Primoris Services Corp - Quarter Report: 2015 September (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 September 30, 2015

 

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 November 5, 2015, 51,675,569 shares of the registrant’s common stock, par value $0.0001 per share, were outstanding.

 

 

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PRIMORIS SERVICES CORPORATION

 

INDEX

 

	Page No.
Part I. Financial Information
Item 1. Financial Statements:
—Condensed Consolidated Balance Sheets at September 30, 2015 and December 31, 2014	3
—Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2015 and 2014	4
— Condensed Consolidated Statements of Cash Flows for the three and nine months ended September 30, 2015 and 2014	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	34
Item 4. Controls and Procedures	35
Part II. Other Information
Item 1. Legal Proceedings	35
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	36
Signatures	37

 

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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, 2015			December 31, 2014
ASSETS
Current assets:
Cash and cash equivalents		$	89,424		$	139,465
Short-term investments		—			30,992
Customer retention deposits and restricted cash		2,064			481
Accounts receivable, net		386,084			337,382
Costs and estimated earnings in excess of billings		116,517			68,654
Inventory and uninstalled contract materials		65,392			58,116
Deferred tax assets		13,555			13,555
Prepaid expenses and other current assets		31,071			31,720
Total current assets		704,107			680,365
Property and equipment, net		286,386			271,431
Intangible assets, net		38,149			39,581
Goodwill		124,562			119,410
Other long-term assets		2,785			400
Total assets		$	1,155,989		$	1,111,187
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	134,205		$	128,793
Billings in excess of costs and estimated earnings		144,837			158,595
Accrued expenses and other current liabilities		113,589			83,401
Dividends payable		2,842			2,062
Current portion of capital leases		1,148			1,650
Current portion of long-term debt		47,288			38,909
Current portion of contingent earnout liabilities		349			5,901
Total current liabilities		444,258			419,311
Long-term capital leases, net of current portion		105			657
Long-term debt, net of current portion		206,381			204,029
Deferred tax liabilities		19,484			19,484
Long-term contingent earnout liabilities, net of current portion		1,102			1,021
Other long-term liabilities		11,332			12,899
Total liabilities		682,662			657,401
Commitments and contingencies
Stockholders’ equity
Common stock—$.0001 par value, 90,000,000 shares authorized, 51,675,569 and 51,561,396 issued and outstanding at September 30, 2015 and December 31, 2014		5			5
Additional paid-in capital		163,067			160,186
Retained earnings		310,191			293,628
Noncontrolling interests		64			(33		)
Total stockholders’ equity		473,327			453,786
Total liabilities and stockholders’ equity		$	1,155,989		$	1,111,187

 

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,
		2015			2014			2015			2014
Revenues		$	555,945		$	613,237		$	1,432,270		$	1,598,602
Cost of revenues		484,298			537,764			1,276,122			1,412,178
Gross profit		71,647			75,473			156,148			186,424
Selling, general and administrative expenses		38,545			36,162			110,852			99,087
Operating income		33,102			39,311			45,296			87,337
Other income (expense):
Income from non-consolidated entities		—			5,250			—			5,264
Foreign exchange gain (loss)		(721		)	(101		)	(425		)	74
Other income (expense)		361			(201		)	272			(642		)
Interest income		4			14			22			80
Interest expense		(1,903		)	(1,778		)	(5,563		)	(4,642		)
Income before provision for income taxes		30,843			42,495			39,602			87,471
Provision for income taxes		(11,764		)	(15,105		)	(15,159		)	(32,813		)
Net income		$	19,079		$	27,390		$	24,443		$	54,658
Less net income attributable to noncontrolling interests		(72		)	—			(126		)	(432		)
Net income attributable to Primoris		$	19,007		$	27,390		$	24,317		$	54,226
Earnings per share:
Basic		$	0.37		$	0.53		$	0.47		$	1.05
Diluted		$	0.37		$	0.53		$	0.47		$	1.05
Weighted average common shares outstanding:
Basic		51,672			51,606			51,637			51,622
Diluted		51,824			51,759			51,789			51,759

 

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,
		2015			2014
Cash flows from operating activities:
Net income		$	24,443		$	54,658
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation		43,452			37,126
Amortization of intangible assets		5,082			5,632
Gain on sale of property and equipment		(901		)	(956		)
Income from non-consolidated entities		—			(5,264		)
Stock—based compensation expense		787			671
Changes in assets and liabilities:
Customer retention deposits and restricted cash		(1,583		)	4,893
Accounts receivable		(45,968		)	(80,658		)
Costs and estimated earnings in excess of billings		(47,561		)	(39,004		)
Other current assets		(5,453		)	(5,787		)
Accounts payable		4,669			30,247
Billings in excess of costs and estimated earnings		(14,657		)	(8,937		)
Contingent earnout liabilities		(5,271		)	(4,358		)
Accrued expenses and other current liabilities		31,712			9,301
Other long-term assets		(2,385		)	283
Other long-term liabilities		(3,067		)	—
Net cash used in operating activities		(16,701		)	(2,153		)
Cash flows from investing activities:
Purchase of property and equipment		(52,440		)	(64,540		)
Proceeds from sale of property and equipment		6,139			3,848
Purchase of short-term investments		—			(3,525		)
Sale of short-term investments		30,992			20,131
Cash received for the sale of Alvah		—			6,439
Cash paid for acquisitions		(22,302		)	(14,595		)
Net cash used in investing activities		(37,611		)	(52,242		)
Cash flows from financing activities:
Proceeds from issuance of long-term debt		42,328			39,700
Repayment of capital leases		(1,086		)	(2,778		)
Repayment of long-term debt		(31,597		)	(26,345		)
Proceeds from issuance of common stock purchased under a long-term incentive plan		1,621			1,671
Dividends paid		(6,966		)	(5,421		)
Cash distribution to non-controlling interest holder		(29		)	(1,515		)
Repurchase of common stock		—			(2,844		)
Net cash provided by financing activities		4,271			2,468
Net change in cash and cash equivalents		(50,041		)	(51,927		)
Cash and cash equivalents at beginning of the period		139,465			196,077
Cash and cash equivalents at end of the period		$	89,424		$	144,150

 

See Accompanying Notes to Condensed Consolidated Financial Statements

 

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SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

 

		Nine months Ended
		September 30,
		2015			2014
		(Unaudited)
Cash paid during the period for:
Interest		$	5,652		$	5,215
Income taxes, net of refunds received		$	10,527		$	35,484

 

SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES

 

		Nine Months Ended
		September 30,
		2015			2014
		(Unaudited)
Dividends declared and not yet paid		$	2,842		$	2,062

 

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 (the “Company”) 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 — In the third quarter 2014, the Company reorganized its business segments to match the changes in the Company’s internal organization and management structure.  The current 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 included certain subsidiaries that were included as part of the prior year East Construction Services and Engineering segments (“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.

 

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

 

 

The Company owned 50% of the Blythe Power Constructors joint venture (“Blythe”) created for the installation of a parabolic trough solar field and steam generation system in California, and its operations have been included as part of the West segment.  The Company determined that in accordance with FASB Topic 810, the Company was the primary beneficiary of a variable interest entity and has consolidated the results of Blythe in its financial statements. The project has been completed, the project warranty expired in May 2015 and final distributions and dissolution was completed in the third quarter 2015.

 

The Company owns a 50% interest in the Carlsbad Power Constructors joint venture (“Carlsbad”) formed in 2015 for the construction of a gas-fired power facility in Southern California.  The operations are included as part of the West segment.  As a result of determining that the Company is the primary beneficiary of the VIE, the results of Carlsbad are consolidated in the Company’s financial statements.  The project is expected to be completed in 2017.  Financial information for both the Blythe and Carlsbad joint ventures is presented in “Note 11— Noncontrolling Interests”.

 

In January 2014, the Company created a wholly owned subsidiary, BW Primoris, LLC, a Texas limited liability company (“BWP”). 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. BWP has entered into an intercompany construction contract with Cardinal Contractors, Inc. to build a small water treatment facility which will be owned by BWP. Beginning in 2016, the facility will generate revenues through a take-or-pay contract with a West Texas municipal entity. All intercompany revenue and profit of the construction project was eliminated, and at September 30, 2015, a total of $13.7 million has been capitalized as property, plant and equipment, including the approximately $5 million acquisition cost.

 

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In May 2014, the Company created a wholly owned subsidiary, Vadnais Trenchless Services, Inc., a California company (“Vadnais”), which on June 5, 2014, purchased the assets of Vadnais Corporation for $6.4 million. Vadnais Corporation was a general contractor specializing in micro-tunneling. The assets purchased were primarily equipment, building and land.  The purchase included a contingent earnout on meeting certain operating targets.

 

During the third quarter 2014, the Company made three small purchases totaling $8.2 million acquiring the net assets of Surber Roustabout, LLC (“Surber”), Ram-Fab, LLC (“Ram-Fab”) and Williams Testing, LLC (“Williams”). Surber and Ram-Fab operate as divisions of PES, and Williams is a division of Cardinal Contractors, Inc. 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 and Ram-Fab purchases provided for contingent earnout amounts as discussed in “Note 7— Business Combinations”.

 

On February 28, 2015, the Company acquired the net assets of Aevenia, Inc. for $22.7 million, consisting of $22.3 million in cash and a payable of $0.4 million to the sellers. Aevenia, Inc. has been re-branded as Primoris Aevenia, Inc. (“Aevenia”) and operates as part of Primoris’ Energy segment. Headquartered in Moorhead, Minnesota, Aevenia is an energy and electrical construction company. Aevenia specializes in overhead and underground line work, substations, telecom/fiber, and certain other client-specific on-demand call out services. The majority of their work is delivered under unit-price Master Services Agreements (“MSAs”). Aevenia has operations in Minnesota, North Dakota, South Dakota and Iowa. The Company believes there are opportunities for Aevenia to grow sales by performing in-house work for other Primoris subsidiaries and to expand the Company’s offerings to new geographies in the Midwest.

 

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, 2015 and 2014 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 16, 2015, which contains the Company’s audited consolidated financial statements for the year ended December 31, 2014, have been omitted.

 

This Third Quarter 2015 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. For fixed-price contracts, the Company recognizes revenues primarily using the percentage-of-completion method, which may result in uneven and irregular results. In the percentage-of-completion method, estimated contract values, estimated cost at completion and total costs incurred to date are used to calculate revenues earned. 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.

 

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 based on an estimated probability of realization from change order approval. 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.

 

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Other contract forms — The Company also uses unit-price, time and material, and cost reimbursable plus fee contracts.  For these jobs, revenue is recognized primarily based on contractual terms. For example, time and material contract revenues are generally recognized on an input basis, based on labor hours incurred and on purchases made. Similarly, unit price contracts generally recognize revenue on an output based measurement such as the completion of specific units at a specified unit price.

 

At any time during a fixed-price contract if an estimate of total contract cost indicates a loss on a contract, the projected loss is recognized in full at that time. The loss amount is recognized as an “accrued loss provision” and is included in the accrued expenses and other liabilities amount on the balance sheet. As the percentage-of-completion method is used to calculate revenues, the accrued loss provision is changed so that the gross profit for the contract remains zero in future periods. If we anticipate that there will be a loss for unit price or cost reimbursable contracts, the projected loss is recognized in full at that time.

 

Changes in job performance, job conditions and estimated profitability, including those arising from final contract settlements, may result in revisions to costs and income. These revisions are recognized in the period in which the revisions are identified.

 

In all forms of contracts, the Company estimates its collectability of contract amounts at the same time that it estimates project costs.  If the Company anticipates that there may be issues associated with the collectability of the full amount calculated as revenues, the Company may reduce the amount recognized as revenue to reflect the uncertainty associated with realization of the eventual cash collection. For example, when a cost reimbursable project exceeds the client’s expected budget amount, the client frequently requests an adjustment to the final amount. Similarly, some utility clients reserve the right to audit costs for significant periods after performance of the work. In these situations, the Company may choose to defer recognition of revenue up to the time that the client pays for the services.

 

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 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 — 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 at the end of the prior year or prior quarter, there can be a difference in revenues and profits that would have been recognized in the prior year or prior quarter, had current estimates of costs to complete been known at the end of the prior year or prior quarter.

 

Customer Concentration — The Company operates in multiple industry segments encompassing the construction of commercial, industrial and public works infrastructure assets throughout primarily the United States. Typically, the top ten customers in any one calendar year generate revenues in excess of 50% of total revenues; however, the group that comprises the top ten customers varies from year to year.

 

During the three and nine months ending September 30, 2015, revenues generated by the top ten customers were $325 million and $848 million, respectively, which represented 58.5% and 59.2%, respectively, of total revenues during the periods. During these respective periods of 2015, a pipeline operator represented 6.7% and 10.3% of total revenues and TXDOT represented 9.9% and 10.0% of total revenues.

 

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 respective periods of 2014, TXDOT 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.

 

At September 30, 2015, approximately 6.6% of the Company’s accounts receivable were due from one customer, and that customer provided 7.9% of the Company’s revenues for the nine months ended September 30, 2015. In addition, of total accounts receivable, approximately 13.2% of total accounts receivable are currently in dispute resolution. See “Note 18 — Commitments and Contingencies”.

 

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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.  In addition, of total accounts receivable at September 30, 2014, approximately 13.1% are currently in dispute resolution. See “Note 18 — Commitments and Contingencies”.

 

Multiemployer Plans — Various subsidiaries in the West 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 would incur a withdrawal obligation. The potential withdrawal obligation may be significant. In accordance with GAAP, any withdrawal liability would be recorded when it is probable that a liability exists and can be reasonably estimated. In November 2011, the Company withdrew from the Central States Southeast and Southwest Areas Pension Fund multiemployer pension plan, as discussed in “Note 18 — Commitments and Contingencies”.  The Company has no plans to withdraw from any other agreements.

 

Inventory and uninstalled contract materials — Inventory consists of expendable construction materials and small tools that will be used in construction projects and is valued at the lower of cost, using first-in, first-out method, or market. Uninstalled contract materials are certain job specific materials not yet installed, primarily for highway construction projects, which are valued using the specific identification method relating the cost incurred to a specific project. In most cases, the Company has been able to invoice a state agency for the materials, but title has not yet passed to the state agency.

 

Note 3—Recent Accounting Pronouncements

 

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 would require new qualitative and quantitative disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments, information about contract balances and performance obligations, and assets recognized from costs incurred to obtain or fulfill a contract.  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 is currently effective January 1, 2017; however, the FASB recently deferred the effective date for us to January 1, 2018.  The Company is currently evaluating the potential impact of adoption and the implementation approach to be used.

 

In February 2015, the FASB issued ASU 2015-02 “Consolidation (Topic 810): Amendment to the Consolidation Analysis” which amends existing consolidation guidance, including amending the guidance related to determining whether an entity is a variable interest entity. The update is effective for interim and annual periods beginning after December 15, 2015, although early adoption is permitted. The guidance may be applied using a modified retrospective approach whereby the entity records a cumulative effect of adoption at the beginning of the fiscal year of initial application. A reporting entity may also apply the amendments on a full retrospective basis. The Company is currently evaluating the potential impact of this authoritative guidance on our consolidated financial statements.

 

In August 2014, the FASB issued ASU 2014-15 “Presentation of Financial Statements — Going Concern (Subtopic 205-40)” to address the diversity in practice in determining when there is substantial doubt about an entity’s ability to continue as a going concern and when and how an entity must disclose certain relevant conditions and events. This update requires an entity to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern for a period of one year after the date that the financial statements are issued (or available to be issued). If such conditions or events exist, an entity should disclose that there is substantial doubt about the entity’s ability to continue as a going concern for a period of one year after the date that the financial statements are issued (or available to be issued), along with the principal conditions or events that raise substantial doubt, management’s evaluation of the significance of those conditions or events in relation to the entity’s ability to meet its obligations and management’s plans that are intended to mitigate those conditions or events. The guidance is effective for annual and interim periods ending after December 15, 2016. This guidance will impact the disclosure and presentation of how we report any substantial doubt about our ability to continue as a going concern, if such substantial doubt were to exist. The Company will adopt this guidance effective January 1, 2017.

 

Note 4—Fair Value Measurements

 

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

 

In general, fair values determined by Level 1 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.

 

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The following table presents, for each of the fair value hierarchy levels identified under ASC Topic 820, the Company’s financial assets and liabilities that are required to be measured at fair value at September 30, 2015 and December 31, 2014:

 

					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, 2015:
Cash and cash equivalents		$	89,424		$	89,424		—		$	—
Liabilities as of September 30, 2015:
Contingent consideration		$	1,451		—			—		$	1,451
Assets as of December 31, 2014:
Cash and cash equivalents		$	139,465		$	139,465		—		$	—
Short-term investments		$	30,992		$	30,992		—		$	—
Liabilities as of December 31, 2014:
Contingent consideration		$	6,922		—			—		$	6,922

 

Short-term investments at December 31, 2014 consisted primarily of 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, 2015 and 2014:

 

		Significant Unobservable Inputs (Level 3)
		2015			2014
Contingent Consideration Liability
Beginning balance, January 1, 2015 and 2014		$	6,922		$	9,233
Additions to contingent consideration liability:
Change in fair value of contingent consideration liability		125			642
Vadnais acquisition		—			729
Other acquisitions made in third quarter 2014		—			1,342
Reductions in the contingent consideration liability:
Payment to Q3C sellers for meeting performance targets		(5,000		)	(5,000		)
Reduction due to non-attainment of performance target — Ram-Fab & Vadnais		(596		)	—
Ending balance, September 30, 2015 and 2014		$	1,451		$	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 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 an 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 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 used of the estimated discount rate is accompanied by a directionally opposite change in the fair value of contingent consideration liability.

 

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Note 5—Accounts Receivable

 

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

 

		September 30, 2015			December 31, 2014
Contracts receivable, net of allowance for doubtful accounts of $1,129 at September 30, 2015 and $540 at December 31, 2014		$	331,065		$	287,806
Retention receivable		54,638			49,104
		385,703			336,910
Other accounts receivable		381			472
		$	386,084		$	337,382

 

Note 6—Costs and Estimated Earnings on Uncompleted Contracts

 

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

 

		September 30, 2015			December 31, 2014
Costs incurred on uncompleted contracts		$	4,957,107		$	5,194,769
Gross profit recognized		575,481			613,510
		5,532,588			5,808,279
Less: billings to date		(5,560,908		)	(5,898,220		)
		$	(28,320	)	$	(89,941	)

 

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

 

		September 30, 2015			December 31, 2014
Costs and estimated earnings in excess of billings		$	116,517		$	68,654
Billings in excess of costs and estimated earnings		(144,837		)	(158,595		)
		$	(28,320	)	$	(89,941	)

 

Note 7 — Business Combinations

 

On February 28, 2015, the Company acquired the net assets of Aevenia, Inc. for $22.7 million, consisting of $22.3 million in cash and a payable of $0.4 million to the sellers. Aevenia, Inc. has been re-branded as Primoris Aevenia, Inc. (“Aevenia”), and operates as part of Primoris’ Energy segment.

 

The purchase was accounted for using the acquisition method of accounting. During the second quarter of 2015, the Company finalized its estimate of fair value of the acquired assets and assumed liabilities of Aevenia, which included $4.2 million in current assets, $2.1 million in current liabilities, plant and equipment of $11.2 million, intangible assets of $3.85 million and goodwill of $5.15 million.

 

The customer relationships were valued at $2.5 million utilizing the “excess earnings method” of the income approach. The estimated discounted cash flows associated with existing customers and projects were based on historical and market participant data. Such discounted cash flows were net of fair market returns on the various tangible and intangible assets that are necessary to realize the potential cash flows.

 

The fair value for the non-compete agreement of $1.35 million was based on a discounted “income approach model,” including estimated financial results with and without the non-compete agreement in place.  The agreement was analyzed based on the potential impact of competition that certain individuals could have on the financial results, assuming the agreement was not in place. An estimate of the probability of competition was applied and the results were compared to a similar model assuming the agreement was in place.

 

Goodwill of $5.15 million largely consists of expected benefits from providing electrical construction expertise for the Company and the greater presence and convenient access to the central plains area of the United States.  Goodwill also includes the value of the assembled workforce of the Aevenia business. Based on the current tax treatment, goodwill and other intangible assets will be deductible for income tax purposes over a fifteen-year period.

 

Supplemental Unaudited Pro Forma Information for the three and nine months ended September 30, 2015 and 2014

 

The following pro forma information for the three and nine months ended September 30, 2015 and 2014 presents the results of operations of the Company as if the Aevenia acquisition and the 2014 acquisitions of Vadnais, Surber, Ram-Fab and Williams had all occurred at the beginning of 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;

 

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·                  the pro forma impact of the expense associated with amortization of the discount for the fair value of the contingent consideration (related to the 2014 Vadnais, Surber and Ram-fab acquisitions) for potential earnout liabilities that may be achieved during the years 2015 through 2017; and

 

·                  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, 2015 and the same period in 2014.

 

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 various acquisitions been completed on January 1, 2014.  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 Aevenia acquisition.

 

		Three months ended September 30,						Nine months ended September 30,
		2015			2014			2015			2014
Revenues		$	555,945		$	633,195		$	1,435,268		$	1,655,472
Income before provision for income taxes		30,843			44,803			37,814			88,398
Net income attributable to Primoris		19,007			28,798			23,226			54,792
Weighted average common shares outstanding:
Basic		51,672			51,606			51,637			51,622
Diluted		51,824			51,759			51,789			51,759
Earnings per share:
Basic		$	0.37		$	0.56		$	0.45		$	1.06
Diluted		$	0.37		$	0.56		$	0.45		$	1.06

 

Note 8—Intangible Assets

 

At September 30, 2015 and December 31, 2014, intangible assets totaled $38,149 and $39,581, 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		September 30,			December 31,
		Period		2015			2014
Tradename		3 to 10 years		$	15,801		$	18,194
Non-compete agreements		2 to 5 years			1,639			1,074
Customer relationships		5 to 15 years			20,709			20,313
Total				$	38,149		$	39,581

 

Amortization expense of intangible assets was $1,712 and $1,945 for the three months ended September 30, 2015 and 2014, respectively, and amortization expense for the nine months ended September 30, 2015 and 2014 was $5,082 and $5,632, respectively. Estimated future amortization expense for intangible assets is as follows:

 

For the Years Ending December 31,		Estimated Intangible Amortization Expense
2015 (remaining three months)		$	1,703
2016		6,460
2017		6,192
2018		5,719
2019		5,509
Thereafter		12,566
		$	38,149

 

Note 9—Accounts Payable and Accrued Liabilities

 

At September 30, 2015 and December 31, 2014, accounts payable included retention amounts of approximately $8,303 and $9,285, respectively.  These amounts are due to subcontractors and have been retained pending contract completion and customer acceptance of jobs.

 

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

 

		September 30, 2015			December 31, 2014
Payroll and related employee benefits		$	48,634		$	37,261
Insurance, including self-insurance reserves		45,420			34,377
Reserve for estimated losses on uncompleted contracts		4,957			2,363
Corporate income taxes and other taxes		9,296			3,775
Accrued overhead cost		954			1,059
Other		4,328			4,566
		$	113,589		$	83,401

 

Note 10—Credit Arrangements

 

Revolving Credit Facility

 

As of September 30, 2015, the Company had a revolving credit facility, as amended on December 12, 2014 (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, Branch Banking and Trust Company and UMB Bank, N.A. (the “Lenders”). The Credit Agreement is a $125 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 $125 million committed amount. 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 outstanding were $12,105 at September 30, 2015 and $4,659 at December 31, 2014.  Other than commercial letters of credit, there were no borrowings under this line of credit during the nine months ended September 30, 2015, and available borrowing capacity at September 30, 2015 was $112,895.

 

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”).  On June 3, 2015, the Notes Agreement was amended to provide for the issuance of additional notes of up to $75 million over the next three year period ending June 3, 2018 (“Additional Senior Notes”).

 

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 $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.

 

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The Company was in compliance with the covenants for the Credit Agreement and Notes Agreement at September 30, 2015.

 

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, 2015 and December 31, 2014, letters of credit outstanding totaled $2,680 and $2,563 in Canadian dollars, respectively.  At September 30, 2015, the available borrowing capacity was $5,320 in Canadian dollars.  The credit facility contains a working capital restrictive covenant for our Canadian subsidiary, OnQuest Canada, ULC. At September 30, 2015, OnQuest Canada, ULC was in compliance with the covenant. On October 8, 2015, the facility was renewed with substantially the same terms and conditions.

 

Commercial Equipment Notes Payable

 

From time to time the Company enters into commercial equipment notes payable with various equipment finance companies and banks.  Interest rates range from 1.78% to 3.85% per annum and maturity dates range from November 30, 2016 to July 25, 2023.  The notes are secured by certain construction equipment of the Company.

 

Note 11 — Noncontrolling Interests

 

The Company determined that both the Blythe joint venture and the Carlsbad Power Constructors joint venture were variable interest entities (“VIE”) and that the Company was the primary beneficiary as a result of its significant influence over the operations of the joint ventures.

 

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,
		2015			2014			2015			2014
Revenues		$	11		$	—		$	119		$	940
Net income attributable to noncontrolling interests		$	5		$	—		$	59		$	432

 

No tax effect was recognized for the income since Blythe is a partnership.  The project has been completed and Blythe made a final distribution of $29 to the non-controlling interests and $29 to the Company during the nine months ending September 30, 2015.  Blythe made total distributions of $1,515 to the non-controlling interests and $1,515 to the Company during the nine months ending September 30, 2014. No capital contributions were made during the year ended December 31, 2014 or through the nine months ended September 30, 2015.

 

The Carlsbad 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,
		2015			2014			2015			2014
Revenues		$	1,020		$	—		$	1,020		$	—
Net income attributable to noncontrolling interests		$	67		$	—		$	67		$	—

 

Since Carlsbad is a partnership, no tax effect was recognized for the income. Carlsbad made no distributions to the partners and the Company made no capital contributions to Carlsbad during the nine months ending September 30, 2015.

 

The carrying values of the assets and liabilities associated with the operations of the Blythe and Carlsbad joint ventures are included in the Company’s consolidated balance sheets and were immaterial at December 31, 2014 and September 30, 2015.

 

Note 12 — 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 were paid an additional $5,000 in March 2015 based on achieving an operating performance target for the calendar year 2014.

 

In June 2014, the Company acquired the assets of Vadnais Company for $6,354 in cash plus an earnout of $900, with $450 payable in September 2015 and $450 payable in September 2016, contingent upon meeting a certain performance targets for each of the two periods.  The estimated fair value of the contingent consideration on the acquisition date was $679. At September 30, 2015, it was determined that the operations of Vadnais did not meet the September 2015 performance targets. As a result, the contingent consideration balance of $396 was credited to non-operating income at September 30, 2015. The fair value of the contingent consideration related to the September 30, 2016 target was $368 as of September 30, 2015.

 

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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 $1.4 million over a 3-year period, which had an estimated fair value of $1.0 million on the acquisition date and $1,083 as of September 30, 2015.  The Ram-Fab purchase included a $0.2 million contingent earnout based on estimated earnings of a six-month operating project.  Because the operating results for the Ram-Fab project were not met during the acquisition measurement period, the contingent earnout liability was reduced in June 2015 and the value of intangible assets of the acquisition was reduced by the same amount.

 

Note 13—Related Party Transactions

 

Primoris has entered into leasing transactions with Stockdale Investment Group, Inc. (“SIGI”).  Brian Pratt, our 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)

 

During the nine months ended September 30, 2015 and 2014, the Company paid $621 and $656, respectively, in lease payments to SIGI for the use of these properties.

 

Primoris leases a property from Roger Newnham, a former owner and current manager of our subsidiary, OnQuest Canada, ULC. The property is located in Calgary, Canada. During the nine months ended September 30, 2015 and 2014, Primoris paid $193 and $219, 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, 2015 and 2014, Primoris paid lease payments of $68 for both periods.  The lease expires in January 2016.

 

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, an operations president in the West Construction segment. The property is located in Little Canada, Minnesota.  During the nine months ended September 30, 2015 and 2014, the Company paid $198 in both periods in lease payments to Quality RE Partners. The lease expires in October 2022.  In addition, during the nine months ended September 30, 2015, Q3C paid $32 for a month-to-month lease of construction equipment to Mr. Osborn.

 

Note 14—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.  At September 30, 2015, a total of 50,000 Units were vested. On March 24, 2014, the Board of Directors granted 48,512 Units to another executive under the Equity Plan.  On September 23, 2015 a total of 24,256 Units vested and the remaining 24,256 Units will vest on March 23, 2017, subject to continuing employment of the executive.  Vesting of 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 months ended September 30, 2015 and 2014, the Company recognized $262 and $262, respectively, in compensation expense. For the nine months ended September 30, 2015 and 2014, the Company recognized compensation expense of $787 and $671, respectively.  At September 30, 2015, approximately $1.6 million of unrecognized compensation expense remains for the Units, which will be recognized 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, 2015, a total of 535 Dividend Equivalent Units were accrued.

 

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Note 15—Income Taxes

 

The effective tax rate for the nine months ended September 30, 2015 for income before taxes and noncontrolling interests is 38.3% and for income attributable to Primoris is 38.4%.  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.

 

In the third quarter of 2014, the Internal Revenue Service concluded an examination of our federal income tax returns for 2011 and 2012 which did not have a material impact on our financial statements. The Company’s federal income tax returns are no longer subject to examination for tax years before 2013. The statutes of limitation of state and foreign jurisdictions vary generally between 3 to 5 years. Accordingly, the tax years 2009 through 2014 generally remain open to examination by the other taxing jurisdictions in which the Company operates.

 

Note 16—Dividends and Earnings Per Share

 

The Company has paid or declared cash dividends during 2015 as follows:

 

·                  On November 4, 2014, the Company declared a cash dividend of $0.04 per common share, payable to stockholders of record on December 31, 2014.  The dividend, totaling $2,062, was paid on January 15, 2015.

 

·                  On February 24, 2015, the Company declared a cash dividend of $0.04 per common share, payable to stockholders of record on March 31, 2015.  The dividend, totaling $2,063, was paid on April 15, 2015.

 

·                  On May 1, 2015, the Company declared a cash dividend of $0.055 per common share, payable to stockholders of record on June 30, 2015.  The dividend, totaling $2,841, was paid on July 15, 2015.

 

·                  On August 4, 2015, the Company declared a cash dividend of $0.055 per common share, payable to stockholders of record on September 30, 2015.  The dividend, totaling $2,842, was paid on October 15, 2015.

 

The table below presents the computation of basic and diluted earnings per share for the three and nine months ended September 30, 2015 and 2014:

 

		Three months ended September 30,						Nine months ended September 30,
		2015			2014			2015			2014
Numerator:
Net income attributable to Primoris		$	19,007		$	27,390		$	24,317		$	54,226
Denominator (shares in thousands):
Weighted average shares for computation of basic earnings per share		51,672			51,606			51,637			51,622
Dilutive effect of shares issued to independent directors		3			4			3			3
Dilutive effect of unvested restricted stock units (1)		149			149			149			134
Weighted average shares for computation of diluted earnings per share		51,824			51,759			51,789			51,759
Earnings per share:
Basic earnings per share		$	0.37		$	0.53		$	0.47		$	1.05
Diluted earnings per share		$	0.37		$	0.53		$	0.47		$	1.05

 

(1)   Represents the dilutive effect of a grant of 148,512 shares of Units and 535 vested Dividend Equivalent Units.

 

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Note 17—Stockholders’ Equity

 

Common stock — In March 2015, the Company received $1,621 for 96,257 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 2015 were for bonus amounts earned in 2014 and the number of shares was calculated at 75% of the average market closing price for the month of December 2014.  In March 2014, the Company received $1,671 for 77,455 shares of common stock issued under the LTR Plan for bonus amounts earned in the prior year.

 

In March and August 2015, the Company issued 8,168 shares and 9,748 shares of common stock, respectively, as part of the quarterly compensation of the non-employee members of the Board of Directors.  Shares issued to the non-employee members of the Board of Directors in February and September 2014 were 6,375 shares and 6,172 shares, respectively.

 

As discussed in Note 14 — “Stock Based Compensation”, the Board of Directors has granted a total of 148,512 shares of Units under the Equity Plan and these Units have accrued 535 Dividend Equivalent Units.

 

Note 18—Commitments and Contingencies

 

Leases — The Company leases certain property and equipment under non-cancellable operating leases which expire at various dates through 2020. 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, 2015 was $3,753 and $14,144, respectively, compared to $3,250 and $10,416 for the same periods in 2014. The amounts for the three and nine months ended September 30, 2015 included lease payments made to related parties of $360 and $1,080, respectively, compared to $377 and $1,140 for the same periods in 2014.

 

Letters of credit — At September 30, 2015, the Company had letters of credit outstanding of $14,107 and at December 31, 2014, the Company had letters of credit outstanding of $6,864.  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 Company participated in court-ordered mediation for 18 months, and on February 25, 2015 the Lawsuit was settled for an expected cost to the Company of $9 million.

 

At September 30, 2015, the Company is engaged in dispute resolution to enforce collection for two construction projects completed by the Company in 2014.  For one project, a cost reimbursable contract, the Company has recorded a receivable of $32.9 million, and for the other project, the Company has a receivable balance due of $17.9 million.  At September 30, 2015, the Company has not recorded revenues in excess of cost for these two projects; however, the Company has specific reserves for both projects of approximately $28 million included in “billings in excess of costs and estimated earnings.” At this time, the Company cannot predict the amount that it will collect nor the timing of any collection.

 

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, 2015 and December 31, 2014, the Company had bid and completion bonds issued and outstanding totaling approximately $1,558,465 and $1,518,018, respectively.

 

Withdrawal liability for multiemployer pension plan —In November 2011, members of the Pipe Line Contractors Association “PLCA” including ARB, Rockford and Q3C (prior to the Company’s acquisition in 2012), withdrew from the Central States Southeast and Southwest Areas Pension Fund multiemployer pension plan (“Plan”). These withdrawals were made in order to mitigate additional liability in connection with the significantly underfunded Plan. The Company recorded a withdrawal liability of $7,500, which was increased to $7,585 after the acquisition of Q3C, based on information provided by the Plan. The Plan asserted that the PLCA members did not affect a proper withdrawal in 2011, and in May 2014, the Plan asserted that the total liability for the Company was $11,819. A legal proceeding commenced, and the United States District Court ruled that the withdrawal of the PLCA members in 2011 was not effective. The PLCA appealed this decision, but as required by the Plan, the Company began making monthly payments which have totaled $1,600 through September 30, 2015.  These payments have been expensed.

 

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On September 2, 2015, the U.S. Court of Appeals for the 7th Circuit reversed the decision of the District Court and ruled that the withdrawal was effective in 2011 as had been asserted by the PLCA. The Company is waiting for the Plan to provide it with final liability amounts based on the Court’s decision.

 

Contingent Consideration — Earnouts related to acquisitions are discussed in Note 12 — “Contingent Earnout Liabilities”.

 

Note 19—Reportable Operating Segments

 

In the third quarter 2014, the Company reorganized its business segments to match the change in the Company’s internal organization and management structure. All prior period amounts related to the segment change have been retrospectively reclassified 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, Q3C, 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, completed in 2014, and the Carlsbad joint venture, which began in 2015, 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 businesses, located primarily in the southeastern United States and in the Gulf Coast region of the United States.

 

The Energy segment businesses are located primarily in the southeastern United States, the Gulf Coast region and the upper Midwest region of the United States. The segment includes the operations of the PES pipeline and gas facility construction and maintenance operations, the PES Industrial division and the newly acquired Aevenia, Surber and Ram-Fab operations. Additionally, the segment includes the OnQuest, Inc. and OnQuest Canada, ULC operations for the design and installation of LNG facilities and 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, 2015 and 2014 were as follows:

 

		For the three months ended September 30,
		2015					2014
Segment		Revenue			% of Segment Revenue		Revenue			% of Segment Revenue
West		$	258,414		46.5	%	$	289,405		47.2	%
East		183,635			33.0	%	135,450			22.1	%
Energy		113,896			20.5	%	188,382			30.7	%
Total		$	555,945		100.0	%	$	613,237		100.0	%

 

Revenue by segment for the nine months ended September 30, 2015 and 2014 were as follows

 

		For the nine months ended September 30,
		2015					2014
Segment		Revenue			% of Segment Revenue		Revenue			% of Segment Revenue
West		$	684,798		47.8	%	$	747,823		46.8	%
East		462,222			32.3	%	360,975			22.6	%
Energy		285,250			19.9	%	489,804			30.6	%
Total		$	1,432,270		100.0	%	$	1,598,602		100.0	%

 

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