Primoris Services Corp - Quarter Report: 2014 June (Form 10-Q)

Table of Contents

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

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

 

For the quarterly period ended June 30, 2014

 

OR

 

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

 

For the transition period from                    to                      .

 

Commission file number 0001-34145

 

Primoris Services Corporation

(Exact name of registrant as specified in its charter)

 

 

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

 

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

 

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

 

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

 

 

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

 

At August 6, 2014, 51,655,224 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 June 30, 2014 and December 31, 2013	3
—Condensed Consolidated Statements of Income for the three and six months ended June 30, 2014 and 2013	4
— Condensed Consolidated Statements of Cash Flows for the three and six months ended June 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	21
Item 3. Quantitative and Qualitative Disclosures About Market Risk	35
Item 4. Controls and Procedures	35
Part II. Other Information
Item 1. Legal Proceedings	36
Item 1A. Risk Factors	36
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	36
Item 3. Defaults Upon Senior Securities	36
Item 4. (Removed and Reserved)	36
Item 5. Other Information	36
Item 6. Exhibits	37
Signatures	38

 

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PART I.  FINANCIAL INFORMATION

 

ITEM 1.  FINANCIAL STATEMENTS

 

PRIMORIS SERVICES CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(In Thousands, Except Share Amounts)

(Unaudited)

 

		June 30, 2014			December 31, 2013
ASSETS
Current assets:
Cash and cash equivalents		$	160,177		$	196,077
Short-term investments		2,280			18,686
Customer retention deposits and restricted cash		56			5,304
Accounts receivable, net		311,321			304,955
Costs and estimated earnings in excess of billings		88,111			57,146
Inventory and uninstalled contract materials		61,230			51,829
Deferred tax assets		13,133			13,133
Prepaid expenses and other current assets		12,003			12,654
Total current assets		648,311			659,784
Property and equipment, net		245,342			226,512
Intangible assets, net		42,345			45,303
Goodwill		118,626			118,626
Other long-term assets		382			468
Total assets		$	1,055,006		$	1,050,693
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	130,575		$	127,302
Billings in excess of costs and estimated earnings		158,097			173,365
Accrued expenses and other current liabilities		93,258			91,079
Dividends payable		1,808			1,805
Current portion of capital leases		2,230			3,288
Current portion of long-term debt		30,683			28,475
Current portion of contingent earnout liabilities		5,403			5,000
Total current liabilities		422,054			430,314
Long-term capital leases, net of current portion		1,386			2,295
Long-term debt, net of current portion		185,570			191,051
Deferred tax liabilities		10,092			10,092
Long-term contingent earnout liabilities, net of current portion		—			4,233
Other long-term liabilities		12,192			14,260
Total liabilities		631,294			652,245
Commitments and contingencies
Stockholders’ equity
Common stock—$.0001 par value, 90,000,000 shares authorized, 51,655,224 and 51,571,394 issued and outstanding at June 30, 2014 and December 31, 2013		5			5
Additional paid-in capital		162,322			159,196
Retained earnings		261,437			238,216
Noncontrolling interests		(52		)	1,031
Total stockholders’ equity		423,712			398,448
Total liabilities and stockholders’ equity		$	1,055,006		$	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						Six months Ended
		June 30,						June 30,
		2014			2013			2014			2013
Revenues		$	515,291		$	445,013		$	985,365		$	855,008
Cost of revenues		454,097			385,476			874,414			749,375
Gross profit		61,194			59,537			110,951			105,633
Selling, general and administrative expenses		33,213			31,560			62,925			60,179
Operating income		27,981			27,977			48,026			45,454
Other income (expense):
Income (loss) from non-consolidated entities		—			(213		)	14			56
Foreign exchange gain (loss)		149			(29		)	175			(88		)
Other expense		(327		)	(377		)	(441		)	(433		)
Interest income		14			23			66			63
Interest expense		(1,196		)	(1,498		)	(2,864		)	(2,922		)
Income before provision for income taxes		26,621			25,883			44,976			42,130
Provision for income taxes		(10,618		)	(9,990		)	(17,708		)	(16,197		)
Net income		$	16,003		$	15,893		$	27,268		$	25,933
Less net income attributable to noncontrolling interests		—			(329		)	(432		)	(599		)
Net income attributable to Primoris		$	16,003		$	15,564		$	26,836		$	25,334
Earnings per share:
Basic		$	0.31		$	0.30		$	0.52		$	0.49
Diluted		$	0.31		$	0.30		$	0.52		$	0.49
Weighted average common shares outstanding:
Basic		51,655			51,562			51,631			51,510
Diluted		51,804			51,626			51,759			51,547

 

See Accompanying Notes to Condensed Consolidated Financial Statements

 

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PRIMORIS SERVICES CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)

(Unaudited)

 

		Six months Ended
		June 30,
		2014			2013
Cash flows from operating activities:
Net income		$	27,268		$	25,933
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		23,941			19,912
Amortization of intangible assets		3,687			3,685
Gain on sale of property and equipment		(809		)	(202		)
Income from non-consolidated entities		(14		)	(56		)
Non-consolidated entity distributions					145
Stock—based compensation expense		409			91
Changes in assets and liabilities:
Customer retention deposits and restricted cash		5,248			7,874
Accounts receivable		(6,366		)	17,003
Costs and estimated earnings in excess of billings		(30,965		)	(28,587		)
Other current assets		(9,846		)	(3,221		)
Accounts payable		3,273			(50,407		)
Billings in excess of costs and estimated earnings		(15,268		)	3,678
Contingent earnout liabilities		(4,559		)	(10,161		)
Accrued expenses and other current liabilities		3,232			4,254
Other long-term liabilities		(2,068		)	(1,585		)
Net cash used in operating activities		(2,837		)	(11,644		)
Cash flows from investing activities:
Purchase of property and equipment		(38,625		)	(49,256		)
Proceeds from sale of property and equipment		3,017			1,675
Purchase of short-term investments		(2,280		)	(4,175		)
Sale of short-term investments		18,686			4,188
Cash received for the sale of Alvah		1,189			—
Cash paid for acquisitions		(6,354		)	(1,025		)
Net cash used in investing activities		(24,367		)	(48,593		)
Cash flows from financing activities:
Proceeds from issuance of long-term debt		15,400			42,364
Repayment of capital leases		(1,967		)	(2,145		)
Repayment of long-term debt		(18,673		)	(23,664		)
Proceeds from issuance of common stock purchased under a long-term incentive plan		1,671			1,455
Dividends paid		(3,612		)	(1,547		)
Cash distribution to non-controlling interest holder		(1,515		)	—
Net cash provided by (used in) financing activities		(8,696		)	16,463
Net change in cash and cash equivalents		(35,900		)	(43,774		)
Cash and cash equivalents at beginning of the period		196,077			157,551
Cash and cash equivalents at end of the period		$	160,177		$	113,777

 

See Accompanying Notes to Condensed Consolidated Financial Statements

 

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SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

 

		Six Months Ended
		June 30,
		2014			2013
		(Unaudited)
Cash paid during the period for:
Interest		$	2,554		$	2,559
Income taxes, net of refunds received		$	17,235		$	18,016

 

SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES

 

		Six Months Ended
		June 30,
		2014			2013
		(Unaudited)
Obligations incurred for the acquisition of property and equipment		$	—		$	2,500
Dividends declared and not yet paid		1,808			$	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.

 

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

 

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

 

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, the Industrial division of JCG was merged into PES.  In this Quarterly Report on Form 10-Q for the three and six months ended June 30, 2014 (the “Second 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.

 

In January 2014, the Company created a wholly owned subsidiary, BW Primoris, LLC, a Texas limited liability company (“BWP”) which will be a part of the East Construction Services segment. BWP’s goal is to develop water projects, primarily in Texas, that will need the Company’s construction services to construct a water treatment system and pipeline.  On January 22, 2014, BWP entered into an agreement to purchase the assets 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 in consolidation.

 

In May 2014, the Company created a wholly owned subsidiary, Vadnais Trenchless Services, Inc., a California company (“Vadnais”), which will be 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 if Vadnais achieves at least $2.8 million in EBIT through December 31, 2014.

 

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 six month periods ended June 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.

 

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

 

Revenue recognition

 

Fixed-price contracts — Historically, a substantial portion of the Company’s revenue has been generated under fixed-price contracts. 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 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 used, is included in the caption “Inventory and uninstalled contract materials.”

 

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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.

 

During the three and six months ending June 30, 2014, revenues generated by the top ten customers were $293 million and $575 million, respectively, which represented 56.8% and 58.4%, respectively, of total revenues during the periods.  During these respective periods, TX DOT represented 9.0% and 9.2%, respectively, of total revenues and a pipeline operator represented 8.8% and 8.2%, respectively, of total revenues.

 

During the three and six months ending June 30, 2013, revenues generated by the top ten customers were $216 million and $443 million, respectively, which represented 48.6% and 51.9%, respectively, of total revenues during the periods.  During these respective periods, a large gas and electric utility represented 7.6% and 8.0%, respectively, of total revenues and a large pipeline company represented 8.2% and 5.0%, respectively, of total revenues.

 

At June 30, 2014, approximately 15.2% of the Company’s accounts receivable were due from one customer, and that customer provided 8.0% of the Company’s revenues for the six months ended June 30, 2014.  At June 30, 2013, approximately 6.5% of the Company’s accounts receivable were due from one customer, and that customer provided 6.4% of the Company’s revenues for the six months ended June 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.

 

Included in inventory are materials purchased and billed for specific contracts.  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 June 30, 2014, billed but not installed inventory was $46,972 compared to $30,012 at June 30, 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.

 

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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.

 

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 June 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 June 30, 2014:
Cash and cash equivalents		$	160,177		$	160,177		—		—
Short-term investments		$	2,280		$	2,280		—		—
Liabilities as of June 30, 2014:
Contingent consideration		$	5,403		—			—		$	5,403
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 six months ended June 30, 2014:

 

Contingent Consideration
Balance at December 31, 2013		$	9,233
Additions:
Change in fair value of contingent consideration		441
Vadnais acquisition		729
Reductions:
Payment to Q3C sellers		(5,000		)
Balance at June 30, 2014		$	5,403

 

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 operations.  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.

 

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Note 5—Accounts Receivable

 

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

 

		June 30, 2014			December 31, 2013
Contracts receivable, net of allowance for doubtful accounts of $615 at June 30, 2014 and $692 at December 31, 2013		$	261,736		$	257,354
Retention receivable		48,978			47,054
		310,714			304,408
Other accounts receivable		607			547
		$	311,321		$	304,955

 

Note 6—Costs and Estimated Earnings on Uncompleted Contracts

 

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

 

		June 30, 2014			December 31, 2013
Costs incurred on uncompleted contracts		$	4,184,551		$	4,741,249
Gross profit recognized		492,755			582,430
		4,677,306			5,323,679
Less: billings to date		(4,747,292		)	(5,439,898		)
		$	(69,986	)	$	(116,219	)

 

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

 

		June 30, 2014			December 31, 2013
Costs and estimated earnings in excess of billings		$	88,111		$	57,146
Billings in excess of costs and estimated earnings		(158,097		)	(173,365		)
		$	(69,986	)	$	(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 (“WPE”), a Nevada limited liability company, from Kealine Holdings, LLC (“Kealine”), a Nevada limited liability company, with Kealine retaining a remaining 50% membership interest. WPE developed pipeline and terminal projects, primarily for the oil and gas industry.

 

On September 30, 2013, WPE, 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 WPE contributing project assets to Midstream and Highstar investing $6,082 in cash.  The Midstream Agreement provides for potential bonus payments of $4,500 each for Kealine and the Company based on attainment of milestones for one of the projects.

 

The Midstream agreement requires that Highstar fund Midstream’s overhead operations for up to two years. To maintain its equity position, the Company will be required to fund its pro rata share of Midstream’s projects.

 

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 value of its equity investment.  As a consequence, in accordance with ASC Topic 323, the Company has suspended the equity method of accounting and the Company’s proportionate share of losses will not be recognized unless the Company makes a further investment.

 

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.  During the three and six months ending June 30, 2013, payments made by ARB to Alvah were $1,423 and $2,909, respectively, and Q3C made payments of $0 and $212, respectively.

 

Note 8 — Business Combinations

 

The Company purchased the assets of FSSI on March 11, 2013.  The fair value of the consideration was $2,377, which consisted of cash payments and three future potential payments to a key employee, contingent upon FSSI meeting certain performance targets for the remainder of calendar year 2013 and for calendar years 2014 and 2015.

 

The contingent consideration was defined as:  (1) a payment of $500 in cash for the achievement of pretax income of at least $553 for the remainder of the year ending December 31, 2013; (2) a payment of $500 in cash if pretax income for the year 2014 is at least $2,502; and (3), a payment of $500 in cash if pretax income for the year 2015 is at least $4,227.  The estimated fair value of the potential contingent consideration on the acquisition date was $702.  At December 31, 2013, the Company determined that the operations of FSSI had not met the 2013 performance target nor was it probable that FSSI would meet any of the future targets; therefore, the full amount of the accrued contingent consideration was credited to non-operating income at December 31, 2013.

 

The purchase agreement also included a provision of an initial payment of $1,000 for a five-year employment, non-competition and non-solicitation agreement with the key employee.  The agreement provided that if the employee terminated his employment or violated the agreement prior to the end of the five-year period, he would be required to repay the unamortized amount of the initial payment.  This agreement was accounted for as a prepaid asset and was being amortized equally over a five-year period.

 

Because the operating performance of FSSI did not meet expected targets, the Company made changes in FSSI management which resulted in adjustments to the value of certain FSSI assets (including the write-down of the unamortized portion of the prepaid employment asset) and liabilities at December 31, 2013.

 

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, if Vadnais achieves at least $2.8 million in EBIT from date of closing 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 and, due to the short period of time between the acquisition date and quarter end, the estimated values are preliminary and subject to change.

 

Supplemental Unaudited Pro Forma Information for the three and six months ended June 30, 2014 and 2013

 

Pro forma information for the three and six months ended June 30, 2014 and 2013 presents the results of operations of the Company as if the FSSI and Vadnais acquisitions had occurred at the beginning of 2013. The FSSI acquisition was completed on March 11, 2013 and the Vadnais on June 5, 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 FSSI and Vadnais 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 six months ended June 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 FSSI and Vadnais 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 FSSI acquisition.

 

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		Three months ended June 30,						Six months ended June 30,
		2014			2013			2014			2013
Revenues		517,276			446,817			988,955			860,893
Income before provision for income taxes		26,804			25,122			44,726			39,633
Net income attributable to Primoris		16,115			15,100			26,684			23,810
Weighted average common shares outstanding:
Basic		51,655			51,562			51,631			51,510
Diluted		51,804			51,626			51,759			51,547
Earnings per share:
Basic		$	0.31		$	0.29		$	0.52		$	0.46
Diluted		$	0.31		$	0.29		$	0.52		$	0.46

 

Note 9—Intangible Assets

 

At June 30, 2014 and December 31, 2013, intangible assets totaled $42,345 and $45,303, respectively, net of amortization.  The table below summarizes the intangible asset categories, amounts and the average amortization periods, which are generally on a straight-line basis, as follows:

 

		Amortization		June 30,			December 31,
		Period		2014			2013
Tradename		3 to 10 years		$	19,217		$	21,023
Non-compete agreements		2 to 5 years		$	1,662		$	2,575
Customer relationships		3 to 15 years		$	21,466		$	21,705
Total				$	42,345		$	45,303

 

Amortization expense of intangible assets was $1,843 and $1,891 for the three months ended June 30, 2014 and 2013, respectively, and amortization expense for the six months ended June 30, 2014 and 2013 was $3,687 and $3,685, respectively.  Estimated future amortization expense for intangible assets is as follows:

 

 

For the Years Ending December 31,		Estimated Intangible Amortization Expense
2014 (remaining six months)		$	4,177
2015		6,164
2016		5,694
2017		5,508
2018		5,307
Thereafter		15,495
		$	42,345

 

Note 10—Accounts Payable and Accrued Liabilities

 

At June 30, 2014 and December 31, 2013, accounts payable included retention amounts of approximately $7,193 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:

 

		June 30, 2014			December 31, 2013
Payroll and related employee benefits		$	41,909		$	36,556
Insurance, including self-insurance reserves		34,198			33,880
Reserve for estimated losses on uncompleted contracts		140			1,392
Corporate income taxes and other taxes		11,326			13,305
Accrued overhead cost		1,046			1,165
Other		4,639			4,781
		$	93,258		$	91,079

 

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Note 11—Credit Arrangements

 

Revolving Credit Facility

 

As of June 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.

 

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 were $4,659 at June 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 six months ended June 30, 2014, and available borrowing capacity at June 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 June 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 June 30, 2014 and December 31, 2013, letters of credit outstanding totaled $3,011 and $2,788 in Canadian dollars, respectively.  At June 30, 2014, the available borrowing capacity was $4,989 in Canadian dollars.  The credit facility contains a working capital restrictive covenant for our Canadian subsidiary, OnQuest Canada, ULC.  At June 30, 2014, OnQuest Canada, ULC was in compliance with the covenant.

 

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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.

 

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

 

		Three months ended June 30,				Six months ended June 30,
		2014		2013		2014		2013
Revenues		—		15,631		940		31,903
Net income attributable to noncontrolling interests		—		329		432		599

 

Since Blythe is a partnership, no tax effect was recognized for the income.  Blythe made a total of $1,515 in distributions to the non-controlling interests and $1,515 in distributions to the Company during the six months ended June 30, 2014.  There were no distributions made during the six months ended June 30, 2013.  There were no capital contributions made during the year ended December 31, 2013 or through the six months ended June 30, 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:

 

		June 30, 2014			December 31, 2013
Cash		$	250		$	3,025
Accounts receivable		—			1,085
Current liabilities		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

 

A contingent earnout payment of $4,000 was made in April 2013 to the sellers of Sprint for achieving certain operating performance targets in 2012.  The operations of Sprint did not meet the 2013 performance target.  There are no further earnout payments for the Sprint acquisition.

 

Saxon’s operations did not meet the performance target for the 2013 year and no payment was made.  There are no further earnout payments for the Saxon acquisition.

 

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, 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 June 30, 2014 of the remaining contingent earnout was $4,674.

 

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 at June 30, 2014 of the remaining contingent earnout was $729.

 

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.

 

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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 (leases expire in August 2014)

 

During the six months ended June 30, 2014 and 2013, the Company paid $441 and $471, respectively, in lease payments to SIGI for the use of these properties.

 

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 six months ended June 30, 2014 and 2013, Primoris paid $145 and $150, respectively, in lease payments.  The current term of the lease is through December 31, 2014.

 

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 six months ended June 30, 2014 and 2013, Primoris paid $45 and $45, 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 six months ended June 30, 2014 and 2013, the Company paid $132 and $132, 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 six months ended June 30, 2014, the Company recognized $272 and $409, respectively, in compensation expense.  At June 30, 2014, approximately $2.92 million of unrecognized compensation expense remains for the Units which will be recognized over the next 2.8 years through April 30, 2017.

 

Vested Units accrue “Dividend Equivalents” (as defined in the Equity Plan) which will be accrued as additional Units.  At June 30, 2014, there were 30 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 six months ended June 30, 2014 is 39.63%.  The effective tax rate for income attributable to Primoris is 39.75%. 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.

 

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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.

 

In the third quarter of 2013, the IRS initiated an examination of our federal income tax returns for 2011 and 2012.  The tax years 2010 through 2012 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 2008 through 2012 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.

 

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

 

		Three months ended June 30,						Six months ended June 30,
		2014			2013			2014			2013
Numerator:
Net income attributable to Primoris		$	16,003		$	15,564		$	26,836		$	25,334
Denominator (shares in thousands):
Weighted average shares for computation of basic earnings per share		51,655			51,562			51,631			51,510
Dilutive effect of shares issued to independent directors		—			—			2			4
Dilutive effect of unvested restricted stock units (1)		149			64			126			32
Dilutive effect of shares to be issued Q3C sellers (2)		—			—			—			1
Weighted average shares for computation of diluted earnings per share		51,804			51,626			51,759			51,547
Earnings per share:
Basic earnings per share		$	0.31		$	0.30		$	0.52		$	0.49
Diluted earnings per share		$	0.31		$	0.30		$	0.52		$	0.49

 

(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 under a long-term incentive plan.  The Company’s Long-Term Retention Plan (“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.

 

In March 2014 and 2013, the Company issued 6,375 shares and 12,480 shares of common stock, respectively, as part of the quarterly compensation of the non-employee members of the Board of Directors.

 

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As part of the acquisition of Q3C, the Company issued 29,273 unregistered shares of stock on January 7, 2013.  The shares were issued based on the average December 2012 closing prices, or $14.69 per share for a total value of $430.

 

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 six months ending June 30, 2014, the Company did not purchase any shares of stock.  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 2019. The leases require the Company to pay all taxes, insurance, maintenance and utilities and are classified as operating leases in accordance with ASC Topic 840 “Leases”.

 

Total lease expense during the three and six months ended June 30, 2014 and 2013 was $3,529 and $7,166, respectively, compared to $3,700 and $7,545 for the same periods in 2013.  The amounts for the three and six months ended June 30, 2014 included lease payments made to related parties of $383 and $763, respectively, and $398 and $797 for the three and six months ended June 30, 2013, respectively.

 

Letters of credit — At June 30, 2014, the Company had letters of credit outstanding of $7,481 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”). The Lawsuit was brought in the District Court of Collin County, Texas, 401st Judicial District, Cause No. 401-01747-2012.  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 Company is investigating all potential causes of the alleged loss, including design liabilities of the owner, owner’s engineers and/or the Company’s subcontractor.  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 June 30, 2014 and December 31, 2013, the Company had bid and completion bonds issued and outstanding totaling approximately $1,407,201 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 totaling $159 through June 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 totaling $23 through June 30, 2014.

 

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

 

Note 20—Reportable Operating Segments

 

The Company segregates its business into three operating segments: the East Construction Services (“East”) segment, the West Construction Services (“West”) segment and the Engineering segment.

 

The East segment includes the JCG and PES construction business, located primarily in the southeastern United States and in the Gulf Coast region of the United States.  The operations of Cardinal Contractors, Inc. and BW Primoris are included in this segment.

 

The West segment includes the 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 the upper Midwest United States.  The Blythe joint venture is also included as a part of the segment.

 

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 June 30, 2014 and 2013 were as follows:

 

		For the three months ended June 30,
		2014					2013
Segment		Revenue			% of Segment Revenue		Revenue			% of Segment Revenue
East		$	278,066		54.0	%	$	175,398		39.4	%
West		224,391			43.5	%	258,194			58.0	%
Engineering		12,834			2.5	%	11,421			2.6	%
Total		$	515,291		100.0	%	$	445,013		100.0	%

 

Revenue by segment for the six months ended June 30, 2014 and 2013 were as follows

 

		For the six months ended June 30,
		2014					2013
Segment		Revenue			% of Segment Revenue		Revenue			% of Segment Revenue
East		$	501,138		50.9	%	$	365,609		42.8	%
West		458,417			46.5	%	465,880			54.4	%
Engineering		25,810			2.6	%	23,519			2.8	%
Total		$	985,365		100.0	%	$	855,008		100.0	%

 

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Segment Gross Profit

 

Gross profit by segment for the three months ended June 30, 2014 and 2013 were as follows:

 

		For the three months ended June 30,
		2014					2013
Segment		Gross Profit			% of Segment Revenue		Gross Profit			% of Segment Revenue
East		$	21,309		7.7	%	$	15,215		8.7	%
West		37,809			16.9	%	41,926			16.2	%
Engineering		2,076			16.2	%	2,396			21.0	%
Total		$	61,194		11.9	%	$	59,537		13.4	%

 

Gross profit by segment for the six months ended June 30, 2014 and 2013 were as follows:

 

		For the six months ended June 30,
		2014					2013
Segment		Gross Profit			% of Segment Revenue		Gross Profit			% of Segment Revenue
East		$	37,325		7.5	%	$	30,210		8.3	%
West		69,483			15.2	%	70,675			15.2	%
Engineering		4,143			16.1	%	4,748			20.2	%
Total		$	110,951		11.3	%	$	105,633		12.4	%

 

Segment Goodwill

 

The following presents the amount of goodwill recorded by segment at June 30, 2014 and at December 31, 2013.

 

Segment		June 30, 2014			December 31, 2013
East		$	70,946		$	70,946
West		45,239			45,239
Engineering		2,441			2,441
Total		$	118,626		$	118,626

 

Geographic Region — Revenues and Total Assets

 

Revenue for the six months ended June 30, 2014 and 2013, and total assets by geographic area at June 30, 2014 and December 31, 2013, were as follows:

 

		External Revenues
		For the six months ended June 30,
		2014					2013					Total Assets
Country:		Revenue			% of Revenue		Revenue			% of Revenue		June 30, 2014			December 31, 2013
United States		$	974,735		98.9	%	$	845,461		98.9	%	$	1,043,406		$	1,039,322
Non-United States		10,630			1.1		9,547			1.1		11,600			11,371
Total		$	985,365		100.0	%	$	855,008		100.0	%	$	1,055,006		$	1,050,693

 

All non-United States revenue was generated in the Engineering segment.  For the table above, revenues generated by OnQuest Canada, ULC, were used to determine non-United States revenues.

 

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