Note”) on December 18, 2009 in favor of the sellers of JCG with an initial principal amount of $53,500. The JCG Note was due and payable on December 15, 2014 and bore interest at differing rates until maturity.  The JCG note was paid in full on March 12, 2012.

 

Note 12 — Contingent Earnout Liabilities

 

Sprint Earnout Consideration

 

As part of the Sprint acquisition on March 12, 2012, the Company agreed to issue additional cash to the sellers, contingent upon Sprint meeting certain operating performance targets for the remainder of 2012 and for the twelve months ending December 31, 2013.

 

The 2012 earnout target is measured by income before interest, taxes, depreciation and amortization (“EBITDA”), as defined in the purchase agreement, for the remainder of the calendar year 2012.  If 2012 EBITDA is at least $7.0 million, we have agreed to pay $4.0 million in cash to the sellers.  The estimated fair value of the 2012 potential contingent consideration on the acquisition date was $3.45 million.

 

The 2013 earnout target provides for an additional cash payment of $4.0 million to the sellers if 2013 EBITDA is at least $7.75 million.  The estimated fair value of the 2013 potential contingent consideration on the acquisition date was $2,745.

 

At June 30, 2012, the estimated fair value of the potential contingent consideration for the 2012 earnout was $3,580 and for the 2013 earnout target, it was $2,842.

 

Rockford Earnout Consideration

 

As part of the Rockford acquisition in November 2010, the Company agreed to issue additional cash and common stock to the sellers, contingent upon Rockford meeting certain operating performance targets for the fourth quarter 2010, for the five quarters ending December 31, 2011 and for the year ended December 31, 2012. The maximum amount of this consideration was $18.4 million, which, when measured on a fair value basis as of the acquisition date, was estimated at $14.3 million and was classified as a liability on the Company’s consolidated balance sheet.

 

The 2010 earnout target for the fourth quarter 2010 was achieved, and in March 2011, the Company issued 494,095 shares of common stock to the sellers, reducing the liability and increasing stockholders’ equity.

 

The 2011 earnout target was achieved and the liability as of December 31, 2011 was $6,900.  In April 2012, the Company issued 232,637 shares of common stock to the sellers and made cash payment of $3.45 million.  The stock component of the earnout was based on the Company’s average closing stock price during the month of December 2011 of $14.83 per share.  The April 2012 cash payment reduced the liability, and the stock component reduced the liability and increased stockholders’ equity in the second quarter 2012.

 

A final contingent earnout liability exists for 2012 based on Rockford’s financial performance as measured by income before interest, taxes, depreciation and amortization (“EBITDA”), as defined in the purchase agreement, for the calendar year 2012.  If 2012 EBITDA is at least $14.0 million, we would pay $6.9 million in cash to the sellers in 2013.

 

At June 30, 2012 and December 31, 2011, the estimated fair value of the potential contingent consideration for the 2012 earnout was $6,175 and $5,818, respectively.  The $357 change in the fair value of this liability was a non-cash charge to “other expense” in the consolidated statement of income for the six month period ended June 30, 2012.

 

Note 13—Related Party Transactions

 

Primoris has entered into various leasing transactions with Stockdale Investment Group, Inc. (“SIGI”).  Brian Pratt, our Chief Executive Officer, President and Chairman of the Board of Directors and our largest stockholder, holds a majority interest and is the chairman, president and chief executive officer and a director of SIGI.  John M. Perisich, our Senior Vice President and General Counsel, is secretary of SIGI.  Primoris leases properties located in Bakersfield (lease expires October 31, 2012), Pittsburg (lease expires September 30, 2014) and San Dimas (lease expires March 30, 2019) in California, and in Pasadena, Texas (leases expire in July 2019 and June 2021) from SIGI. During the six months ended June 30, 2012 and 2011, the Company paid $462 and $381, respectively, in lease payments to SIGI for the use of these properties.

 

The Company entered into a $6.1 million agreement in 2010 to construct a wastewater facility for Pluris, LLC, a private company in which Brian Pratt holds the majority interest.  The transaction was reviewed and approved by the Audit Committee of the Board of Directors of the Company.  During the six months ending June 30, 2012 the Company recognized related party revenues of $355 and $4,439 for the same period in the prior year.  The project was substantially completed at December 31, 2011.

 

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Primoris leases a property from Roger Newnham, one of our stockholders and a manager of our subsidiary, Born Heaters Canada. The property is located in Calgary, Canada. During the six months ended June 30, 2012 and 2011, Primoris paid $141 and $137, respectively, in lease payments to Mr. Newnham for the use of this property. The term of the lease is through December 31, 2014.

 

As a result of the November 2010 acquisition of Rockford, the Company entered into a lease for property from Lemmie Rockford, one of our stockholders.  The property is located in Toledo, Washington.  During the six months ended June 30, 2012 and 2011, Primoris paid $45 and $46, respectively, in lease payments to Mr. Rockford for the use of this property.  The lease expires on January 15, 2015.

 

Note 14—Income Taxes

 

The effective tax rate for the six months ended June 30, 2012 was 38.50%. The rate differs from the U.S. federal statutory rate of 35% due primarily to state income taxes and the “Domestic Production Activity Deduction”.

 

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

 

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

 

The Internal Revenue Service (“IRS”) is presently conducting an examination of our federal income tax returns for 2008 and 2009.  The tax years 2010 through 2011 remain open to examination by the IRS.  The statute of limitations of state and foreign jurisdictions vary generally between 3 to 5 years.  Accordingly, the tax years 2007 through 2011 generally remain open to examination by the other major taxing jurisdictions in which the Company operates.

 

Note 15—Dividends and Earnings Per Share

 

The Company has paid or declared cash dividends during 2012 as follows:

 

·                                    On November 3, 2011, the Company declared a cash dividend of $0.03 per common share, payable to stockholders of record on December 31, 2011.  The dividend, totaling $1,532, was paid on January 16, 2012.

·                                    On February 24, 2012, the Company declared a cash dividend of $0.03 per common share, payable to stockholders of record on March 30, 2012.  The dividend, totaling $1,537, was paid on April 16, 2012.

·                                    On May 4, 2012, the Company declared a cash dividend of $0.03 per common share, payable to stockholders of record on June 29, 2012.  The dividend, totaling $1,542, was paid on July 16, 2012.

 

The table below presents the computation of basic and diluted earnings per share for the three and six months ended June 30, 2012 and 2011:

 

		Three months ended June 30,						Six months ended June 30,
		2012			2011			2012			2011
Numerator:
Net income		$	11,733		$	14,462		$	22,219		$	26,740
Denominator (shares in thousands):
Weighted average shares for computation of basic earnings per share		51,435			51,044			51,386			50,363
Dilutive effect of warrants and units (1)		—			110			—			66
Dilutive effect of contingently issuable shares (2)		—			—			—			659
Dilutive effect of employee purchased shares (3)		—			—			—			23
Weighted average shares for computation of diluted earnings per share		51,435			51,154			51,386			51,111
Basic earnings per share		$	0.23		$	0.28		$	0.43		$	0.53
Diluted earnings per share		$	0.23		$	0.28		$	0.43		$	0.52

 

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(1)                                                                      Represents the dilutive effect of common stock warrants available under the Unit Purchase Option (“UPO”).  See Note 16 — “Stockholders’ Equity”.

 

(2)                                                                      Represents the dilutive effect of the following contingency arrangements which were met at the end of each period, but for which shares of common stock were not issued until the end of the first quarter:

 

a)                           A total of 494,095 shares issued to Rockford’s former stockholders in March 2011 as a result of Rockford meeting a defined performance target in 2010.

 

b)                          A total of 1,095,646 shares issued to JCG’s sellers in March 2011 as a result of JCG meeting a defined performance target in 2010.

 

(3)                                                                      Represents the effect of 94,966 shares of common stock issued in 2011 to managers and executives of the Company under a purchase arrangement within the Company’s Long-Term Incentive Plan.

 

Note 16—Stockholders’ Equity

 

Common stock — In March 2012, the Company received $1,240 in exchange for 111,790 shares of common stock under a purchase arrangement within the Company’s Long-Term Incentive Plan for managers and executives.  The Company also issued 12,395 shares of common stock in February 2012 as part of the quarterly compensation of non-employee members of the Board of Directors.  Additionally, as part of the acquisition of Sprint, the Company issued 62,052 shares of common stock in March 2012.

 

In April 2012, the Company issued 232,637 shares of common stock to the Rockford sellers as a result of Rockford meeting a defined performance target in 2011.

 

In May 2012, the Company’s Board of Directors authorized a 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 $20 million.  During the three months ending June 30, 2012, the Company purchased and cancelled 89,600 shares of stock for $1.0 million at an average cost of $11.17 per share.  The share repurchase program expires December 31, 2012.

 

Note 17—Commitments and Contingencies

 

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

 

Total lease expense during the three and six months ended June 30, 2012 amounted to $2,517 and $4,759, respectively, compared to $2,275 and $4,621 for the same periods in 2011.   The amounts for the three and six months ended June 30,  2012 included lease payments made to related parties of $323 and $648, respectively.

 

Letters of credit — At June 30, 2012, the Company had letters of credit outstanding of $10,162 and at December 31, 2011, the Company had letters of credit outstanding of $11,798.  The outstanding amounts include the U.S. dollar equivalents for letters of credit issued in Canadian dollars.

 

Litigation— The Company is subject to claims and legal proceedings arising out of its business. Management believes that the Company has meritorious defenses to such claims. Although management is unable to ascertain the ultimate outcome of such matters, after review and consultation with counsel and taking into consideration relevant insurance coverage and related deductibles, management believes that the outcome of these matters will not have a materially adverse effect on the consolidated financial position of the Company.

 

Bonding— At June 30, 2012 and December 31, 2011, the Company had bid and completion bonds issued and outstanding totaling approximately $1,108,312 and $1,105,933, respectively.

 

Note 18—Reportable Operating Segments

 

The Company segregates the business into three operating segments: the East Construction Services segment, the West Construction Services segment and the Engineering segment.

 

The East Construction Services segment includes the JCG construction business, located primarily in the southeastern United States.  The segment also includes the businesses located in the Gulf Coast region of the United States, including Cardinal Contractors, Inc. The segment also includes the operating results relating to the acquisition of Sprint Pipeline Services on March 12, 2012.

 

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