Primoris Services Corp - Quarter Report: 2014 September (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 September 30, 2014

 

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):

 

 

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

 

At November 5, 2014, 51,561,396 shares of the registrant’s common stock, par value $0.0001 per share, were outstanding.

 

 

Table of Contents

 

PRIMORIS SERVICES CORPORATION

 

INDEX

 

		Page No.
Part I. Financial Information
Item 1. Financial Statements:
—Condensed Consolidated Balance Sheets at September 30, 2014 and December 31, 2013		3
—Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2014 and 2013		4
— Condensed Consolidated Statements of Cash Flows for the three and nine months ended September 30, 2014 and 2013		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		36
Item 4. Controls and Procedures		36
Part II. Other Information
Item 1. Legal Proceedings		37
Item 1A. Risk Factors		37
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		37
Item 3. Defaults Upon Senior Securities		37
Item 4. (Removed and Reserved)		37
Item 5. Other Information		37
Item 6. Exhibits		38
Signatures		39

 

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PART I.  FINANCIAL INFORMATION

 

ITEM 1.  FINANCIAL STATEMENTS

 

PRIMORIS SERVICES CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(In Thousands, Except Share Amounts)

(Unaudited)

 

		September 30, 2014			December 31, 2013
ASSETS
Current assets:
Cash and cash equivalents		$	144,150		$	196,077
Short-term investments		2,080			18,686
Customer retention deposits and restricted cash		411			5,304
Accounts receivable, net		388,381			304,955
Costs and estimated earnings in excess of billings		96,150			57,146
Inventory and uninstalled contract materials		58,271			51,829
Deferred tax assets		13,133			13,133
Prepaid expenses and other current assets		11,653			12,654
Total current assets		714,229			659,784
Property and equipment, net		262,835			226,512
Intangible assets, net		42,471			45,303
Goodwill		118,626			118,626
Other long-term assets		404			468
Total assets		$	1,138,565		$	1,050,693
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	158,118		$	127,302
Billings in excess of costs and estimated earnings		164,428			173,365
Accrued expenses and other current liabilities		100,052			91,079
Dividends payable		2,062			1,805
Current portion of capital leases		1,796			3,288
Current portion of long-term debt		35,024			28,475
Current portion of contingent earnout liabilities		6,136			5,000
Total current liabilities		467,616			430,314
Long-term capital leases, net of current portion		1,009			2,295
Long-term debt, net of current portion		197,857			191,051
Deferred tax liabilities		10,092			10,092
Long-term contingent earnout liabilities, net of current portion		810			4,233
Other long-term liabilities		14,543			14,260
Total liabilities		691,927			652,245
Commitments and contingencies
Stockholders’ equity
Common stock—$.0001 par value, 90,000,000 shares authorized, 51,561,396 and 51,571,394 issued and outstanding at September 30, 2014 and December 31, 2013		5			5
Additional paid-in capital		159,920			159,196
Retained earnings		286,765			238,216
Noncontrolling interests		(52		)	1,031
Total stockholders’ equity		446,638			398,448
Total liabilities and stockholders’ equity		$	1,138,565		$	1,050,693

 

See Accompanying Notes to Condensed Consolidated Financial Statements

 

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PRIMORIS SERVICES CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In Thousands, Except Per Share Amounts)

(Unaudited)

 

		Three Months Ended						Nine months Ended
		September 30,						September 30,
		2014			2013			2014			2013
Revenues		$	613,237		$	551,333		$	1,598,602		$	1,406,341
Cost of revenues		537,764			475,868			1,412,178			1,225,243
Gross profit		75,473			75,465			186,424			181,098
Selling, general and administrative expenses		36,162			36,478			99,087			96,657
Operating income		39,311			38,987			87,337			84,441
Other income (expense):
Income from non-consolidated entities		5,250			113			5,264			169
Foreign exchange gain (loss)		(101		)	91			74			3
Other expense		(201		)	(376		)	(642		)	(809		)
Interest income		14			32			80			95
Interest expense		(1,778		)	(1,579		)	(4,642		)	(4,501		)
Income before provision for income taxes		42,495			37,268			87,471			79,398
Provision for income taxes		(15,105		)	(14,075		)	(32,813		)	(30,272		)
Net income		$	27,390		$	23,193		$	54,658		$	49,126
Less net income attributable to noncontrolling interests		—			(1,348		)	(432		)	(1,947		)
Net income attributable to Primoris		$	27,390		$	21,845		$	54,226		$	47,179
Earnings per share:
Basic		$	0.53		$	0.42		$	1.05		$	0.92
Diluted		$	0.53		$	0.42		$	1.05		$	0.91
Weighted average common shares outstanding:
Basic		51,606			51,568			51,622			51,529
Diluted		51,759			51,671			51,759			51,595

 

See Accompanying Notes to Condensed Consolidated Financial Statements

 

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PRIMORIS SERVICES CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)

(Unaudited)

 

		Nine months Ended
		September 30,
		2014			2013
Cash flows from operating activities:
Net income		$	54,658		$	49,126
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		37,126			31,003
Amortization of intangible assets		5,632			5,576
Gain on sale of property and equipment		(956		)	(1,176		)
Income from non-consolidated entities		(5,264		)	(169		)
Impairment expense for non-consolidated entities		—			3,250
Non-consolidated entity distributions		—			3,186
Stock—based compensation expense		671			229
Changes in assets and liabilities:
Customer retention deposits and restricted cash		4,893			20,000
Accounts receivable		(80,658		)	(16,402		)
Costs and estimated earnings in excess of billings		(39,004		)	(38,733		)
Other current assets		(5,787		)	(8,665		)
Accounts payable		30,247			(32,551		)
Billings in excess of costs and estimated earnings		(8,937		)	(11,428		)
Contingent earnout liabilities		(4,358		)	(9,287		)
Accrued expenses and other current liabilities		9,301			26,626
Other long-term liabilities		283			90
Net cash provided by (used in) operating activities		(2,153		)	20,675
Cash flows from investing activities:
Purchase of property and equipment		(64,540		)	(68,749		)
Proceeds from sale of property and equipment		3,848			6,554
Purchase of short-term investments		(3,525		)	(5,620		)
Sale of short-term investments		20,131			5,882
Cash received for the sale of Alvah and WesPac		6,439			—
Cash paid for acquisitions		(14,595		)	(2,273		)
Net cash used in investing activities		(52,242		)	(64,206		)
Cash flows from financing activities:
Proceeds from issuance of long-term debt		39,700			97,035
Repayment of capital leases		(2,778		)	(3,399		)
Repayment of long-term debt		(26,345		)	(29,225		)
Proceeds from issuance of common stock purchased under a long-term incentive plan		1,671			1,455
Dividends paid		(5,421		)	(3,352		)
Cash distribution to non-controlling interest holder		(1,515		)	(2,500		)
Repurchase of common stock		(2,844		)	—
Net cash provided by financing activities		2,468			60,014
Net change in cash and cash equivalents		(51,927		)	16,483
Cash and cash equivalents at beginning of the period		196,077			157,551
Cash and cash equivalents at end of the period		$	144,150		$	174,034

 

See Accompanying Notes to Condensed Consolidated Financial Statements

 

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SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

 

		Nine Months Ended
		September 30,
		2014			2013
		(Unaudited)
Cash paid during the period for:
Interest		$	5,215		$	3,369
Income taxes, net of refunds received		$	35,484		$	32,379

 

SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES

 

		Nine Months Ended
		September 30,
		2014			2013
		(Unaudited)
Obligations incurred for the acquisition of property and equipment		$	—		$	2,523
Dividends declared and not yet paid		$	2,062		$	1,805

 

See Accompanying Notes to Condensed Consolidated Financial Statements

 

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PRIMORIS SERVICES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)

 

Note 1—Nature of Business

 

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

 

Reportable Operating Segments — For a number of years and through the end of the second quarter 2014, the Company segregated its business into three operating segments: the East Construction Services segment, the West Construction Services segment and the Engineering segment.  In the third quarter 2014, the Company reorganized its business segments to match the change in the Company’s internal organization and management structure.  The operating segments include:  The West Construction Services segment (“West segment”), which is unchanged from the previous segment, the East Construction Services segment (“East segment”), which is realigned from the previous East Construction Services segment and the Energy segment (“Energy segment”).  All prior period amounts related to the segment change have been retrospectively reclassified throughout these quarterly financial statements to conform to the new presentation.  See Note 20 — Reportable Operating Segments.

 

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

 

Subsidiary		Operating Segment		Prior Operating Segment
ARB, Inc. (“ARB”)		West		West
ARB Structures, Inc.		West		West
Q3 Contracting, Inc. (“Q3C”)		West		West
Rockford Corporation (“Rockford”)		West		West
Stellaris, LLC.		West		West
Vadnais Trenchless Services, Inc. (“Vadnais”); acquired in 2014		West		West
Silva Group (“Silva”)		East		East
Cardinal Contractors, Inc.		East		East
BW Primoris, LLC (“BWP”)		East		East
James Construction Group, LLC (“JCG”):
JCG Heavy Civil Division		East		East
JCG Infrastructure and Maintenance Division		East		East
JCG Industrial Division		Energy		East
Primoris Energy Services Corporation (“PES”)		Energy		East
OnQuest, Inc.		Energy		Engineering
OnQuest, Canada, ULC (Born Heaters Canada, ULC prior to 2013)		Energy		Engineering

 

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Sprint Pipeline Services, L.P. (“Sprint”) was purchased by PES in 2012.  PES has operated using the Sprint name as a DBA during 2012 and 2013.  PES acquired two subsidiaries, The Saxon Group (“Saxon”) in 2012 and Force Specialty Services, Inc. (“FSSI”) in 2013. On January 1, 2014, the two subsidiaries were merged into PES.  Additionally, effective January 1, 2014 the Industrial division of JCG was merged into PES.  In this Quarterly Report on Form 10-Q for the three and nine months ended September 30, 2014 (the “Third Quarter 2014 Report), references to Sprint, FSSI, Saxon and James Industrial are to the divisions of PES, while the references are to the entities or divisions for periods prior to 2014.

 

The Company owns 50% of the Blythe Power Constructors joint venture (“Blythe”) for the installation of a parabolic trough solar field and steam generation system in California and its operations are included as part of the West Construction Services segment.  The project has been completed and final wrap-up of the joint venture is expected in December 2014.

 

In January 2014, the Company created a wholly owned subsidiary, BW Primoris, LLC, a Texas limited liability company (“BWP”) which operations are a part of the East segment. BWP’s goal is to develop water projects, primarily in Texas, that will need the Company’s construction services.  On January 22, 2014, BWP entered into an agreement to purchase the assets and business of Blaus Wasser, LLC, a Wyoming limited liability company for approximately $5 million.  During the 2014 first quarter, BWP entered into an intercompany construction contract with Cardinal Contractors, Inc. to build a small water treatment facility in West Texas; intercompany revenue and profit of the project is eliminated. At September 30, 2014, a total of $3.9 million has been capitalized as property, plant and equipment.

 

In May 2014, the Company created a wholly owned subsidiary, Vadnais Trenchless Services, Inc., a California company (“Vadnais”), which is a part of the West Construction Services segment.  On June 5, 2014, the Company purchased assets, consisting of equipment, building and land, from Vadnais Corporation for $6.4 million, a general contractor specializing in micro-tunneling. In addition, the sellers were provided a contingent earnout of $0.9 million upon meeting certain operating targets through December 31, 2014. The estimated fair value of the contingent earnout on the acquisition date was $729.

 

During the third quarter 2014, the Company made three small purchases totaling $8.2 million acquiring the net assets of Surber Roustabout, LLC, Ram-Fab, LLC and Williams Testing, LLC. Surber and Ram-Fab operate as divisions of PES in the Energy segment and Williams is a division of Cardinal Contractors, Inc. in the East segment.  Surber provides general oil and gas related construction activities in Texas, Ram-Fab is a fabricator of custom piping systems located in Arkansas and Williams provides construction services related to sewer pipeline maintenance, rehabilitation and integrity testing in the Florida market.  The Surber purchase provided for a contingent earnout amount of up to $1.8 million over a 3-year period, based on meeting certain operating targets, which had an estimated fair value of $1.1 million on the acquisition date.  The Ram-Fab purchase included a $0.2 million contingent earnout based on estimated earnings of a six-month operating project, with the estimated fair value of the contingency at $0.2 million.

 

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

 

Note 2—Basis of Presentation

 

Interim consolidated financial statements — The interim condensed consolidated financial statements for the three and nine month periods ended September 30, 2014 and 2013 have been prepared in accordance with Rule 10-01 of Regulation S-X of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). As such, certain disclosures, which would substantially duplicate the disclosures contained in the Company’s Annual Report on Form 10-K, filed on March 3, 2014, which contains the Company’s audited consolidated financial statements for the year ended December 31, 2013, have been omitted.

 

This Third Quarter 2014 Report should be read in concert with the Company’s most recent Annual Report on Form 10-K. In the opinion of management, the interim information includes all adjustments (consisting of normal recurring adjustments) necessary for the fair presentation of the interim financial information. The interim financial information is unaudited.

 

Revenue recognition

 

Fixed-price contracts — Historically, a substantial portion of the Company’s revenue has been generated under fixed-price contracts. Fixed price contracts generally provide that the Company will perform all of the work required by the contract for a stated price.  For fixed-price contracts, the Company recognizes revenues using the percentage-of-completion method, which may result in uneven and irregular results. In the percentage-of-completion method, estimated revenues and resulting contract income are calculated based on the total costs incurred to date as a percentage of total estimated costs.

 

Unit-price contracts — A unit-price contract provides performance of a specific project at a specific price for each unit of output.  These contracts are commonly associated with road building.

 

Unforeseen events and circumstances can alter the estimate of the costs and potential profit associated with a particular contract.  Total estimated costs, and thus contract revenues and income, can be impacted by changes in productivity, scheduling, the unit

 

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cost of labor, subcontracts, materials and equipment. Additionally, external factors such as weather, client needs, client delays in providing permits and approvals, labor availability, governmental regulation and politics may affect the progress of a project’s completion and thus the timing of revenue recognition.  To the extent that original cost estimates are modified, estimated costs to complete increase, delivery schedules are delayed, or progress under a contract is otherwise impeded, cash flow, revenue recognition and profitability from a particular contract may be adversely affected.

 

Other contract forms — The Company also uses 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.

 

For all contracts, if an estimate of total contract cost indicates a loss on a contract, the projected loss is recognized in full at the time of the estimate.  The loss amount is recognized as an “accrued loss provision” and is included in the accrued expenses and other liabilities amount on the consolidated balance sheet.  Because the full loss has been recognized, any future revenues that are generated will result in the accrued loss provision being changed and the gross profit of the contract in future periods will be zero.

 

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

 

The Company considers claims to be amounts it seeks, or will seek, to collect from customers or others for customer-caused changes in contract specifications or design, or other customer-related causes of unanticipated additional contract costs on which there is no agreement with customers on both scope and price changes. Claims are included in the calculation of revenues when realization is probable and amounts can be reliably determined. Revenues in excess of contract costs incurred on claims are recognized when the amounts have been agreed upon with the customer.  Revenue in excess of contract costs from claims is recognized when an agreement is reached with customers as to the value of the claims, which in some instances may not occur until after completion of work under the contract. Costs associated with claims are included in the estimated costs to complete the contracts and are treated as project costs when incurred.

 

The caption “Costs and estimated earnings in excess of billings” in the consolidated balance sheet represents unbilled receivables which arise when revenues have been recorded but the amount will not be billed until a later date.  Balances represent:  (a) unbilled amounts arising from the use of the percentage-of-completion method of accounting which may not be billed under the terms of the contract until a later date, (b) incurred costs to be billed under cost reimbursement type contracts, (c) amounts arising from routine lags in billing, or (d) the revenue associated with unapproved change orders or claims when realization is probable and amounts can be reliably determined.  For those contracts in which billings exceed contract revenues recognized to date, the excess amounts are included in the caption “Billings in excess of costs and estimated earnings”.

 

In certain contracts, primarily for highway construction for governmental agencies, the Company is allowed to purchase and bill in advance for materials that will be used on the job.   The unused amount of materials purchased and billed, but not yet installed at the balance sheet date, is included in the caption “Inventory and uninstalled contract materials.”

 

In accordance with applicable terms of certain construction contracts, retainage amounts may be withheld by customers until completion and acceptance of the project.  Some payments of the retainage may not be received for a significant period after completion of our portion of a project.  In some jurisdictions, retainage amounts are deposited into an escrow account.

 

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

 

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

 

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

 

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During the three and nine months ending September 30, 2014, revenues generated by the top ten customers were $309 million and $884 million, respectively, which represented 50.3% and 55.3%, respectively, of total revenues during the periods.  During these periods, TX DOT represented 7.8% and 8.6%, respectively, of total revenues and a petrochemical operating company represented 8.0% and 8.0%, respectively, of total revenues.

 

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

 

At September 30, 2014, approximately 12.4% of the Company’s accounts receivable were due from one customer, and that customer provided 8.0% of the Company’s revenues for the nine months ended September 30, 2014.  At September 30, 2013, approximately 13.1% of the Company’s accounts receivable were due from one customer, and that customer provided 7.4% of the Company’s revenues for the nine months ended September 30, 2013.

 

Multiemployer Plans — Various subsidiaries in the West Construction Services segment are signatories to collective bargaining agreements.  These agreements require that the Company participate in and contribute to a number of multiemployer benefit plans for its union employees at rates determined by the agreements.  The trustees for each multiemployer plan determine the eligibility and allocations of contributions and benefit amounts, determine the types of benefits and administer the plan.  Federal law requires that if the Company were to withdraw from an agreement, it will incur a withdrawal obligation.  The potential withdrawal obligation may be significant.  Any withdrawal liability would be recorded when it is probable that a liability exists and can be reasonably estimated, in accordance with generally accepted accounting principles (“GAAP”).  In November 2011, the Company withdrew from the Central States Southeast and Southwest Areas Pension Fund multiemployer pension plan.  The Company has no plans to withdraw from any other agreements.  See Note 19 — “Commitments and Contingencies”.

 

Inventory and uninstalled contract materials — Inventory consists of expendable construction materials and small tools that will be used in construction projects and is valued at the lower of cost, using first-in, first-out method, or market.  Uninstalled contract materials include certain job specific materials not yet installed which are valued using the specific identification method relating the inventory cost to a specific project.  These materials have been purchased for specific jobs, normally highway construction jobs for state or local governmental agencies.  The Company retains responsibility for safeguarding of the materials.   At September 30, 2014, billed but not installed inventory was $51,927 compared to $44,966 at December 31, 2013.

 

Note 3—Recent Accounting Pronouncements

 

In February 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 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 Company adopted this guidance as of January 1, 2014 which did not have a material impact on the Company’s consolidated financial statements.

 

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). The new standard is effective for reporting periods beginning after December 15, 2016 and early adoption is not permitted. The comprehensive new standard will supersede existing revenue recognition guidance and require revenue to be recognized when promised goods or services are transferred to customers in amounts that reflect the consideration to which the company expects to be entitled in exchange for those goods or services. Adoption of the new rules could affect the timing of revenue recognition for certain transactions. The guidance permits two implementation approaches, one requiring retrospective application of the new standard with restatement of prior years and one requiring prospective application of the new standard with disclosure of results under old standards. For the Company the new standard will be effective January 1, 2017 and the Company is currently evaluating the impacts of adoption and the implementation approach to be used.

 

Note 4—Fair Value Measurements

 

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

 

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

 

The following table presents, for each of the fair value hierarchy levels identified under ASC Topic 820, the Company’s financial assets and liabilities that are required to be measured at fair value at September 30, 2014 and December 31, 2013:

 

					Fair Value Measurements at Reporting Date
		Amount Recorded on Balance Sheet			Quoted Prices in Active Markets for Identical Assets (Level 1)			Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets as of September 30, 2014:
Cash and cash equivalents		$	144,150		$	144,150		—		—
Short-term investments		$	2,080		$	2,080		—		—
Liabilities as of September 30, 2014:
Contingent consideration		$	6,946		—			—		$	6,946
Assets as of December 31, 2013:
Cash and cash equivalents		$	196,077		$	196,077		—		—
Short-term investments		$	18,686		$	18,686		—		—
Liabilities as of December 31, 2013:
Contingent consideration		$	9,233		—			—		$	9,233

 

Short-term investments consist primarily of Certificates of Deposit (“CDs”) and U.S. Treasury bills with various financial institutions that are backed by the federal government.

 

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

 

The following table provides changes to the Company’s contingent consideration liability Level 3 fair value measurements during the nine months ended September 30, 2014:

 

Contingent Consideration
Balance at December 31, 2013		$	9,233
Additions:
Change in fair value of contingent consideration		642
Vadnais acquisition		729
Other acquisitions made in third quarter 2014		1,342
Reductions:
Payment to Q3C sellers		(5,000		)
Balance at September 30, 2014		$	6,946

 

On a quarterly basis, the Company assesses the estimated fair value of the contractual obligation to pay the contingent consideration and any changes in estimated fair value are recorded as other non-operating expense or income in the Company’s consolidated statement of income.  Fluctuations in the fair value of contingent consideration are impacted by two unobservable inputs, management’s estimate of the probability (which has ranged from 33% to 100%) of the acquired company meeting the contractual operating performance target and the estimated discount rate (a rate that approximates the Company’s cost of capital). Significant changes in either of those inputs in isolation would result in a significantly different fair value measurement.  Generally, a change in the assumption of the probability of meeting the performance target is accompanied by a directionally similar change in the fair value of contingent consideration liability, whereas a change in assumption of the estimated discount rate is accompanied by a directionally opposite change in the fair value of contingent consideration liability.

 

Note 5—Accounts Receivable

 

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

 

		September 30, 2014			December 31, 2013
Contracts receivable, net of allowance for doubtful accounts of $525 at September 30, 2014 and $692 at December 31, 2013		$	323,387		$	257,354
Retention receivable		64,221			47,054
		387,608			304,408
Other accounts receivable		773			547
		$	388,381		$	304,955

 

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Note 6—Costs and Estimated Earnings on Uncompleted Contracts

 

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

 

		September 30, 2014			December 31, 2013
Costs incurred on uncompleted contracts		$	4,743,681		$	4,741,249
Gross profit recognized		559,359			582,430
		5,303,040			5,323,679
Less: billings to date		(5,371,318		)	(5,439,898		)
		$	(68,278	)	$	(116,219	)

 

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

 

		September 30, 2014			December 31, 2013
Costs and estimated earnings in excess of billings		$	96,150		$	57,146
Billings in excess of costs and estimated earnings		(164,428		)	(173,365		)
		$	(68,278	)	$	(116,219	)

 

Note 7—Equity Method Investments

 

WesPac Energy LLC and WesPac Midstream LLC

 

On July 1, 2010, the Company acquired a 50% membership interest in WesPac Energy LLC (“WesPac”), a Nevada limited liability company, from Kealine Holdings, LLC (“Kealine”), a Nevada limited liability company, with Kealine retaining a remaining 50% membership interest. WesPac developed pipeline and terminal projects, primarily for the oil and gas industry.

 

On September 30, 2013, WesPac, Kealine and the Company entered into an agreement (the “Midstream Agreement”) with Highstar Capital IV, LP (“Highstar”), to form a new entity, WesPac Midstream LLC, a Delaware limited liability company (“Midstream”), with WesPac contributing project assets to Midstream and Highstar investing $6,082 in cash.

 

The Company has accounted for the investment using the equity method of accounting and recorded its proportionate share of operating expenses.  During the fourth quarter 2013, the Company recorded non-cash impairment charges and wrote-off the total value of its equity investment.

 

During the third quarter 2014, the Company entered into negotiations with the members of Midstream. In August, the Company entered into a redemption agreement for the sale of all of the Company’s ownership in both WesPac and Midstream for a total of $5,250 in cash.

 

Alvah, Inc.

 

As part of its acquisition of Q3C, the Company acquired a 49% membership interest in Alvah, Inc., a California corporation (“Alvah”).  Alvah is engaged in electrical contracting activities, primarily in Northern California and has worked as a subcontractor for ARB both prior to and subsequent to the Q3C acquisition.

 

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On February 5, 2014, the majority owner of Alvah, in accordance with the original investment agreement, elected to purchase the Company’s minority interest effective January 1, 2014 for a cash payment of $1,189.  At the time of the transaction, the Company recorded income adjustments of $14 related to the final sale in the first quarter 2014.

 

Note 8 — Business Combinations

 

In May 2014, the Company created a wholly owned subsidiary, Vadnais Trenchless Services, Inc., a California company (“Vadnais”), which is a part of the West Construction Services segment.  On June 5, 2014, the Company purchased certain assets from Vadnais Corporation, a general contractor specializing in micro-tunneling.  The assets were purchased for their estimated fair value of $6.4 million in cash and included equipment, building and land.  In addition upon meeting certain operating targets through December 31, 2014, the sellers will receive a contingent earnout of $0.9 million.  The estimated fair value of the potential contingent consideration on the acquisition date was $729.  The purchase was accounted for using the acquisition method of accounting. During the third quarter of 2014, the Company finalized its estimate of fair value for the contingent consideration and intangible assets, which resulted in no change from the estimated values recorded at June 30, 2014.

 

During the third quarter 2014, the Company made three small acquisitions totaling $8.2 million acquiring the net assets of Surber Roustabout, LLC, Ram-Fab, LLC and Williams Testing, LLC. Surber and Ram-Fab operate as divisions of PES in the Energy segment and Williams is a division of Cardinal Contractors, Inc. in the East segment.  Surber provides general oil and gas related construction activities in Texas, Ram-Fab is a fabricator of custom piping systems located in Arkansas and Williams provides construction services related to sewer pipeline maintenance, rehabilitation and integrity testing in the Florida market.  The Surber purchase provided for a contingent earnout amount of up to $1.8 million over a 3-year period, based on meeting certain operating targets, which had an estimated fair value of $1.1 million on the acquisition date.  The Ram-Fab purchase included a $0.2 million contingent earnout based on estimated earnings of a six-month operating project, with the estimated fair value of the contingency at $0.2 million on the acquisition date.  The purchases were accounted for using the acquisition method of accounting and, due to the short period of time between the acquisition dates and quarter end, the estimated values are preliminary and subject to change.

 

Supplemental Unaudited Pro Forma Information for the three and nine months ended September 30, 2014 and 2013

 

Pro forma information for the three and nine months ended September 30, 2014 and 2013 presents the results of operations of the Company as if Vadnais and the three acquisitions made in the third quarter 2014, plus the March 11, 2013 FSSI acquisition had all occurred at the beginning of 2013. The Vadnais acquisition was completed on June 5, 2014, the Surber purchase on July 28, 2014, Ram-Fab on August 29, 2014 and the Williams purchase on September 19, 2014.  The supplemental pro forma information has been adjusted to include:

 

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

·                                          the pro forma impact of the expense associated with the amortization of the discount for the fair value of the contingent consideration for potential earnout liabilities that may be achieved in 2013 and 2014 for the Vadnais, Surber, Ram-Fab and FSSI acquisitions;

·                                          the pro forma tax effect of both the income before income taxes and the pro forma adjustments, calculated using a tax rate of 39.0% for the three and nine months ended September 30, 2014 and the same period in 2013.

 

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, 2013.  For example, the pro forma results do not reflect any operating efficiencies and associated cost savings that the Company might have achieved with respect to the acquisitions.

 

		Three months ended September 30,						Nine months ended September 30,
		2014			2013			2014			2013
Revenues		620,503			558,543			1,622,480			1,430,124
Income before provision for income taxes		43,407			35,358			87,091			75,034
Net income attributable to Primoris		27,946			20,680			53,994			44,517
Weighted average common shares outstanding:
Basic		51,606			51,568			51,622			51,529
Diluted		51,759			51,671			51,759			51,595
Earnings per share:
Basic		$	0.54		$	0.40		$	1.05		$	0.86
Diluted		$	0.54		$	0.40		$	1.04		$	0.86

 

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Note 9—Intangible Assets

 

At September 30, 2014 and December 31, 2013, intangible assets totaled $42,471 and $45,303, respectively, net of amortization.  The table below summarizes the intangible asset categories, amounts and the average amortization periods, as follows:

 

		Amortization		September 30,			December 31,
		Period		2014			2013
Tradename		3 to 10 years		$	19,535		$	21,023
Non-compete agreements		2 to 5 years		$	2,120		$	2,575
Customer relationships		3 to 15 years		$	20,816		$	21,705
Total				$	42,471		$	45,303

 

Amortization expense of intangible assets, on a straight-line basis, was $1,945 and $1,891 for the three months ended September 30, 2014 and 2013, respectively, and amortization expense for the nine months ended September 30, 2014 and 2013 was $5,632 and $5,576, respectively.  Estimated future amortization expense for intangible assets is as follows:

 

For the Years Ending December 31,		Estimated Intangible Amortization Expense
2014 (remaining three months)		$	2,004
2015		7,023
2016		6,274
2017		5,968
2018		5,535
Thereafter		15,667
		$	42,471

 

Note 10—Accounts Payable and Accrued Liabilities

 

At September 30, 2014 and December 31, 2013, accounts payable included retention amounts of approximately $9,001 and $5,602, respectively.  These amounts are due to subcontractors but have been retained pending contract completion and customer acceptance of jobs.

 

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

 

		September 30, 2014			December 31, 2013
Payroll and related employee benefits		$	47,067		$	36,556
Insurance, including self-insurance reserves		35,433			33,880
Reserve for estimated losses on uncompleted contracts		3,005			1,392
Corporate income taxes and other taxes		8,786			13,305
Accrued overhead cost		1,314			1,165
Other		4,447			4,781
		$	100,052		$	91,079

 

Note 11—Credit Arrangements

 

Revolving Credit Facility

 

As of September 30, 2014, the Company had a revolving credit facility (the “Credit Agreement”) with The PrivateBank and Trust Company, as administrative agent (the “Administrative Agent”) and co-lead arranger, The Bank of the West, as co-lead arranger, and IBERIABANK Corporation (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.

 

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The principal amount of any loans under the Credit Agreement will bear interest at either: (i) LIBOR plus an applicable margin as specified in the Credit Agreement (based on the Company’s senior debt to EBITDA ratio as that term is defined in the Credit Agreement), or (ii) the Base Rate (which is the greater of (a) the Federal Funds Rate plus 0.5% or (b) the prime rate as announced by the Administrative Agent). Quarterly non-use fees, letter of credit fees and administrative agent fees are payable at rates specified in the Credit Agreement.

 

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

 

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

 

Commercial letters of credit outstanding were $4,659 at September 30, 2014 and $5,074 at December 31, 2013.  Other than commercial letters of credit, there were no borrowings under this line of credit during the nine months ended September 30, 2014, and available borrowing capacity at September 30, 2014 was $70,341.

 

Senior Secured Notes and Shelf Agreement

 

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

 

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

 

On July 25, 2013, the Company drew the full $25 million available under the Notes Agreement.  The notes are due July 25, 2023 and bear interest at an annual rate of 3.85% paid quarterly in arrears.  Seven annual principal payments of $3.6 million are required from July 25, 2017 with a final payment due on July 25, 2023.

 

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

 

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

 

The Company was in compliance with the covenants for the Credit Agreement and Notes Agreement at September 30, 2014.

 

Canadian Credit Facility

 

The Company has a credit facility for $8,000 in Canadian dollars with a Canadian bank for purposes of issuing commercial letters of credit in Canada.  The credit facility has an annual renewal and provides for the issuance of commercial letters of credit for a term of up to five years. The facility provides for an annual fee of 1% for any issued and outstanding commercial letters of credit. Letters of credit can be denominated in either Canadian or U.S. dollars. At September 30, 2014 and December 31, 2013, letters of credit outstanding totaled $2,252 and $2,512 in Canadian dollars, respectively.  At September 30, 2014, the available borrowing capacity was $5,488 in Canadian dollars.  The credit facility contains a working capital restrictive covenant for our Canadian subsidiary, OnQuest Canada, ULC.  At September 30, 2014, OnQuest Canada, ULC was in compliance with the covenant.

 

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.

 

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The Blythe joint venture operating activities are included in the Company’s consolidated statements of income as follows for the three and nine months ended September 30:

 

		Three months ended September 30,				Nine months ended September 30,
		2014		2013		2014		2013
Revenues		—		15,468		940		47,371
Net income attributable to noncontrolling interests		—		1,348		432		1,947

 

Blythe is a partnership and no tax effect was recognized for income at the partnership level.  Blythe made distributions of $1,515 to the non-controlling interests and $1,515 to the Company during the nine months ended September 30, 2014.  During the nine months ended September 30, 2013, Blythe made a total of $2,500 in distributions to the non-controlling interests and $2,500 in distributions to the Company.  There were no capital contributions made during the year ended December 31, 2013 or through the nine months ended September 30, 2014.  The project has been completed and final wrap-up of the joint venture is expected in December 2014.

 

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

 

		September 30, 2014			December 31, 2013
Cash		$	250		$	3,025
Accounts receivable		—			1,085
Billings in excess of costs and estimated earnings		348			2,041

 

The net assets of the joint venture are restricted for use by the project and are not available for general operations of the Company.

 

Note 13 — Contingent Earnout Liabilities

 

In March 2014, the Company paid $5,000 to the sellers of Q3C based on achievement of the 2013 operating performance targets.  The sellers will be paid an additional $3,750, contingent on meeting an EBITDA target for calendar year 2014 of at least $19 million, as defined in the purchase agreement which as of September 30, 2014, has been achieved, and an additional $1,250 will be paid if EBITDA exceeds $22 million, for a total payment of $5,000.  The estimated fair value at September 30, 2014 of the remaining contingent earnout was $4,788.

 

In June 2014, the Company acquired the assets of Vadnais Company for $6,354 in cash plus an earnout of $900 in 2015, contingent upon meeting a certain performance target for the remaining calendar year 2014.  The estimated fair value of the contingent consideration on the acquisition date was $729 and on September 30, 2014 was $816.

 

During the third quarter 2014, the Company made three small purchases totaling $8.2 million in cash for the net assets of Surber Roustabout, LLC, Ram-Fab, LLC and Williams Testing, LLC.  The Surber purchase provided a contingent earnout amount of up to $1.8 million over a 3-year period, based on meeting certain operating targets, which had an estimated fair value of $1.1 million on the acquisition date.  The Ram-Fab purchase included a $0.2 million contingent earnout based on estimated earnings of a six-month operating project, with the estimated fair value of the contingency at $0.2 million at the acquisition date.

 

Note 14—Related Party Transactions

 

Primoris has entered into 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 Executive Vice President and General Counsel, is secretary of SIGI.

 

Primoris leases properties from SIGI at the following locations:

 

1.     Bakersfield, California (lease expires October 2022)

2.     Pittsburg, California (lease expires April 2023)

3.     San Dimas, California (lease expires March 2019)

4.     Pasadena, Texas (lease was mutually terminated as of August 31, 2014)

 

During the nine months ended September 30, 2014 and 2013, the Company paid $656 and $688, respectively, in lease payments to SIGI for the use of these properties.

 

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Primoris leases a property from Roger Newnham, a former owner and manager of our subsidiary, OnQuest Canada, ULC. The property is located in Calgary, Canada. During the nine months ended September 30, 2014 and 2013, Primoris paid $219 and $223, respectively, in lease payments.  The current term of the lease is through December 31, 2017.

 

Primoris leases a property from Lemmie Rockford, one of the Rockford sellers, which commenced November 1, 2011.  The property is located in Toledo, Washington.  During the nine months ended September 30, 2014 and 2013, Primoris paid $68 and $68, respectively, in lease payments.  The lease expires in January 2015.

 

Primoris leases a 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 property is located in Little Canada, Minnesota.  During the nine months ended September 30, 2014 and 2013, the Company paid $198 and $198, respectively, in lease payments to Quality RE Partners.  The lease expires in October 2022.

 

As discussed in Note 7— “Equity Method Investments”, the Company owns several non-consolidated investments and has recognized revenues on work performed by the Company for those joint ventures.

 

Note 15—Stock-Based Compensation

 

On May 3, 2013, the Board of Directors granted 100,000 Restricted Stock Units (“Units”) to an executive under the 2013 Long-term Incentive Equity Plan (the “Equity Plan”).  Commencing annually on May 10, 2014 and ending April 30, 2017, the Units will vest in four equal installments subject to continuing employment of the executive.  On April 30, 2014, 25,000 of these Units vested.  On March 24, 2014, the Board of Directors granted 48,512 Units to another executive under the Equity Plan.  The Units will vest 50% on September 23, 2015 and the remaining 50% on March 23, 2017 subject to continuing employment of the executive.  Vesting in both grants is also subject to earlier acceleration, termination, cancellation or forfeiture as provided in the underlying Primoris Restricted Stock Unit agreement (“RSU Award Agreement”).  Each Unit represents the right to receive one share of the Company’s common stock when vested.

 

Under guidance of ASC Topic 718 “Compensation — Stock Compensation”, stock-based compensation cost is measured at the date of grant (utilizing the prior-day closing price), based on the calculated fair value of the stock-based award, and is recognized as expense over the employee’s requisite service period (generally the vesting period of the award).

 

The fair value of the Units was based on the closing market price of our common stock on the day prior to the date of the grant.  Stock compensation expense for the Units is being amortized using the straight-line method over the service period.  For the three and nine months ended September 30, 2014, the Company recognized $262 and $671, respectively, in compensation expense.  At September 30, 2014, approximately $2.66 million of unrecognized compensation expense remains for the Units which will be recognized over the next 2.5 years through April 30, 2017.

 

Vested Units accrue “Dividend Equivalents” (as defined in the Equity Plan) which will be accrued as additional Units.  At September 30, 2014, there were 67 Dividend Equivalent Units that were accrued on 25,000 Units that vested on April 30, 2014.

 

Note 16—Income Taxes

 

The effective tax rate on income before taxes and noncontrolling interests for the nine months ended September 30, 2014 was 37.57%.  The effective tax rate for income attributable to Primoris was 37.7%. 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 of enactment date.

 

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In the third quarter of 2013, the IRS initiated an examination of our federal income tax returns for 2011 and 2012.  The examination was settled in the third quarter of 2014 without a material impact to the Company.  The Company’s federal returns are no longer subject to examination for tax years before 2013.  The statute of limitations of state and foreign jurisdictions vary generally between 3 to 5 years.  Accordingly, the tax years 2008 through 2013 generally remain open to examination by the other taxing jurisdictions in which the Company operates.

 

Note 17—Dividends and Earnings Per Share

 

The Company has paid or declared cash dividends during 2014 as follows:

 

·          On October 30, 2013, the Company declared a cash dividend of $0.035 per common share, payable to stockholders of record on December 31, 2013.  The dividend, totaling $1,805, was paid on January 15, 2014.

 

·          On February 26, 2014, the Company declared a cash dividend of $0.035 per common share, payable to stockholders of record on March 31, 2014.  The dividend, totaling $1,808, was paid on April 15, 2014.

 

·          On May 2, 2014, the Company declared a cash dividend of $0.035 per common share, payable to stockholders of record on June 30, 2014.  The dividend, totaling $1,808, was paid on July 15, 2014.

 

·          On August 5, 2014, the Company declared a cash dividend of $0.04 per common share, payable to stockholders of record on September 30, 2014.  The dividend, totaling $2,062, was paid on October 15, 2014.

 

The table below presents the computation of basic and diluted earnings per share for the three and nine months ended September 30, 2014 and 2013:

 

		Three months ended September 30,						Nine months ended September 30,
		2014			2013			2014			2013
Numerator:
Net income attributable to Primoris		$	27,390		$	21,845		$	54,226		$	47,179
Denominator (shares in thousands):
Weighted average shares for computation of basic earnings per share		51,606			51,568			51,622			51,529
Dilutive effect of shares issued to independent directors		4			3			3			10
Dilutive effect of unvested restricted stock units (1)		149			100			134			55
Dilutive effect of shares to be issued Q3C sellers (2)		—			—			—			1
Weighted average shares for computation of diluted earnings per share		51,759			51,671			51,759			51,595
Earnings per share:
Basic earnings per share		$	0.53		$	0.42		$	1.05		$	0.92
Diluted earnings per share		$	0.53		$	0.42		$	1.05		$	0.91

 

(1)         Represents the dilutive effect of a grant for 100,000 shares of Units on May 3, 2013 and 48,512 shares of Units on March 24, 2014.

(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.

 

Note 18—Stockholders’ Equity

 

Common stock — In March 2014, the Company received $1,671 for 77,455 shares of common stock purchased and issued in accordance with the Company’s Long-Term Retention Plan (“LTR Plan”).  The Company’s LTR Plan for managers and executives allows participants to use a portion of their annual bonus amount to purchase Company common stock at a discount from the market price. The shares purchased in March 2014 were for bonus amounts earned in 2013 and the number of shares was calculated at 75% of the average market closing price of December 2013.  In March 2013, the Company received $1,455 for 131,989 shares of common stock issued under the LTR Plan for bonus amounts earned in the prior year.

 

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In February and September 2014, the Company issued 6,375 shares and 6,172 shares, respectively, of common stock as part of the quarterly compensation of the non-employee members of the Board of Directors.  Shares issued to the non-employee Directors in February and July 2013 were 12,480 shares and 9,110 shares, respectively and were issued in accordance with the LTR Plan.

 

As discussed in Note 15 — “Stock Based Compensation”, the Board of Directors has granted a total of 148,512 shares of Units under the Equity Plan.

 

In February 2014, the Company’s Board of Directors authorized a share repurchase program under which the Company, from time to time and depending on market conditions, share price and other factors, may acquire shares of its common stock on the open market or in privately negotiated transactions up to an aggregate purchase price of $23 million.  During the three and nine months ending September 30, 2014, the Company purchased and cancelled 100,000 shares of stock for $2.8 million at an average cost of $28.44 per share.  The share repurchase program expires December 31, 2014.

 

Note 19—Commitments and Contingencies

 

Leases — The Company leases certain property and equipment under non-cancellable operating leases which expire at various dates through 2022. 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 nine months ended September 30, 2014 was $3,250 and $10,416, respectively, compared to $3,566 and $11,111 for the same periods in 2013.  The amounts for the three and nine months ended September 30, 2014 included lease payments made to related parties of $377 and $1,140, respectively, and $379 and $1,176 for the three and nine months ended September 30, 2013, respectively.

 

Letters of credit — At September 30, 2014, the Company had letters of credit outstanding of $6,911 and at December 31, 2013, the Company had letters of credit outstanding of $7,696.  The outstanding amounts include the U.S. dollar equivalents for letters of credit issued in Canadian dollars.

 

Litigation — On February 7, 2012, the Company was sued in an action entitled North Texas Tollway Authority, Plaintiff v. James Construction Group, LLC, and KBR, Inc., Defendants, v. Reinforced Earth Company, Third-Party Defendant (the “Lawsuit”). In the Lawsuit, the North Texas Tollway Authority (“NTTA”) is alleging damages to a road and retaining wall that were constructed in 1999 on the George Bush Turnpike near Dallas, Texas, due to negligent construction by JCG.  The Lawsuit claims that the cost to repair the retaining wall was approximately $5,400.  The NTTA also alleges that six other walls constructed on the project by JCG could have the same potential exposure to failure.  The Company has denied any liability, has tendered the claim to its insurance carriers and has cross-complained against its engineering subcontractor for potential design liability.  The extent of insurance coverage by the carriers of the Company and its subcontractor is undetermined at this time.  The parties to the lawsuit are engaged in mediation and discussions which involve the owner, the entity performing construction management, the Company’s subcontractor and the Company.  At this time, there are no assurances that the mediation efforts will be successful and the lawsuit may proceed to trial.  However, no trial date has been set.  The Company will vigorously defend the claims.  After discussion with our legal counsel, we have recorded loss contingencies which have not been material to the financial statements, to reflect the best estimate of the Company’s portion of the NTTA claim.  At this time, management does not believe it is possible to make a reasonably probable estimate of additional loss or a range of loss.

 

The Company is subject to other claims and legal proceedings arising out of its business. The Company provides for costs related to contingencies when a loss from such claims is probable and the amount is reasonably determinable. In determining whether it is possible to provide an estimate of loss, or range of possible loss, the Company reviews and evaluates its litigation and regulatory matters on a quarterly basis in light of potentially relevant factual and legal developments. If we determine an unfavorable outcome is not probable or reasonably estimable, we do not accrue for a potential litigation loss. Management is unable to ascertain the ultimate outcome of other claims and legal proceedings; however, after review and consultation with counsel and taking into consideration relevant insurance coverage and related deductibles/self-insurance retention, management believes that it has meritorious defense to the claims and believes that the reasonably possible outcome of such claims will not, individually or in the aggregate, have a materially adverse effect on the consolidated results of operations, financial condition or cash flows of the Company.

 

Bonding— At September 30, 2014 and December 31, 2013, the Company had bid and completion bonds issued and outstanding totaling approximately $1,355,950 and $1,458,744, 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”).  The Company withdrew from the Plan in order to mitigate its liability in connection with the Plan, which is significantly underfunded.  The Company recorded a liability of $7,500 based on information provided by the Plan. However, the Plan has asserted that the PLCA members did not affect a proper withdrawal in 2011. The Company believes that a legally effective withdrawal occurred in November 2011 and has recorded the withdrawal liability on that basis. In May 2014, the Plan asserted that the liability was $11.7 million.  Without agreeing to the amount, the Company has made monthly payments, which are being expensed, including interest, totaling $458 through September 30, 2014.

 

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Prior to the Company’s acquisition, Q3C had also withdrawn from the Plan.  In November 2012, Q3C estimated a withdrawal liability of $85.  In the first quarter of 2013, the Plan asserted that the liability was $119.  Without agreeing to the amount, Q3C has made monthly payments, including interest, totaling $26 through September 30, 2014.

 

Contingent Consideration — Earnouts related to acquisitions are discussed in Note 13 — “Contingent Earnout Liabilities”.

 

Note 20—Reportable Operating Segments

 

For a number of years and through the end of the second quarter 2014, the Company segregated its business into three operating segments: the East Construction Services segment, the West Construction Services segment and the Engineering segment.  In the third quarter 2014, the Company reorganized its business segments to match the change in the Company’s internal organization and management structure.  The segment changes during the quarter reflect the focus of our new chief operating officer on the services we provide to our energy related customers, primarily in the Gulf Coast area (the “Energy segment”) and a continuing geographic view for the West and East segments. The chief operating officer regularly reviews the operating and financial performance based on these revised segments.  The operating segments include:  The West Construction Services segment (“West segment”), which is unchanged from the previous segment, the East Construction Services segment (“East segment”), which is realigned from the previous East Construction Services segment and the Energy segment (which includes the previous Engineering segment).  All prior period amounts related to the segment change have been retrospectively reclassified throughout these quarterly financial statements to conform to the new presentation.  The following is a brief description of each of the Company’s reportable segments and business activities.

 

The West segment includes the underground and industrial operations and construction services performed by ARB, ARB Structures, Inc., Rockford, Alaska Continental Pipeline, Inc., Q3C, Primoris Renewables, LLC, Juniper Rock Corporation, Stellaris, LLC and Vadnais, acquired in June 2014.  Most of the entities perform work primarily in California; however, Rockford operates throughout the United States and Q3C operates in Colorado and the upper Midwest United States.  The Blythe joint venture is also included as a part of the segment.  The West segment consists of businesses headquartered primarily in the western United States.

 

The East segment includes the JCG Heavy Civil division, the JCG Infrastructure and Maintenance division, BW Primoris and Cardinal Contractors, Inc. construction business, located primarily in the southeastern United States and in the Gulf Coast region of the United States and includes the heavy civil construction and infrastructure and maintenance operations.

 

The Energy segment businesses are located primarily in the southeastern United States and in the Gulf Coast region of the United States.  The segment includes the operations of the PES pipeline and gas facility construction and maintenance operations the JCG Industrial division and the newly acquired Surber and Ram-Fab operations.  Additionally, the segment includes the OnQuest, Inc. and OnQuest Canada, ULC operations for the design and installation of high-performance furnaces and heaters for the oil refining, petrochemical and power generation industries.

 

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 September 30, 2014 and 2013 were as follows:

 

		For the three months ended September 30,
		2014					2013
Segment		Revenue			% of Segment Revenue		Revenue			% of Segment Revenue
West		$	289,405		47.2	%	$	362,362		65.7	%
East		135,450			22.1	%	117,537			21.3	%
Energy		188,382			30.7	%	71,434			13.0	%
Total		$	613,237		100.0	%	$	551,333		100.0	%

 

Revenue by segment for the nine months ended September 30, 2014 and 2013 were as follows

 

		For the nine months ended September 30,
		2014					2013
Segment		Revenue			% of Segment Revenue		Revenue			% of Segment Revenue
West		$	747,823		46.8	%	$	828,242		58.9	%
East		360,975			22.6	%	316,218			22.5	%
Energy		489,804			30.6	%	261,881			18.6	%
Total		$	1,598,602		100.0	%	$	1,406,341		100.0	%

 

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