Primoris Services Corp - Quarter Report: 2013 March (Form 10-Q)

Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

 

For the quarterly period ended March 31, 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)

 

 

 

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

 

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

 

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

 

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

 

Large accelerated filer  o		Accelerated filer x
Non-accelerated filer  o		Smaller reporting company  o
Do not check if a smaller reporting company.

 

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

 

At May 7, 2013, 51,562,284 shares of the registrant’s common stock were outstanding.

 

 

Table of Contents

 

PRIMORIS SERVICES CORPORATION

 

INDEX

 

	Page No.
Part I. Financial Information
Item 1. Financial Statements:	3
—Condensed Consolidated Balance Sheets at March 31, 2013 and December 31, 2012	3
—Condensed Consolidated Statements of Income for the three months ended March 31, 2013 and 2012	4
— Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 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	22
Item 3. Quantitative and Qualitative Disclosures About Market Risk	32
Item 4. Controls and Procedures	33
Part II. Other Information	33
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)

 

		March 31, 2013			December 31, 2012
ASSETS
Current assets:
Cash and cash equivalents		$	141,527		$	157,551
Short term investments		3,179			3,441
Customer retention deposits and restricted cash		27,371			35,377
Accounts receivable, net		249,621			268,095
Costs and estimated earnings in excess of billings		48,164			41,701
Inventory and uninstalled contract materials		37,917			37,193
Deferred tax assets		10,477			10,477
Prepaid expenses and other current assets		10,810			10,800
Total current assets		529,066			564,635
Property and equipment, net		195,258			184,840
Investment in non-consolidated entities		13,082			12,813
Intangible assets, net		50,984			51,978
Goodwill		118,964			116,941
Other long-term assets		1,181			—
Total assets		$	908,535		$	931,207
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	105,876		$	151,546
Billings in excess of costs and estimated earnings		160,944			158,892
Accrued expenses and other current liabilities		75,996			76,152
Dividends payable		1,547			—
Current portion of capital leases		4,273			3,733
Current portion of long-term debt		20,944			19,446
Current portion of contingent earnout liabilities		18,728			10,900
Total current liabilities		388,308			420,669
Long-term capital leases, net of current portion		3,469			3,831
Long-term debt, net of current portion		136,764			128,367
Deferred tax liabilities		20,018			20,018
Long-term contingent earnout liabilities, net of current portion		5,897			12,531
Other long-term liabilities		9,913			13,153
Total liabilities		564,369			598,569
Commitments and contingencies
Stockholders’ equity
Common stock—$.0001 par value, 90,000,000 shares authorized, 51,562,284 and 51,403,686 issued and outstanding at March 31, 2013 and December 31, 2012		5			5
Additional paid-in capital		158,639			155,605
Retained earnings		183,741			175,517
Noncontrolling interests		1,781			1,511
Total stockholders’ equity		344,166			332,638
Total liabilities and stockholders’ equity		$	908,535		$	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 March 31,
		2013			2012
Revenues		$	409,995		$	291,573
Cost of revenues		363,899			253,977
Gross profit		46,096			37,596
Selling, general and administrative expenses		28,619			20,274
Operating income		17,477			17,322
Other income (expense):
Income from non-consolidated entities		269			1,101
Foreign exchange loss		(59		)	(42		)
Other expense		(56		)	(208		)
Interest income		40			22
Interest expense		(1,424		)	(1,101		)
Income before provision for income taxes		16,247			17,094
Provision for income taxes		(6,207		)	(6,564		)
Net income		$	10,040		$	10,530
Less net income attributable to noncontrolling interests		$	(270	)	$	(44	)
Net income attributable to Primoris		$	9,770		$	10,486
Earnings per share:
Basic		$	0.19		$	0.21
Diluted		$	0.19		$	0.20
Weighted average common shares outstanding:
Basic		51,456			51,096
Diluted		51,467			51,337

 

See Accompanying Notes to Condensed Consolidated Financial Statements

 

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PRIMORIS SERVICES CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)

(Unaudited)

 

		Three Months Ended
		March 31,
		2013			2012
Cash flows from operating activities:
Net income		$	10,040		$	10,530
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation		9,490			6,424
Amortization of intangible assets		1,794			1,746
Loss (gain) on sale of property and equipment		48			(339		)
Income from non-consolidated entities		(269		)	(1,101		)
Distributions received from non-consolidated entities		—			1,260
Changes in assets and liabilities:
Customer retention deposits and restricted cash		8,006			(3,886		)
Accounts receivable		18,174			38,297
Costs and estimated earnings in excess of billings		(6,463		)	9,494
Inventory, prepaid expenses and other current assets		(232		)	3,946
Other long-term assets		(381		)	—
Accounts payable		(46,557		)	(20,141		)
Billings in excess of costs and estimated earnings		2,052			(6,609		)
Contingent earnout liabilities		356			208
Accrued expenses and other current liabilities		(99		)	8
Other long-term liabilities		(3,240		)	(12		)
Net cash (used in) provided by operating activities		(7,281		)	39,825
Cash flows from investing activities:
Purchase of property and equipment		(19,550		)	(5,188		)
Proceeds from sale of property and equipment		1,222			3,935
Purchase of short-term investments		(2,939		)	—
Sale of short-term investments		3,201			23,000
Cash paid for acquisitions		(1,025		)	(19,228		)
Net cash (used in) provided by investing activities		(19,091		)	2,519
Cash flows from financing activities:
Proceeds from issuance of long-term debt		16,116			—
Repayment of capital leases		(1,002		)	(6,058		)
Repayment of long-term debt		(6,221		)	(4,959		)
Repayment of subordinated debt		—			(16,861		)
Proceeds from issuance of common stock purchased by management under long-term incentive plan		1,455			1,240
Dividends paid		—			(1,532		)
Net cash provided by (used in) financing activities		10,348			(28,170		)
Net change in cash and cash equivalents		(16,024		)	14,174
Cash and cash equivalents at beginning of the period		157,551			120,306
Cash and cash equivalents at end of the period		$	141,527		$	134,480

 

See Accompanying Notes to Condensed Consolidated Financial Statements

 

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SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

 

		Three Months Ended
		March 31,
		2013			2012
		(Unaudited)
Cash paid during the period for:
Interest		$	1,259		$	951
Income taxes, net of refunds received		$	802		$	955
Components of cash paid for acquisition:
Fair value of assets acquired		$	2,513		$	28,524
Estimated cash payments due sellers		(650		)	(2,116		)
Contingent liabilities		(838		)	(6,200		)
Common stock issued for acquisition		—			(980		)
Cash paid for acquisition		$	1,025		$	19,228

 

SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES

 

		Three Months Ended
		March 31,
		2013			2012
		(Unaudited)
Non-cash activities:
Dividends declared and not yet paid		$	1,547		$	1,537

 

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 Per Share Amounts)

(Unaudited)

 

Note 1—Nature of Business

 

Organization and operations —Primoris Services Corporation is a holding company of various subsidiaries, which 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.

 

The wholly-owned subsidiaries of Primoris include ARB, Inc. (“ARB”), ARB Structures, Inc., All Day Electric Company, Inc., OnQuest, Inc. (parent of OnQuest Canada, ULC, formerly Born Heaters Canada, ULC prior to January 1, 2013), Cardinal Contractors, Inc., Stellaris, LLC, James Construction Group LLC (“JCG”), Rockford Corporation (“Rockford”) and Primoris Energy Services Corporation (“PES”).  Primoris has been acquisitive over the last several years expanding both service capabilities and geographic footprint.  The acquisitions in 2012 included the purchase of Sprint Pipeline Services, L.P. (“Sprint”), the purchase of certain assets of Silva Contracting Company, Inc., Tarmac Materials, LLC and C3 Interest, LLC (collectively “Silva”), The Saxon Group (“Saxon”) and the acquisition of Q3C Contracting, Inc. (“Q3C”).

 

In 2011, the Company entered into a joint venture agreement and formed Blythe Power Constructors for the installation of a parabolic trough solar field and steam generation system in California.

 

On March 11, 2013, the Company’s subsidiary, 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.

 

Unless specifically noted otherwise, as used throughout these consolidated financial statements, “Primoris”, “the Company”, “we”, “our”, “us” or “its” refers to the business, operations and financial results of the Company and its wholly-owned subsidiaries.

 

Note 2—Basis of Presentation

 

Interim Consolidated Financial Statements — The interim condensed consolidated financial statements for the three-month periods ended March 31, 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 latest audited consolidated financial statements, have been omitted. This Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2013 (the “First Quarter 2013 Report”) should be read in concert with 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.

 

The interim financial information for the three-month periods ended March 31, 2013 and 2012 is unaudited and has been prepared on the same basis as the audited consolidated financial statements. However, the financial statements contained in this First Quarter 2013 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. 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—Historically, substantial portions of the Company’s revenues have been generated under fixed-price contracts. Fixed-price contracts carry certain inherent risks, including underestimation of costs, problems with new technologies and economic and other changes that may occur over the contract period. For fixed-price contracts, the Company recognizes revenues using the percentage-of-completion method, which may result in uneven and irregular results. 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 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.  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.

 

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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. 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 full loss amount is recognized as an “accrued loss provision” 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.

 

Other contract forms—In addition, 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 accomplishment of specific units at a specified unit price.

 

For all of its contracts, the Company includes the 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 determined. Claims are included in revenues when realization is probable and amounts can be reliably determined. Revenues in excess of contract costs incurred on claims are recognized only when the amounts have been paid.

 

The caption “Costs and estimated earnings in excess of billings” represents unbilled receivables which arise when revenues have been recorded but the amount cannot be billed under the terms of the contract until a later date.  Balances may represent:  (a) unbilled amounts arising from the use of the percentage-of-completion method of accounting, (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, excesses 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 we have customer approval for a change in scope but for which we do 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 and the estimated revenue amount is equal to or greater than the costs related to the unapproved change order. 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 Primoris 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. Revenue 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 construction contracts, certain retainage amounts may be withheld by customers until completion and acceptance of the project.  Final payments of the majority of retainage may not be made until 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 ending March 31, 2013, revenues generated by the top ten customers were $227 million, which represented 55.4% of total revenues during the period.  During that period, a large gas and electric utility represented 8.5% of total revenues and a large pipeline company represented 7.3% of total revenues.

 

During the three months ending March 31, 2012, revenues generated by the top ten customers were $179 million, which represented 61.5% of total revenues during the period.  During the period, the Louisiana DOT represented 15.2% of total revenues and a large gas and electric utility represented 11.7% of total revenues.

 

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At March 31, 2013, approximately 8.2% of the Company’s accounts receivable were due from one customer, and that customer provided 7.3% of the Company’s revenues for the three months ended March 31, 2013.

 

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.  The Company recorded the liability, and as of March 31, 2013, the withdrawal liability amounts to $7.5 million on the balance sheet.  The Company has no plans to withdraw from any other agreements.  See Note 18 — Commitments and Contingencies.

 

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 is effective for the fiscal years beginning on or after January 1, 2013, and interim periods within.  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 within those years, beginning after December 15, 2013.  The Company is currently evaluating the impact of this guidance on its financial statements.

 

Note 4—Fair Value Measurements

 

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

 

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

 

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The following table presents, for each of the fair value hierarchy levels identified under ASC Topic 820, the Company’s financial assets that are required to be measured at fair value at March 31, 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 March 31, 2013:
Cash and cash equivalents		$	141,527		$	141,527		—		—
Short-term investments		$	3,179		$	3,179		—		—
Liabilities as of March 31, 2013:
Contingent consideration		$	—		—			—		$	24,625
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

 

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 the 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 a rollforward of the Company’s contingent consideration liability (see Note 13 — Contingent Earnout Liabilities) level three fair value measurements during the three months ended March 31, 2013:

 

		Significant Unobservable Inputs (Level 3)
Contingent Consideration
Balance at December 31, 2012		$	23,431
Additions:
FSSI acquisition on March 11, 2013		838
Change in fair value of contingent consideration		356
Balance at March 31, 2013		$	24,625

 

Contingent consideration amounts, included as a liability on the balance sheet at December 31, 2012, for the Rockford and the Sprint earnout targets were settled in April 2013 with payments of $6,900 and $4,000, respectively.

 

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 a non-operating charge 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 are greater than 50%) 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 increases (decreases) in either of those inputs in isolation would result in a significantly higher (lower) fair value measurement.  Generally, a change in the assumption used for the probability of meeting the performance target is accompanied by a directionally similar change in the fair value of contingent consideration liability, whereas a change in assumption used for 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 at the dates shown:

 

		March 31, 2013			December 31, 2012
Contracts receivable, net of allowance for doubtful accounts of $456 for March 31, 2013 and $432 for December 31, 2012		$	207,442		$	227,548
Retention		41,834			39,710
		249,276			267,258
Other accounts receivable		345			837
		$	249,621		$	268,095

 

Note 6—Costs and Estimated Earnings on Uncompleted Contracts

 

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

 

		March 31, 2013			December 31, 2012
Costs incurred on uncompleted contracts		$	3,334,793		$	3,882,968
Provision for estimated loss on uncompleted contracts		593			764
Gross profit recognized		390,956			448,928
		3,726,342			4,332,660
Less: billings to date		(3,839,122		)	(4,449,851		)
		$	(112,780	)	$	(117,191	)

 

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

 

		March 31, 2013			December 31, 2012
Costs and estimated earnings in excess of billings		$	48,164		$	41,701
Billings in excess of costs and estimated earnings		(160,944		)	(158,892		)
		$	(112,780	)	$	(117,191	)

 

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”), with 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 require unanimous approval from a management committee equally represented by Kealine and us.  The Company believes the ownership interest in WesPac broadens 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:

 

		March 31, 2013			December 31, 2012
Balance sheet data
Assets		$	16,397		$	16,896
Liabilities		756			1,063
Net assets		$	15,641		$	15,833
Company’s equity investment in venture		$	11,367		$	11,463

 

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		Three months ended March 31,
		2013			2012
Earnings data:
Revenue		$	39		$	400
Expenses		$	231		$	216
Earnings before taxes		$	(192	)	$	184
Company’s equity in earnings		$	(96	)	$	92

 

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 $0 and $4,200 to its equity holders during the three months ended March 31, 2013 and 2012, respectively, of which, the Company’s share, as calculated under the joint venture agreement, was $0 and $1,260 for the same periods in 2013 and 2012, respectively. There was no activity in the three month period ended March 31, 2013.  The following is a summary of the financial position and results as of and for the periods ended:

 

		March 31, 2013			December 31, 2012
Balance sheet data
Assets		$	592		$	592
Liabilities		86			86
Net assets		$	506		$	506
Company’s equity investment in venture		$	150		$	150

 

		Three months ended March 31,
		2013			2012
Earnings data:
Revenue		$	—		$	3,435
Expenses		$	—		$	72
Earnings before taxes		$	—		$	3,363
Company’s equity in earnings		$	—		$	1,009

 

Alvah, Inc.

 

On November 17, 2012, the Company acquired a 49% membership interest in Alvah, Inc., a California corporation (“Alvah”), as part of the acquisition of Q3C.  Alvah is engaged in electrical contracting activities, primarily in Northern California and worked as a subcontractor for ARB prior to and after the acquisition. In December 2012, Alvah distributed $200, of which the Company’s share was $98.  During the three months ending March 31, 2013, payments made to Alvah as a subcontractor by ARB and Q3C were $1,486 and $1,245, respectively.  For the same period in the prior year, payments were $212 and $118, respectively. The following is a summary of the financial position and results as of and for the period ended:

 

		March 31, 2013			December 31, 2012
Balance sheet data
Assets		$	2,880		$	2,177
Liabilities		1,166			1,208
Net assets		$	1,714		$	969
Company’s equity investment in venture		$	1,565		$	1,200

 

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		Three months ended March 31,
		2013			2012
Earnings data:
Revenue		$	2,716		$	—
Expenses		$	1,971		$	—
Earnings before taxes		$	745		$	—
Company’s equity in earnings		$	365		$	—

 

Note 8 — Business Combinations

 

2013 Acquisition - FSSI

 

On March 11, 2013, the Company’s subsidiary, 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 amounted to $2,513.  The consideration consisted of cash of $1,025 paid the sellers on the closing date and PES expects to pay an additional $650 in the second quarter 2013.  The agreement provides for other payments, contingent upon FSSI meeting certain operating performance targets for the remainder of calendar year 2013 and for the twelve months ending December 31, 2014 and 2015.

 

The contingent consideration consists of additional payments of (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 and March 31, 2013 was $838.

 

Finally, the acquisition includes an agreement for a key employee whereby PES will pay $1,000 for a five-year employment, non-competition and non-solicitation agreement.  If the employee violates the agreement or terminates his employment prior to the end of the five-year period, he is required to repay the unamortized amount of the $1,000 payment.  We will account for this agreement as a current and long-term prepaid asset and will amortize it equally over the five-year period.

 

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.  The estimates are preliminary and subject to change.  The final determination of the fair value of the assets acquired and liabilities assumed, primarily the estimated intangible assets, has not been completed because of the short period of time from the date of the FSSI acquisition to the end of the quarter.  The FSSI purchase was included in the Company’s consolidated balance sheet as of March 31, 2013.  FSSI contributed revenues of $483 and gross profit of $128 during the period subsequent to March 11, 2013.

 

As part of the asset purchase agreement, the Company received $302 in small tools inventory, $448 in property, plant and equipment, and recorded accounts payable of $1,060.

 

The customer relationships were valued at $500 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 $300 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.

 

Goodwill of $2,023 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 of the FSSI acquisition, goodwill and other intangible assets are 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 transferred to the sellers totaled $28,377, and included Company stock valued at $980 (or 62,052 shares of our restricted common stock) and contingent consideration of $6,200.

 

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If income before interest, taxes, depreciation and amortization (“EBITDA”) for 2012, as defined in the purchase agreement, was at least $7,000, we agreed to pay $4,000 in cash to the sellers. The earnout target was achieved in 2012 and the $4,000 liability is reflected on the balance sheet at both December 31, 2012 and March 31, 2013, 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 potential contingent consideration as of the acquisition date was $2,745 and at March 31, 2013 and December 31, 2012, the estimated fair value was $3,109 and $3,020, respectively.

 

2012 Acquisition - Silva Companies

 

The May 30, 2012 acquisition of Silva Contracting Company, Inc., Tarmac Materials, LLC and C3 Interests, LLC (collectively “Silva”) was accounted for using the acquisition method of accounting.  The fair value of the consideration transferred to the sellers was $14,090.

 

2012 Acquisition - The Saxon Group

 

The September 28, 2012 acquisition of The Saxon Group (“Saxon”) was accounted for using the acquisition method of accounting.  The fair value of the consideration transferred to the sellers was $550 in cash, paid off a note for $2,429, and provided 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 June 30, 2014 of at least $4,750.  The estimated fair value of the potential contingent consideration on the acquisition date was $1,950.  The estimated fair value was $2,106 and $2,028 at March 31, 2013 and December 31, 2012, respectively.

 

2012 Acquisition — Q3 Contracting

 

The November 17, 2012 acquisition of Q3C was accounted for using the acquisition method of accounting.  The fair value of the consideration transferred to the sellers totaled $55,994, and included a cash payment of $48,116, a contingent earnout with a fair value of $7,448 and a commitment to issue $430 in Company common stock, based on the average December 2012 closing price, or 29,273 shares of unregistered stock, which were provided to the sellers in January 2013.

 

The contingent consideration included an earnout where the Company would pay additional cash to the sellers, contingent upon Q3C meeting certain operating performance targets.  The targets are based on the achievement of meeting certain levels of Q3C’s EBITDA.  The targets are as follows:

 

1.                                   If EBITDA for the period November 18, 2012 through December 31, 2013 is at least $17,700, the Company agreed to pay $3,750 in cash to the sellers, with an additional cash payment of $1,250 if EBITDA exceeds $19,000.

 

2.                                   If EBITDA for the calendar year 2014 is at least $19,000, the Company agreed to pay $3,750 in cash to the sellers, with an additional cash payment of $1,250 if EBITDA exceeds $22,000.

 

The fair value of the contingent consideration was estimated to be $7,450 as of the purchase date and is included on the Company’s balance sheet as a liability.  The fair value is based on management’s evaluation of the probability of Q3C meeting the EBITDA targets for the two periods, discounted at the Company’s estimated average cost of capital.  The estimated fair value at March 31, 2013 and December 31, 2012 was $7,672 and $7,490, respectively.

 

Supplemental Unaudited Pro Forma Information for the three months ended March 31, 2013 and 2012

 

In accordance with ASC Topic 805 we are combining the FSSI, Sprint, Silva, Saxon and Q3C acquisition (“the Acquisitions”) information.  The following pro forma information for the three months ended March 31, 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;

 

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·                                          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 acquisition and 2013 or 2014 for the Saxon and Q3C 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 months ended March 31, 2012 and the applicable 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 the 29,273 shares of unregistered shares of 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.  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 March 31,
		2013			2012
Revenues		412,794			318,415
Income before provision for income taxes		16,162			14,241
Net income attributable to Primoris		9,718			8,746
Weighted average common shares outstanding:
Basic		51,456			51,145
Diluted		51,467			51,386
Earnings per share:
Basic		$	0.19		$	0.17
Diluted		$	0.19		$	0.17

 

Note 9—Intangible Assets

 

At March 31, 2013 and December 31, 2012, intangible assets totaled $52,184 and $51,978, respectively, net of amortization.  The March 31, 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		March 31,			December 31,
		Period		2013			2012
Tradename		3 to 10 years		$	22,828		$	23,586
Non-compete agreements		2 to 5 years		$	4,023		$	4,130
Customer relationships		5 to 15 years		$	24,133		$	24,212
Backlog		0.75 years		$	—		$	50
Total				$	50,984		$	51,978

 

Amortization expense of intangible assets was $1,794 and $1,746 for the three months ended March 31, 2013 and 2012, respectively.  Estimated amortization expense for intangible assets is as follows:

 

For the Years Ending December 31,		Estimated Intangible Amortization Expense
2013 (remaining nine months)		$	4,632
2014		7,316
2015		7,046
2016		6,126
2017		5,769
Thereafter		20,095
		$	50,984

 

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Note 10—Accounts Payable and Accrued Liabilities

 

At March 31, 2013 and December 31, 2012, accounts payable included retention amounts of approximately $13,326 and $15,946, 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:

 

		March 31, 2013			December 31, 2012
Payroll and related employee benefits		$	29,190		$	33,086
Insurance, including self-insurance reserves		25,275			22,982
Reserve for estimated losses on uncompleted contracts		593			764
Corporate income taxes and other taxes		6,177			3,779
Accrued overhead cost		1,745			2,007
Current liabilities of discontinued operations		133			133
Other		12,883			13,401
		$	75,996		$	76,152

 

Note 11—Credit Arrangements

 

Revolving Credit Facility

 

As of March 31, 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 by the Company 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.

 

Other than commercial letters of credit of $5,659, there were no borrowings under this line of credit during the three months ended March 31, 2013, leaving available borrowing capacity at $69,341.

 

As part of the execution of the Credit Agreement, the previous Loan and Security Agreement dated October 29, 2009, as amended, between the Company and The Private Bank and Trust Company (the “PrivateBank Agreement”), was terminated.  There were no borrowings outstanding at the time of the termination and all letter of credit amounts issued and outstanding under the terminated agreement were transferred to the Lenders under the Credit Agreement discussed above.

 

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.  The agreement was terminated and all the remaining liabilities were transferred to the Credit Agreement.

 

Senior Secured Notes and Shelf Agreement

 

On December 28, 2012, the Company also entered into a $50 million Senior Secured Notes purchase (“Senior Notes”) and a $25 million private shelf agreement (the “Notes Agreement”) by and among the Company and The Prudential Investment Management, Inc. and certain Prudential affiliates (the “Noteholders”).

 

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A total of $50 million in Senior Notes was funded on December 28, 2012. The Senior Notes are due December 28, 2022 and bear interest at an annual rate of 3.65%, paid quarterly in arrears. Annual principal payments of $7.1 million are required beginning December 28, 2016 through December 28, 2021 with a final payment due on December 28, 2022. The principal amount may be prepaid in whole or in part, with a minimum prepayment of $5 million, at any time, subject to make-whole provisions.

 

The Notes Agreement provides for the issuance of additional notes of up to $25 million, during the first three years of the Notes Agreement with maturity dates no more than 10 years from the date issued, at the market interest rate for notes with equivalent terms and conditions.

 

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

 

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

 

The Company was in compliance with the covenants for the Credit Agreement and Senior Notes as of March 31, 2013.

 

Canadian Credit Facility

 

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 provides for an annual fee of 1% for any issued and outstanding commercial letters of credit. Letters of credit can be denominated in either Canadian or U.S. dollars. At March 31, 2013 and December 31, 2012, commercial letters of credit outstanding under this credit facility totaled $3,468 and $1,364 in Canadian dollars, respectively.  At March 31, 2013, the available borrowing capacity under this credit facility was $6,532 in Canadian dollars.  The credit facility contains a working capital restrictive covenant for our Canadian subsidiary, OnQuest Canada, and as of March 31, 2013, OnQuest Canada was in compliance.

 

Subordinated Promissory Note — Rockford.   In connection with the 2010 acquisition of Rockford, the Company executed an unsecured promissory note (the “Rockford Note”).

 

As a result of a dispute related to a certain liability at the time of the closing of the transaction, the Company ceased making principal and interest payments in May 2012, when the outstanding balance reached $5,000.  In December 2012, the parties came to a resolution and the Company paid $1,500 to cancel the subordinated note.

 

Subordinated Promissory Note — JCG.   In connection with the acquisition of JCG, the Company executed an unsecured 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 — Noncontrolling Interests

 

The Company applies the provisions of ASC Topic 810-10-45, which establishes accounting and reporting standards for ownership interests of parties other than the Company in subsidiaries, such as joint ventures and partnerships.

 

The Company determined that the Blythe joint venture was a variable interest entity (“VIE”) and that the Company was the primary beneficiary as a result of its significant influence over the joint venture operations.  Revenues for the Blythe joint venture for the three months ended March 31, 2013 and 2012 were $16,272 and $1,621.   Net income attributable to noncontrolling interests in the Blythe joint venture was $270 and $44 for the three months ended March 31, 2013 and 2012, respectively.  Since Blythe is a partnership, no tax effect was recognized for the income.  There were no distributions to noncontrolling interests and no capital contributions made by noncontrolling interests during the three months ended March 31, 2013 and 2012.

 

Included in the consolidated financial statements at March 31, 2013, the carrying value of the assets and liabilities associated with the operations of the Blythe joint venture were $4,983 of cash, $13,715 of accounts receivable and current liabilities of $15,130.  At December 31, 2012, the carrying value of the assets and liabilities included $3,565 of cash, $8,843 of accounts receivable and current liabilities of $9,379.  The net assets of the joint venture are restricted for use by the project and are not available for general operations of the Company.

 

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Note 13 — Contingent Earnout Liabilities

 

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 $18,400 which when measured on a fair value basis as of the acquisition date, was estimated at $14,300 and was classified as a liability in 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 unregistered shares of common stock to the sellers.  The 2011 earnout target was achieved and in April 2012, the Company issued 232,637 unregistered shares of common stock to the sellers and made a cash payment of $3,450.

 

The contingent earnout liability for 2012 was achieved and in April 2013, the Company made a $6,900 cash payment to the sellers.

 

Other Earnout Consideration

 

The Company has recorded additional contingent earnout consideration liabilities related to the acquisitions of FSSI, Sprint, Saxon and Q3C as discussed in Note 8 — Business Combinations.

 

Note 14—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, also 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 in October 2022), Pittsburg (lease expires April 2023) and San Dimas in California (lease expires March 30, 2019), and in Pasadena, Texas (leases expire in July 2019 and 2021) from SIGI.  During the three month ended March 31, 2013 and 2012, the Company paid $235 and $231, respectively, in lease payments to SIGI for the use of these properties.

 

The Company entered into a $6,100 agreement in 2010 to construct a wastewater facility for Pluris, LLC, a private company in which Brian Pratt also holds a majority interest. The transaction was reviewed and approved by the Audit Committee of the Board of Directors of the Company.  The project was substantially completed in December 2011. The Company recognized no revenues in 2013 and recognized revenues of $291 for the three months ended March 31, 2012, at normal margins.

 

Primoris leases a property from Roger Newnham, one of our stockholders and a manager of our subsidiary OnQuest Canada.  The property is located in Calgary, Canada. During the three months ended March 31, 2013 and 2012, Primoris paid $75 and $72, respectively, in lease payments to Mr. Newnham for the use of this property. The term of the lease is through December 31, 2014.

 

Primoris leases a property from Lemmie Rockford, one of our stockholders, which commenced November 1, 2011.  The property is located in Toledo, Washington.  During the three months ended March 31, 2013 and 2012, Primoris paid $23 and $23, respectively, in lease payments to Mr. Rockford for the use of this property.  The lease expires on January 15, 2015.

 

As a result of the November 2012 acquisition of Q3C, the Company became party to leased property from Quality RE Partners, owned by three of the Q3C selling shareholders, of whom two are current employees, including Jay Osborn, President of Q3C.  The lease commenced October 28, 2012.  The property is located in Little Canada, Minnesota.  During the three months ended March 31, 2013, the Company paid $66, in lease payments to Quality RE Partners for the use of this property.  The lease expires on October 27, 2022.

 

The Company owns several non-consolidated investments and has recognized revenues on work performed for those joint ventures.  The Company recognized $20 and $0 in related party revenues for the three months ended March 31, 2013 and 2012, respectively, from the Westpac and St. - Bernard Levee Partners joint venture.  On November 17, 2012, the Company acquired a 49% interest in Alvah, Inc. as part of the Q3C acquisition.  During the three months ended March 31, 2013, payments made to Alvah as a subcontractor by ARB and Q3C were 1,245 and $212, respectively.  See Note 7— “Equity Method Investments”.

 

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Note 15—Income Taxes

 

The effective tax rate on income before taxes and noncontrolling interests for the three months ended March 31, 2013 was 37.82%.  The effective tax rate for income attributable to Primoris is 38.85%. The rate differs from the U.S. federal statutory rate of 35% due primarily to state income taxes, the “Domestic Production Activity Deduction” and nondeductible meals and incidental per diems common in the construction industry.

 

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

 

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

 

In September 2012, the Internal Revenue Service (“IRS”) concluded an  examination of our federal income tax returns for 2008 and 2009, which did not have a material impact on our financial statements.  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 16—Dividends and Earnings Per Share

 

On November 1, 2012, the Company declared a cash dividend of $0.03 per common share, payable to stockholders of record on December 18, 2011.  The dividend, totaling $1,542, was paid on December 26, 2012.  On March 5, 2013, the Company declared a cash dividend of $0.03 per common share, payable to stockholders of record on March 28, 2013.  The dividend, totaling $1,547, was paid on April 15, 2013.

 

The table below presents the computation of basic and diluted earnings per share for the three months ended March 31, 2013 and 2012:

 

		Three months ended March 31,
		2013			2012
Numerator:
Net income attributable to Primoris		$	9,770		$	10,486
Denominator:
Weighted average shares for computation of basic earnings per share		51,456			51,096
Dilutive effect of contingently issuable shares (1)		—			233
Dilutive effect of shares issued to independent directors		9			8
Dilutive effect of shares to be issued to Q3C sellers (2)		2			—
Weighted average shares for computation of diluted earnings per share		51,467			51,337
Earnings per share:
Basic		$	0.19		$	0.21
Diluted		$	0.19		$	0.20

 

(1)                                 Represents the dilutive effect of 232,637 unregistered shares of common stock issued to Rockford’s former stockholders in April 2012 as a result of Rockford meeting a defined performance target in 2011.

 

(2)                                 Represents the dilutive effect of 29,273 unregistered shares of common stock provided in January 2013 as part of the purchase consideration for the Q3C acquisition.

 

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Note 17—Stockholders’ Equity

 

Common stock —In March 2013, the Company received $1,455 in exchange for 131,989 shares of common stock, under a purchase arrangement within the Company’s Long-Term Incentive Plan (“LTI Plan”) for managers and executives. The LTI Plan allows participants to purchase Company common stock at a discount from the market price and can purchase stock up to a fixed percent of their bonus amount. The shares purchased in March 2013 were for bonuses earned in 2012 and were calculated at 75% of the average market closing price of December 2012.

 

In March 2013, the Company issued 12,480 shares of common stock as part of the quarterly compensation of the non-employee members of the Board of Directors.

 

As part of the acquisition of Q3C, the Company agreed to issue shares of common stock amounting to $430 based on the average December 2012 closing price, or $14.69 per share, with 29,273 unregistered shares of stock issued as of January 7, 2013.

 

Note 18—Commitments and Contingencies

 

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

 

Total lease expense during the three months ended March 31, 2013 and 2012 amounted to $3,845 and $2,242, respectively, including amounts paid to related parties of $399 and $325, respectively.

 

Letters of credit — At March 31, 2013, the Company had letters of credit outstanding of $9,066 and at December 31, 2012, the Company had letters of credit outstanding of $6,168.  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 March 31, 2013 and December 31, 2012, the Company had bid and completion bonds issued and outstanding totaling approximately $1,183,423 and $1,298,589, respectively.

 

Withdrawal liability for multiemployer pension plan—In November 2011, Rockford and ARB, along with other members of the Pipe Line Contractors Association (“PLCA”), withdrew from the Central States Southeast and Southwest Areas Pension Fund multiemployer pension plan (the “Plan”). In connection with the withdrawal, the Company has recorded an estimated liability of $7,500 based on information provided by the Plan. The Company withdrew from the Plan in order to mitigate its liability in connection with the Plan, which is significantly underfunded. The Plan has asserted that the PLCA members did not affect a withdrawal in 2011, although the Company believes that a legally effective withdrawal occurred in November 2011 and has recorded the withdrawal liability on that basis. If the Plan were to prevail in its assertion and the withdrawal of the Company were deemed to occur after 2011, the amount of any withdrawal liability would be expected to increase.

 

Prior to its acquisition, Q3C had also withdrawn from the Plan.  At the November 2012 acquisition closing, Q3C estimated a withdrawal liability of $85.  Subsequently, in the first quarter of 2013, the Plan asserted that the liability was $119.  Without agreeing to the amount, Q3C has made a payment toward the liability.

 

Contingent Consideration—Earnouts related to acquisitions as discussed in Note 8 — Business Combinations and Note 13 — Contingent Earnout Liabilities.

 

Note 19—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 and 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 acquisitions of Sprint, Silva and Saxon in 2012 and FSSI in 2013.

 

The West Construction Services segment includes the construction services performed by ARB, ARB Structures, Inc., Rockford, Alaska Continental Pipeline, Inc., All Day Electric Company, Inc., Primoris Renewables, Inc., Juniper Rock, Inc. and Stellaris, LLC.  Most of the entities perform work primarily in California.  Rockford operates throughout the United States.  The segment also includes the operating results relating to the November 2012 acquisition of Q3C, with operations in the upper Midwest United States.  The Blyth Power Constructors joint venture is also included as part of the segment.

 

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Table of Contents

 

The Engineering segment includes the results of OnQuest, Inc. and OnQuest Canada, ULC.

 

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

 

Segment Revenues

 

Revenue by segment for the three months ended March 31, 2013 and 2012 were as follows:

 

		For the three months ended March 31,
		2013					2012
Segment		Revenue			% of Segment Revenue		Revenue			% of Segment Revenue
East Construction Services		$	190,211		46.4	%	$	121,850		41.8	%
West Construction Services		207,686			50.6	%	158,031			54.2	%
Engineering		12,098			3.0	%	11,692			4.0	%
Total		$	409,995		100.0	%	$	291,573		100.0	%

 

Segment Gross Profit

 

Gross profit by segment for the three months ended March 31, 2013 and 2012 were as follows:

 

		For the three months ended March 31,
		2013					2012
Segment		Gross Profit			% of Segment Revenue		Gross Profit			% of Segment Revenue
East Construction Services		$	14,995		7.9	%	$	11,418		9.4	%
West Construction Services		28,749			13.8	%	24,401			15.4	%
Engineering		2,352			19.4	%	1,777			15.2	%
Total		$	46,096		11.2	%	$	37,596		12.9	%

 

Segment Goodwill

 

The following presents the amount of goodwill recorded by segment at March 31, 2013 and at December 31, 2012.

 

Segment		March 31, 2013			December 31, 2012
East Construction Services		$	71,883		$	69,859
West Construction Services		44,640			44,641
Engineering		2,441			2,441
Total		$	118,964		$	116,941

 

Geographic Region — Revenues and Total Assets

 

Revenue and total assets by geographic area for the three months ended March 31, 2013 and 2012 were as follows:

 

		Revenues
		For the three months ended March 31,
		2013					2012					Total Assets
Country:		Revenue			% of Revenue		Revenue			% of Revenue		March 31, 2013			December 31, 2012
United States		$	405,163		98.8	%	$	289,128		99.2	%	$	896,330		$	920,872
Non-United States		4,832			1.2		2,445			0.8		12,205			10,335
Total		$	409,995		100.0	%	$	291,573		100.0	%	$	908,535		$	931,207

 

All non-United States revenue was generated in the Engineering Segment.  For the table above, revenues generated by OnQuest’s Canadian subsidiary, OnQuest Canada, ULC, were used to estimate non-United States revenues.

 

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