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Primoris Services Corp - Quarter Report: 2016 September (Form 10-Q)

Table of Contents 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

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

 

For the quarterly period ended September 30, 2016

 

OR

 

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)

 

Delaware

    

20-4743916

(State or Other Jurisdiction of

 

(I.R.S. Employer

Incorporation or Organization)

 

Identification No.)

 

 

 

2100 McKinney Avenue, Suite 1500

 

 

Dallas, Texas

 

75201

(Address of Principal Executive Offices)

 

(Zip Code)

 

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 ☒  No ☐

 

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  ☒ No ☐

 

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

 

Large accelerated filer  ☒

    

Accelerated filer  ☐

 

 

 

Non-accelerated filer  ☐

 

Smaller reporting company  ☐

Do not check if a smaller reporting company.

 

 

 

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

 

At November 7, 2016, 51,784,242 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 

 

 

 

 

 

 

 

 

 

 

 

—Condensed Consolidated Balance Sheets at September 30, 2016 (Unaudited) and December 31, 2015 

 

 

 

 

—Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2016 and 2015 (Unaudited) 

 

 

 

 

— Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2016 and 2015 (Unaudited) 

 

 

 

 

—Notes to Condensed Consolidated Financial Statements (Unaudited) 

 

 

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 

 

26 

 

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk 

 

41 

 

 

 

Item 4. Controls and Procedures 

 

42 

 

 

 

Part II. Other Information 

 

 

 

 

 

Item 1. Legal Proceedings 

 

43 

 

 

 

Item 1A. Risk Factors 

 

43 

 

 

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 

 

43 

 

 

 

Item 3. Defaults Upon Senior Securities 

 

43 

 

 

 

Item 4. (Removed and Reserved) 

 

43 

 

 

 

Item 5. Other Information 

 

44 

 

 

 

Item 6. Exhibits 

 

45 

 

 

 

Signatures 

 

46 

 

2


 

Table of Contents 

PART I.  FINANCIAL INFORMATION

 

ITEM 1.  FINANCIAL STATEMENTS

 

PRIMORIS SERVICES CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(In Thousands, Except Share Amounts)

 

 

 

 

 

 

 

 

 

 

 

September 30, 

 

 

December 31, 

 

 

    

2016

    

2015

 

ASSETS

 

 

(Unaudited)

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

148,667

 

$

161,122

 

Customer retention deposits and restricted cash

 

 

3,049

 

 

2,598

 

Accounts receivable, net

 

 

293,495

 

 

320,588

 

Costs and estimated earnings in excess of billings

 

 

156,391

 

 

116,455

 

Inventory and uninstalled contract materials

 

 

55,294

 

 

67,796

 

Prepaid expenses and other current assets

 

 

16,965

 

 

18,265

 

Total current assets

 

 

673,861

 

 

686,824

 

Property and equipment, net

 

 

286,886

 

 

283,545

 

Deferred tax asset - long-term

 

 

1,075

 

 

1,075

 

Intangible assets, net

 

 

31,423

 

 

36,438

 

Goodwill

 

 

123,445

 

 

124,161

 

Other long-term assets

 

 

2,174

 

 

211

 

Total assets

 

$

1,118,864

 

$

1,132,254

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

 

$

134,486

 

$

124,450

 

Billings in excess of costs and estimated earnings

 

 

98,291

 

 

139,875

 

Accrued expenses and other current liabilities

 

 

111,473

 

 

93,596

 

Dividends payable

 

 

2,848

 

 

2,842

 

Current portion of capital leases

 

 

353

 

 

974

 

Current portion of long-term debt

 

 

53,632

 

 

54,436

 

Total current liabilities

 

 

401,083

 

 

416,173

 

Long-term capital leases, net of current portion

 

 

17

 

 

22

 

Long-term debt, net of current portion

 

 

213,790

 

 

219,853

 

Other long-term liabilities

 

 

12,790

 

 

12,741

 

Total liabilities

 

 

627,680

 

 

648,789

 

Commitments and contingencies

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

 

 

Common stock—$.0001 par value; 90,000,000 shares authorized; 51,784,242 and 51,676,140 issued and outstanding at September 30, 2016 and December 31, 2015

 

 

5

 

 

5

 

Additional paid-in capital

 

 

166,662

 

 

163,344

 

Retained earnings

 

 

323,594

 

 

319,899

 

Non-controlling interest

 

 

923

 

 

217

 

Total stockholders’ equity

 

 

491,184

 

 

483,465

 

Total liabilities and stockholders’ equity

 

$

1,118,864

 

$

1,132,254

 

 

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, 

 

 

    

2016

    

2015

    

2016

    

2015

 

Revenues

 

$

507,828

 

$

555,945

 

$

1,395,085

 

$

1,432,270

 

Cost of revenues

 

 

457,699

 

 

484,298

 

 

1,262,394

 

 

1,276,122

 

Gross profit

 

 

50,129

 

 

71,647

 

 

132,691

 

 

156,148

 

Selling, general and administrative expenses

 

 

35,994

 

 

38,545

 

 

101,150

 

 

110,852

 

Impairment of goodwill

 

 

2,716

 

 

 —

 

 

2,716

 

 

 —

 

Operating income

 

 

11,419

 

 

33,102

 

 

28,825

 

 

45,296

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange gain (loss)

 

 

(92)

 

 

(721)

 

 

288

 

 

(425)

 

Other income (expense)

 

 

(278)

 

 

361

 

 

(278)

 

 

272

 

Interest income

 

 

31

 

 

4

 

 

122

 

 

22

 

Interest expense

 

 

(2,246)

 

 

(1,903)

 

 

(6,754)

 

 

(5,563)

 

Income before provision for income taxes

 

 

8,834

 

 

30,843

 

 

22,203

 

 

39,602

 

Provision for income taxes

 

 

(4,078)

 

 

(11,764)

 

 

(9,244)

 

 

(15,159)

 

Net income

 

$

4,756

 

$

19,079

 

$

12,959

 

$

24,443

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less net income attributable to noncontrolling interests

 

 

(252)

 

 

(72)

 

$

(706)

 

 

(126)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to Primoris

 

$

4,504

 

$

19,007

 

$

12,253

 

$

24,317

 

Earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.09

 

$

0.37

 

$

0.24

 

$

0.47

 

Diluted

 

$

0.09

 

$

0.37

 

$

0.24

 

$

0.47

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

51,780

 

 

51,672

 

 

51,759

 

 

51,637

 

Diluted

 

 

52,034

 

 

51,824

 

 

51,978

 

 

51,789

 

 

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, 

 

 

    

2016

    

2015

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net income

 

$

12,959

 

$

24,443

 

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

 

 

 

 

 

 

 

Depreciation

 

 

46,430

 

 

43,452

 

Amortization of intangible assets

 

 

5,015

 

 

5,082

 

Impairment of goodwill

 

 

2,716

 

 

 —

 

Gain on sale of property and equipment

 

 

(3,361)

 

 

(901)

 

Stock-based compensation expense

 

 

1,169

 

 

787

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

Customer retention deposits and restricted cash

 

 

(451)

 

 

(1,583)

 

Accounts receivable

 

 

27,093

 

 

(45,968)

 

Costs and estimated earnings in excess of billings

 

 

(39,936)

 

 

(47,561)

 

Other current assets

 

 

13,865

 

 

(5,453)

 

Accounts payable

 

 

10,036

 

 

4,669

 

Billings in excess of costs and estimated earnings

 

 

(41,584)

 

 

(14,657)

 

Contingent earnout liabilities

 

 

 —

 

 

(5,271)

 

Accrued expenses and other current liabilities

 

 

18,580

 

 

31,712

 

Other long-term assets

 

 

(1,963)

 

 

(2,385)

 

Other long-term liabilities

 

 

49

 

 

(3,067)

 

Net cash provided by (used in) operating activities

 

 

50,617

 

 

(16,701)

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Purchase of property and equipment

 

 

(52,137)

 

 

(52,440)

 

Proceeds from sale of property and equipment

 

 

7,763

 

 

6,139

 

Sale of short-term investments

 

 

 —

 

 

30,992

 

Cash paid for acquisitions

 

 

(4,108)

 

 

(22,302)

 

Net cash used in investing activities

 

 

(48,482)

 

 

(37,611)

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Proceeds from issuance of long-term debt

 

 

30,000

 

 

42,328

 

Repayment of capital leases

 

 

(626)

 

 

(1,086)

 

Repayment of long-term debt

 

 

(36,867)

 

 

(31,597)

 

Proceeds from issuance of common stock purchased by management under long-term incentive plan

 

 

1,439

 

 

1,621

 

Dividends paid

 

 

(8,536)

 

 

(6,966)

 

Cash distribution to non-controlling interest holder

 

 

 —

 

 

(29)

 

Net cash provided by (used in) financing activities

 

 

(14,590)

 

 

4,271

 

Net change in cash and cash equivalents

 

 

(12,455)

 

 

(50,041)

 

Cash and cash equivalents at beginning of the period

 

 

161,122

 

 

139,465

 

Cash and cash equivalents at end of the period

 

$

148,667

 

$

89,424

 

 

See Accompanying Notes to Condensed Consolidated Financial Statements

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SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 

 

 

    

2016

    

2015

 

 

 

(Unaudited)

 

Cash paid during the year for:

 

 

 

 

 

 

 

Interest

 

$

6,654

 

$

5,652

 

 

 

 

 

 

 

 

 

Income taxes, net of refunds received

 

$

2,079

 

$

10,527

 

 

SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 

 

 

    

2016

    

2015

 

 

 

(Unaudited)

 

 

 

 

 

 

 

 

 

Dividends declared and not yet paid

 

$

2,848

 

$

2,842

 

 

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 is located at 2100 McKinney Avenue, Suite 1500, Dallas, Texas 75201.

 

Reportable Segments — As discussed in Note 19 — “Reportable Segments”, the Company segregates its business into three reporting segments: the West Construction Services segment (“West segment”), the East Construction Services segment (“East segment”) and the Energy segment (“Energy segment”). 

 

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

 

 

 

 

 

Subsidiary

    

Reportable Segment

 

ARB, Inc. (“ARB”)

 

West

 

ARB Structures, Inc.

 

West

 

Q3 Contracting, Inc. (“Q3C”)

 

West

 

Rockford Corporation (“Rockford”)

 

West

 

Vadnais Trenchless Services, Inc. (“Vadnais”)

 

West

 

Cardinal Contractors, Inc.

 

East

 

BW Primoris, LLC (“BWP”)

 

East

 

James Construction Group, LLC (“JCG”):

 

East

 

JCG Heavy Civil Division

 

East

 

JCG Infrastructure and Maintenance Division

 

East

 

Primoris Energy Services Corporation (“PES”)

 

Energy

 

PES Pipeline Services

 

Energy

 

PES Industrial Division

 

Energy

 

OnQuest, Inc.

 

Energy

 

  OnQuest Canada, ULC

 

Energy

 

Primoris Aevenia, Inc. (“Aevenia”); acquired February 28, 2015

 

Energy

 

 

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 project has been completed, the project warranty expired in May 2015 and dissolution of the joint venture was completed in the third quarter 2015.

 

The Company owns a 50% interest in two separate joint ventures, both formed in 2015 to engineer and construct gas-fired power generation facilities:  Carlsbad Power Constructors joint venture (“Carlsbad”) and ARB Inc. & B&M Engineering Co. joint venture (“Wilmington”). Both projects are located in the Southern California area and both are expected to be completed in 2018. The joint venture operations are included as part of the West segment. As a result of determining that the Company is the primary beneficiary of the two variable interest entities (“VIE’s”), the results of the Carlsbad and Wilmington joint ventures are consolidated in the Company’s financial statements. Financial information for the joint ventures is presented in Note 11— “Noncontrolling Interests”.

 

On February 28, 2015, the Company acquired the net assets of Aevenia, Inc. for $22.3 million in cash, and established a new entity, Primoris Aevenia, Inc. (“Aevenia”), which operates as part of the Company’s Energy segment.  Aevenia is an energy and electrical construction company that 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,

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South Dakota and Iowa.  On January 29, 2016, the Company acquired the net assets of Mueller Concrete Construction Company (“Mueller”) for $4.1 million. Mueller operates as a division of Aevenia.  See Note 7 — “Business Combinations”.

 

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, 2016 and 2015 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 February 29, 2016, which contains the Company’s audited consolidated financial statements for the year ended December 31, 2015, have been omitted. 

 

This Third Quarter 2016 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 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.  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.

 

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

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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, 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 current liabilities amount on the balance sheet. For fixed price contracts, 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 or project milestone, (b)  amounts arising from routine lags in billing, or (c) 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 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 used 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 ended September 30, 2016, revenues generated by the top ten customers were approximately $272 million and $805 million, respectively, which represented 53.5% and 57.7%, respectively, of total revenues during the periods. During these respective periods, a Louisiana petrochemical project represented 10.3% and 11.6% of total revenues, respectively, and the Texas Department of Transportation (“TX DOT”) represented 7.9% and 10.4% of total revenues, respectively.

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

 

At September 30, 2016, approximately 15.4% of the Company’s accounts receivable were due from one customer, and that customer provided 11.6% of the Company’s revenues for the nine months ended September 30, 2016. In addition, of total accounts receivable, approximately 11.2% are currently in dispute resolution. See Note 18 – “Commitments and Contingencies”.

 

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, approximately 13.2% of total accounts receivable at September 30, 2015 were 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 Generally Accepted Accounting Principles (“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.

 

Deferred tax classification on the statement of financial position —  Deferred tax assets and liabilities are classified as non-current in a statement of financial position, reflecting a recent change required by ASU 2015-17 “Balance Sheet Classification of Deferred Taxes” adopted by the Company at December 31, 2015. This change eliminates the need to analyze temporary differences to determine if deferred taxes should be reported as current or noncurrent. Past practice did not typically align with the time period in which deferred taxes were expected to be recovered or settled. For this reason, effective December 31, 2015 the Company classified all deferred tax assets and liabilities as a net non-current deferred tax asset.

 

Note 3—Recent Accounting Pronouncements

 

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)”, which has also had several clarifying updates issued during 2016. The new standard is effective for reporting periods beginning after December 15, 2017 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 will 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, the “full retrospective method” that requires restatement of prior years and the “modified retrospective method” that requires prospective application of the new standard as a cumulative-effect adjustment as of the date of adoption.  The Company is currently evaluating the impact of adopting the ASU on the Company’s financial position, results of operations, cash flows and related disclosures.  The Company expects to adopt this new standard using the modified retrospective method that will result in a cumulative-effect adjustment as of the date of adoption.

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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.  The Company will adopt this guidance effective January 1, 2017.

 

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. As of January 1, 2016, the Company adopted this ASU, which did not have a material impact on the Company’s consolidated financial statements.

 

In February 2016, the FASB issued ASU 2016-02 “Leases (Topic 842)”. The ASU will require recognition of operating leases with lease terms of more than twelve months on the balance sheet as both assets for the rights and liabilities for the obligations created by the leases. The ASU will require disclosures that provide qualitative and quantitative information for the lease assets and liabilities recorded in the financial statements. The guidance is effective for fiscal years beginning after December 15, 2018. The Company will establish procedures to adopt the ASU.

 

In March 2016, the FASB issued ASU 2016-09 “Compensation — Stock Compensation (Topic 718) — Improvements to Employee Share-Based Payment Accounting”. The ASU modifies the accounting for excess tax benefits and tax deficiencies associated with share-based payments by requiring that excess tax benefits or deficiencies be included in the income statement rather than in equity.  Additionally, the tax benefits for dividends on share-based payment awards will also be reflected in the income statement. As a result of these modifications, the ASU requires that the tax-related cash flows resulting from share-based payments will be shown on the cash flow statement as operating activities rather than as financing activities. This guidance is effective for annual periods beginning after December 15, 2016, with early adoption permitted. Adoption of this ASU is not expected to have a material effect on the Company’s consolidated financial statements.

 

Note 4—Fair Value Measurements

 

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

 

In general, fair values determined by Level 1 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, 2016 and December 31, 2015:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements at Reporting Date

 

 

    

 

 

    

 

 

    

Significant

    

 

 

 

 

 

Amount

 

Quoted Prices

 

Other

 

Significant

 

 

 

Recorded

 

in Active Markets

 

Observable

 

Unobservable

 

 

 

on Balance

 

for Identical Assets

 

Inputs

 

Inputs

 

 

 

Sheet

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Assets as of September 30, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

148,667

 

$

148,667

 

 —

 

 

 —

 

Goodwill

 

$

123,445

 

$

 —

 

 —

 

$

123,445

 

Liabilities as of September 30, 2016: 

 

 

 

 

 

 

 

 

 

 

 

 

    None

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets as of December 31, 2015:

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

161,122

 

$

161,122

 

 —

 

 

 —

 

Goodwill

 

$

126,161

 

$

 —

 

 —

 

$

126,161

 

Liabilities as of December 31, 2015: 

 

 

 

 

 

 

 

 

 

 

 

 

    None

 

 

 

 

 

 

 

 

 

 

 

 

 

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.

 

As discussed in Note 8 — “Goodwill and Intangible Assets”, during the third quarter 2016, the Company recorded a goodwill impairment operating charge of $2,716 as a result of the Company’s plan to divest the Texas heavy civil business unit.  The impairment is a Level 3 adjustment, since it is valued based on significant unobservable inputs, which are based primarily on discounted cash flow estimates for the JCG reporting unit.

 

Other than the impairment of goodwill and the remaining goodwill balances, there were no other Level 3 amounts as of September 30, 2016 and December 31, 2015; however, the following table provides changes to the Company’s contingent consideration liability Level 3 fair value measurements during the nine months ended September 30, 2016 and 2015:

 

 

 

 

 

 

 

 

 

 

 

Significant Unobservable Inputs

 

 

 

(Level 3)

 

 

    

2016

    

2015

 

Contingent Consideration Liability

 

 

 

 

 

 

 

Beginning balance, January 1, 2016 and 2015

 

$

 —

 

$

6,922

 

Additions to contingent consideration liability:

 

 

 

 

 

 

 

Change in fair value of contingent consideration liability during year

 

 

 —

 

 

125

 

Reductions in the contingent consideration liability:

 

 

 

 

 

 

 

Payment to Q3C sellers for meeting performance targets

 

 

 —

 

 

(5,000)

 

Reduction due to non-attainment of performance target – Ram Fab and Vadnais

 

 

 —

 

 

(596)

 

Ending balance, September 30, 2016 and 2015

 

$

 —

 

$

1,451

 

 

During each quarter in 2015, the Company assessed the estimated fair value of the contractual obligation to pay the contingent consideration and any changes in estimated fair value were recorded as other non-operating expense or income in the Company’s statement of income for that period.  Fluctuations in the fair value of contingent consideration were 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, 

    

December 31, 

 

 

 

2016

 

2015

 

Contracts receivable, net of allowance for doubtful accounts of $490 at September 30, 2016 and $480 at December 31, 2015, respectively

 

$

259,561

 

$

288,300

 

Retention receivable

 

 

32,878

 

 

31,396

 

 

 

 

292,439

 

 

319,696

 

Other accounts receivable

 

 

1,056

 

 

892

 

 

 

$

293,495

 

$

320,588

 

 

 

Note 6—Costs and Estimated Earnings on Uncompleted Contracts

 

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

 

 

 

 

 

 

 

 

 

 

    

September 30, 

    

December 31, 

 

 

 

2016

 

2015

 

Costs incurred on uncompleted contracts

 

$

4,833,755

 

$

5,413,224

 

Gross profit recognized

 

 

395,630

 

 

625,280

 

 

 

 

5,229,385

 

 

6,038,504

 

Less: billings to date

 

 

(5,171,285)

 

 

(6,061,924)

 

 

 

$

58,100

 

$

(23,420)

 

 

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

 

 

 

 

 

 

 

 

 

 

 

    

September 30, 

    

December 31, 

 

 

 

2016

 

2015

 

Costs and estimated earnings in excess of billings

 

$

156,391

 

$

116,455

 

Billings in excess of cost and estimated earnings

 

 

(98,291)

 

 

(139,875)

 

 

 

$

58,100

 

$

(23,420)

 

 

 

Note 7 — Business Combinations

 

On February 28, 2015, the Company acquired the net assets of Aevenia, Inc. for $22.3 million in cash, and established a new entity, Primoris Aevenia, Inc. (“Aevenia”).  The acquisition provides electrical construction expertise for the Company and provides a greater presence and convenient access to the central plains area of the United States.  The purchases were accounted for using the acquisition method of accounting. The assets were purchased for their estimated fair value and included current assets, current liabilities, plant and equipment, intangible assets and goodwill.

 

On January 29, 2016, the Company’s subsidiary, Aevenia, acquired certain assets and liabilities of Mueller Concrete Construction Company ("Mueller") for $4.1 million. The purchase was accounted for using the acquisition method of accounting.  During the second quarter of 2016, the Company finalized its estimate of fair value of the acquired assets of Mueller, which included $2.0 million of fixed assets, $2.0 million of goodwill and $0.1 million of inventory. Mueller operates as a division of Aevenia.  Goodwill largely consists of expected benefits from providing foundation expertise for Aevenia’s construction efforts in underground line work, substations and telecom/fiber.  Goodwill also includes the value of the assembled workforce that the Mueller acquisition provides to 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.

 

On June 24, 2016, the Company’s subsidiary, Vadnais, purchased property, plant and equipment from Pipe Jacking Unlimited, Inc., consisting of specialty directional drilling and tunneling equipment for $13.4 million in cash. The Company determined this purchase did not meet the definition of a business as defined under ASC 805. The estimated fair value of the equipment was equal to the purchase price.  The Company believes the purchase of the equipment will aid in the Company’s pipeline construction projects and enhance the work provided to our utility clients.

 

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Supplemental Unaudited Pro Forma Information for the three and nine months ended September 30, 2016 and 2015

 

The following pro forma information for the three and nine months ended September 30, 2016 and 2015 presents the results of operations of the Company as if the 2016 Mueller acquisition and the 2015 Aevenia acquisition had occurred at the beginning of 2015. 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; and

 

·

the pro forma tax effect of both the income before income taxes and the pro forma adjustments, calculated using a tax rate of 40.0% for the three and nine months ended September 30, 2016 and the same period in 2015.

 

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, 2015.  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 Mueller or Aevenia acquisition.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 

 

Nine Months Ended September 30, 

 

 

 

2016

    

2015

    

2016

    

2015

 

 

 

(unaudited)

 

(unaudited)

 

(unaudited)

 

(unaudited)

 

Revenues

 

$

507,828

 

$

557,020

 

$

1,395,443

 

$

1,438,493

 

Income before provision for income taxes

 

$

8,834

 

$

30,903

 

$

22,274

 

$

38,539

 

Net income attributable to Primoris

 

$

4,504

 

$

19,043

 

$

12,297

 

$

23,669

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

51,780

 

 

51,672

 

 

51,759

 

 

51,637

 

Diluted

 

 

52,034

 

 

51,824

 

 

51,978

 

 

51,789

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.09

 

$

0.37

 

$

0.24

 

$

0.46

 

Diluted

 

$

0.09

 

$

0.37

 

$

0.24

 

$

0.46

 

 

 

Note 8—Goodwill and Intangible Assets

 

Goodwill was recorded as follows:

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

September 30, 

    

December 31,

 

Reporting Unit

 

Segment

 

2016

 

2015

 

Rockford

 

West

 

$

32,079

 

$

32,079

 

Q3C

 

West

 

 

13,160

 

 

13,160

 

JCG

 

East

 

 

40,150

 

 

42,866

 

PES

 

Energy

 

 

28,463

 

 

28,463

 

OnQuest Canada, ULC

 

Energy

 

 

2,441

 

 

2,441

 

Aevenia

 

Energy

 

 

7,152

 

 

5,152

 

 

 

 

 

 

 

 

 

 

 

Total Goodwill

 

 

 

$

123,445

 

$

124,161

 

 

As discussed in Note 20 — “Planned Divestiture of Texas Heavy Civil Business Unit”, during the third quarter 2016, the Company made a decision to divest its Texas heavy civil business unit, a division of JCG within the East Construction Services segment.  The Company will continue to operate the division while actively seeking a buyer.  In accordance with the provisions of ASC 350, the planned divestiture required a valuation of the goodwill recorded on the JCG books.  The analysis of goodwill in the JCG reporting unit resulted in a pretax, non-cash goodwill impairment charge of approximately $2.7 million.

 

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At September 30, 2016 and December 31, 2015, intangible assets totaled $31,423 and $36,438, respectively, net of amortization.  The table below summarizes the intangible asset categories, amounts and the average amortization periods, which are on a straight-line basis, as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization

 

September 30, 

 

December 31, 

 

 

    

Period

    

2016

    

2015

 

Tradename

 

3 to 10 years

 

$

12,518

 

$

15,019

 

Non-compete agreements

 

2 to 5 years

 

 

1,054

 

 

1,424

 

Customer relationships

 

3 to 15 years

 

 

17,851

 

 

19,995

 

 

 

 

 

$

31,423

 

$

36,438

 

 

Amortization expense of intangible assets was $1,766 and $1,712 for the three months ended September 30, 2016 and 2015, respectively, and amortization expense for the nine months ended September 30, 2016 and 2015 was $5,015 and $5,082, respectively. Estimated future amortization expense for intangible assets is as follows:

 

 

 

 

 

 

 

    

Estimated

 

 

 

Intangible

 

For the Years Ending

 

Amortization

 

December 31, 

 

Expense

 

2016 (remaining three months)

 

$

1,607

 

2017

 

 

6,165

 

2018

 

 

5,719

 

2019

 

 

5,511

 

2020

 

 

3,112

 

Thereafter

 

 

9,309

 

 

 

$

31,423

 

 

 

Note 9—Accounts Payable and Accrued Liabilities

 

At September 30, 2016 and December 31, 2015, accounts payable amounted to $134,486 and $124,450, respectively.  These balances included retention amounts for the same periods of approximately $9,919 and $8,375, respectively.  The retention amounts are due to subcontractors and have been retained pending contract completion and customer acceptance of jobs.

 

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

 

 

 

 

 

 

 

 

 

 

    

September 30, 

    

December 31, 

 

 

 

2016

 

2015

 

Payroll and related employee benefits

 

$

36,499

 

$

33,358

 

Insurance, including self-insurance reserves

 

 

46,003

 

 

44,695

 

Reserve for estimated losses on uncompleted contracts

 

 

15,487

 

 

7,261

 

Corporate income taxes and other taxes

 

 

6,097

 

 

2,447

 

Accrued administrative cost

 

 

2,975

 

 

1,415

 

Other

 

 

4,412

 

 

4,420

 

 

 

$

111,473

 

$

93,596

 

 

 

Note 10—Credit Arrangements

 

Long-term debt and credit facilities consist of the following:

 

Commercial Notes Payable and Mortgage 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 3.51% per annum and maturity dates range from November 30, 2016 to September 24, 2021. The notes are secured by certain construction equipment of the Company.

 

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The Company also entered into two secured mortgage notes payable to a bank in December 2015, with interest rates of 4.3% per annum and maturity dates of January 1, 2031. The mortgage notes are secured by two buildings.

 

Revolving Credit Facility

 

As of September 30, 2016, 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 agreed 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 $17,118 at September 30, 2016 and $12,105 at December 31, 2015.  Other than commercial letters of credit, there were no borrowings under this line of credit during the nine months ended September 30, 2016, and available borrowing capacity at September 30, 2016 was $107,882.

 

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 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.

 

On November 9, 2015, the Company drew $25 million available under the Additional Senior Notes Agreement. The notes are due November 9, 2025 and bear interest at an annual rate of 4.6%, paid quarterly in arrears. Seven annual principal payments of $3.6 million are required from November 9, 2019, with a final payment due on November 9, 2025.

 

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, 2016.

 

Canadian Credit Facility

 

The Company has a demand 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, 2016 and December 31, 2015, letters of credit outstanding totaled $1,624 and $2,179 in Canadian dollars, respectively.  At September 30, 2016, the available borrowing capacity was $6,376 in Canadian dollars.  The credit facility contains a working capital restrictive covenant for our Canadian subsidiary, OnQuest Canada, ULC.  At September 30, 2016, OnQuest Canada, ULC was in compliance with the covenant.

 

 

Note 11 — Noncontrolling Interests

 

The Company owns a 50% interest in two separate joint ventures, each of which has been determined to be a variable interest entity (“VIE”), and the Company was determined to be the primary beneficiary in each as a result of its significant influence over the joint venture operations.

 

Each joint venture is a partnership, and consequently, no tax effect was recognized for the income attributable to the noncontrolling interests. The net assets of the joint ventures are restricted for use by the specific project and are not available for general operations of the Company.

 

The Carlsbad joint venture operating activities began in September 2015 and are included in the Company’s consolidated statements of income as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Three Months Ended

 

Nine Months Ended

 

 

 

September 30, 

 

September 30, 

 

 

 

2016

    

2015

    

2016

    

2015

 

Revenues

 

$

608

 

$

1,020

 

$

7,276

 

$

1,020

 

Net income attributable to noncontrolling interests

 

 

367

 

 

67

 

 

653

 

 

67

 

 

The Carlsbad joint venture made no distributions to the partners and the Company made no capital contributions to the Carlsbad joint venture during the nine months ending September 30, 2016. The project is expected to be completed in 2018.

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

 

 

 

 

 

 

 

 

 

 

    

September 30, 

    

December 31, 

 

 

 

2016

 

2015

 

 

 

 

 

 

 

 

 

Cash

 

$

4,631

 

$

1,952

 

Accounts receivable

 

$

 

$

955

 

Costs and estimated earnings in excess of billings

 

$

124

 

$

 

Current liabilities

 

$

3,757

 

$

2,562

 

 

The Wilmington joint venture operating activities began in October 2015 and are included in the Company's consolidated statements of income as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Three months ended 

 

Nine months ended

 

 

 

September 30, 

 

September 30, 

 

 

 

2016

    

2015

    

2016

    

2015

 

Revenues

 

$

6,140

 

$

 —

 

$

11,057

 

$

 —

 

Net income attributable to noncontrolling interests

 

 

590

 

 

 —

 

 

758

 

 

 —

 

 

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The Wilmington joint venture made no distributions to the partners and the Company made no capital contributions to the Wilmington joint venture during the nine months ending September 30, 2016. The project is expected to be completed in 2018.

 

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

 

 

 

 

 

 

 

 

 

 

    

September 30, 

    

December 31, 

 

 

 

2016

 

2015

 

 

 

 

 

 

 

 

 

Cash

 

$

4,667

 

$

2,339

 

Accounts receivable

 

$

1,435

 

$

2,003

 

Current liabilities

 

$

5,249

 

$

4,247

 

 

 

Note 12 — Contingent Earnout Liabilities

 

In March 2015, the Company paid $5,000 to the sellers of Q3C based on achievement of an operating performance target for the 2014 calendar year, as outlined in the purchase agreement.

 

The June 2014 acquisition of Vadnais Company included 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. In September 2015, the Company 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. In December 2015, the Company determined that the September 2016 target was not likely to be achieved, and the remaining balance of $368 was credited to non-operating income.

 

The purchase of Surber in July 2014 provided a contingent earnout amount of up to $1.4 million that could be earned during the period 2014 through 2016. The estimated fair value for the contingent earnout was $1.0 million on the acquisition date. In the fourth quarter 2015, the seller and the Company agreed that none of the targets for the Surber operations were likely to be achieved, and the remaining balance of $1,083 was credited to non-operating income.

 

The August 2014 purchase of Ram-Fab provided for a contingent earnout amount of $0.2 million which could be earned 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, 2016 and 2015, the Company paid $635 and $621, respectively, in lease payments to SIGI for the use of these properties.

 

Primoris leases a property from Roger Newnham, a former owner and current employee of our subsidiary, OnQuest Canada, ULC. The property is located in Calgary, Canada. During the nine months ended September 30, 2016 and 2015, Primoris paid $190 and $193, respectively, in lease payments.  The current term of the lease is through December 31, 2017.

 

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Primoris leased 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, 2016 and 2015, Primoris paid $23 and $68, respectively, in lease payments.  The lease terminated on March 31, 2016.

 

Primoris leases a property from Quality RE Partners, owned by three of the Q3C selling shareholders, of whom one is a current employee, Jay Osborn, an operations president in the West segment. The property is located in Little Canada, Minnesota.  During the nine months ended September 30, 2016 and 2015, the Company paid $198 in both periods in lease payments to Quality RE Partners.  The lease expires in October 2022.

 

Primoris leases certain equipment and property from the sellers of the Mueller acquisition, on a month-to-month basis. The property is located in Iowa. During the nine months ended September 30, 2016, the Company paid $18 in lease payments to the sellers.

 

Note 14—Stock-Based Compensation

 

In July 2008, the shareholders approved and the Company adopted the Primoris Services Corporation 2008 Long-term Incentive Equity Plan, which was replaced by the Primoris Services Corporation 2013 Long-term Incentive Equity Plan (“Equity Plan”), after approval by the shareholders and adoption by the Company on May 3, 2013.

 

The Company’s Board of Directors has granted 249,065 Restricted Stock Units (“Units”) to executives under the Equity Plan.  The grants were documented in RSU Award Agreements which provide for a vesting schedule and require continuing employment of the executive.  The Units are subject to earlier acceleration, termination, cancellation or forfeiture as provided in the underlying RSU Award Agreement. 

 

At September 30, 2016, a total of 99,256 Units were vested.  The vesting schedule for the remaining Units follows:

 

 

 

 

 

 

 

Number of

 

 

 

Units

 

For the Years Ending December 31,

 

to Vest

 

2016 (remaining three months)

 

 —

 

2017

 

74,394

 

2018

 

25,138

 

2019

 

48,219

 

2020

 

2,058

 

 

 

149,809

 

 

Under guidance of ASC Topic 718 “Compensation — Stock Compensation”, stock-based compensation cost is measured at the date of grant, 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 both the nine months ended September 30, 2016 and 2015, the Company recognized $1,169 and $787, respectively, in compensation expense.  At September 30, 2016, approximately $2.6 million of unrecognized compensation expense remains for the Units, which will be recognized over the next 3.5 years through April 1, 2020.

 

Vested Units accrue “Dividend Equivalent Units” (as defined in the Equity Plan) which will be accrued as additional Units.  At September 30, 2016, a total of 1,450 Dividend Equivalent Units were accrued.

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Note 15—Income Taxes

 

The Company determines its best current estimate of the annual effective tax rate using expected pre-tax earnings, statutory tax rates, and available tax planning opportunities. 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.

 

The effective tax rate on income including noncontrolling interests for the nine months ended September 30, 2016 was 42.1%. The effective tax rate on income attributable to Primoris (excluding noncontrolling interests) was 43.0%.  The rates differ from the U.S. federal statutory rate of 35% primarily due to state income taxes, the Domestic Production Activity Deduction, and partially nondeductible meals and incidental per diem expenses common to the construction industry.

 

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 generally vary between 3 to 5 years. Accordingly, the tax years 2010 through 2015 remain open to examination by the other taxing jurisdictions in which the Company operates.

 

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 in the years in which those temporary differences are expected to reverse. The effects of remeasurement of deferred tax assets and liabilities resulting from changes in tax rates are recognized in income in the period of enactment.

 

Note 16—Dividends and Earnings Per Share

 

The Company has paid or declared cash dividends during 2015 and 2016 as follows:

 

 

 

 

 

 

 

 

 

 

Declaration Date

 

Record Date

    

Payable Date

    

Amount Per Share

 

February 24, 2015

 

March 31, 2015

 

April 15, 2015

 

$

0.040

 

May 1, 2015

 

June 30, 2015

 

July 15, 2015

 

$

0.055

 

August 4, 2015

 

September 30, 2015

 

October 15, 2015

 

$

0.055

 

November 3, 2015

 

December 31, 2015

 

January 15, 2016

 

$

0.055

 

February 22, 2016

 

March 31, 2016

 

April 15, 2016

 

$

0.055

 

May 2, 2016

 

June 30, 2016

 

July 15, 2016

 

$

0.055

 

August 3, 2016

 

September 30, 2016

 

October 14, 2016

 

$

0.055

 

November 2, 2016

 

December 31, 2016

 

January 15, 2017

 

$

0.055

 

 

The payment of future dividends is contingent upon our revenues and earnings, capital requirements and general financial condition of the Company, as well as contractual restrictions and other considerations deemed relevant by the Board of Directors.

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The table below presents the computation of basic and diluted earnings per share for the nine months ended September 30, 2016 and 2015:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Three months ended 

 

Nine months ended

 

 

 

September 30, 

 

September 30, 

 

 

 

2016

    

2015

    

2016

    

2015

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to Primoris

 

$

4,504

 

$

19,007

 

$

12,253

 

$

24,317

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Denominator (shares in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares for computation of basic earnings per share

 

 

51,780

 

 

51,672

 

 

51,759

 

 

51,637

 

Dilutive effect of shares issued to independent directors

 

 

4

 

 

3

 

 

4

 

 

3

 

Dilutive effect of restricted stock units (1)

 

 

250

 

 

149

 

 

215

 

 

149

 

Weighted average shares for computation of diluted earnings per share

 

 

52,034

 

 

51,824

 

 

51,978

 

 

51,789

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share attributable to Primoris:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.09

 

$

0.37

 

$

0.24

 

$

0.47

 

Diluted

 

$

0.09

 

$

0.37

 

$

0.24

 

$

0.47

 


(1)

Represents the dilutive effect of a grant of 249,065 Units and 1,450 vested Dividend Equivalent Units.

 

Note 17—Stockholders’ Equity

 

Common stock —The Company issued 85,907 shares of common stock in February 2016 and 96,828 shares of common stock in March 2015 under the Company’s long-term retention plan (“LTR Plan”). The shares were purchased by the participants in the LTR Plan with payment made to the Company of $1,439 in February 2016 and $1,621 in March 2015. The Company’s LTR Plan for managers and executives allows participants to use a portion of their annual bonus amount to purchase Company common stock at a discount from the market price. The shares purchased in March 2016 were for bonus amounts earned in 2015, and the number of shares was calculated at 75% of the average closing market price of December 2015.

 

In February 2016 and August 2016, the Company issued 10,450 shares and 11,745 shares of common stock, respectively, as part of the quarterly compensation of the non-employee members of the Board of Directors.  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.

 

As discussed in Note 14 — Stock Based Compensation, as of September 30, 2016, the Board of Directors has granted a total of 249,065 shares of Units under the Equity Plan and these Units have accrued 1,450 Dividend Equivalent Units.

 

Share repurchase plan —The Company's Board of Directors has authorized a share repurchase program under which the Company may, from time to time and depending on market conditions, share price and other factors, acquire shares of its common stock on the open market or in privately negotiated transactions up to an aggregate purchase price of $5 million. The share repurchase program expires December 31, 2016.

 

Note 18—Commitments and Contingencies

 

Leases  — The Company leases certain property and equipment under non-cancellable operating leases which expire at various dates through 2023. 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, 2016 was $5,671 and $16,467, respectively, compared to $3,753 and $14,144 for the same periods in 2015.  The amounts for the three and nine months ended September 30, 2016 included lease payments made to related parties of $370 and $1,101, respectively compared to $360 and $1,080 for the same periods in 2015. 

 

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Letters of credit  — At September 30, 2016, the Company had letters of credit outstanding of $17,118, and at December 31, 2015, the Company had letters of credit outstanding of $13,679. The outstanding amounts include the U.S. dollar equivalents for letters of credit issued in Canadian dollars.

 

Bonding — At September 30, 2016 and December 31, 2015, the Company had bid and completion bonds issued and outstanding totaling approximately $1,539,254 and $1,483,877, respectively.

 

NTTA settlement — On February 7, 2012, the Company was sued in an action entitled North Texas Tollway Authority (“NTTA”), Plaintiff v. James Construction Group, LLC, and KBR, Inc., Defendants, v. Reinforced Earth Company, Third-Party Defendant (the “Lawsuit”).  On February 25, 2015 the Lawsuit was settled for an expected cost to the Company of $9 million.  One of the defendants paid the Company $8 million to remove all of their liability. A second defendant agreed to provide up to $5.4 million to pay for the total expected remediation cost of approximately $22.4 million. The Company will use its $17 million to pay for a third-party contractor approved by the NTTA. At September 30, 2016, the remaining accrual balance was $15.8 million. In the event that the total remediation costs exceed the estimated amount, the second defendant would pay 20% of the excess amount and the Company would pay for 80% of the excess amount.

 

Legal proceedings —The Company has been engaged in dispute resolution to collect money it believes it is owed for two construction projects completed  in 2014.  Because of uncertainties associated with the projects, including uncertainty of the amounts that would be collected, the Company used a zero profit margin approach to recording revenues during the construction period for both projects. 

 

For one project, a cost reimbursable contract, the Company has recorded a receivable of $32.9 million with a reserve of approximately $18.3 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 dispute resolution for the $32.9 million receivable initially required international arbitration; however, in the first half of 2016, the owner sought bankruptcy protection in U.S. bankruptcy court. The Company has initiated litigation against the sureties who have provided lien and stop payment release bonds for the total amount owed.

 

For the second project, the Company had recorded a receivable of $17.9 million. During the third quarter 2016, the Company settled the dispute with an exchange of general releases and receipt of $38 million in cash.  The Company has changed its zero estimate of profit and has accounted for the settlement as a change in accounting estimate which resulted in recognizing revenues of approximately $27.5 million and gross profit of approximately $26.7 million in the third quarter of 2016.

 

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.

 

SEC Inquiry — Beginning in October 2014, the Company has been cooperating with an inquiry by the staff of the Securities and Exchange Commission which appears to be focused on certain percentage-of-completion contract revenue recognition practices of the Company during the time period 2013 and 2014.  The Company is continuing to respond to the staff’s inquiries in connection with this matter.  At this stage, the Company is unable to predict when the staff’s inquiry will conclude or the outcome.

 

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

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Q3C.  During the first quarter of 2016, the Company received a final payment schedule.  Based on this schedule, the liability recorded as of September 30, 2016 was $5,926.  The Company has no plans to withdraw from any other agreements.

 

Note 19—Reportable Segments

 

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

 

The West segment includes the underground and industrial operations and construction services performed by ARB, ARB Structures, Inc., Rockford, Q3C, and Vadnais. 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, Carlsbad and Wilmington joint ventures are also included as part of the segment.

 

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

 

The Energy segment includes the operations of the PES pipeline and gas facility construction and maintenance operations and the PES Industrial division, whose operations are located primarily in the southeastern United States and in the Gulf Coast region. The segment also includes the Aevenia, Surber and Ram-Fab operations as well as the OnQuest, Inc. and OnQuest Canada, ULC operations, which provide 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, 2016 and 2015 were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended September 30, 

 

 

 

2016

 

2015

 

 

 

 

 

 

% of

 

 

 

 

% of

 

 

 

 

 

 

Total

 

 

 

 

Total

 

Reportable Segment

    

Revenue

    

Revenue

    

Revenue

    

Revenue

 

West

 

$

264,463

 

52.1%

 

$

258,414

 

46.5%

 

East

 

 

122,854

 

24.2%

 

 

183,635

 

33.0%

 

Energy

 

 

120,511

 

23.7%

 

 

113,896

 

20.5%

 

Total

 

$

507,828

 

100.0%

 

$

555,945

 

100.0%

 

 

Revenue by segment for the nine months ended September 30, 2016 and 2015 were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the nine months ended September 30, 

 

 

 

2016

 

2015

 

 

 

 

 

 

% of

 

 

 

 

% of

 

 

 

 

 

 

Total

 

 

 

 

Total

 

Reportable Segment

    

Revenue

    

Revenue

    

Revenue

    

Revenue

 

West

 

$

652,850

 

46.8%

 

$

684,798

 

47.8%

 

East

 

 

398,304

 

28.6%

 

 

462,222

 

32.3%

 

Energy

 

 

343,931

 

24.6%

 

 

285,250

 

19.9%

 

Total

 

$

1,395,085

 

100.0%

 

$

1,432,270

 

100.0%

 

 

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Table of Contents 

 

Segment Gross Profit

 

Gross profit by segment for the three months ended September 30, 2016 and 2015 were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended September 30, 

 

 

 

2016

 

2015

 

 

    

 

 

    

% of

    

 

 

    

% of

 

Reportable Segment

 

Gross Profit

 

Revenue

 

Gross Profit

 

Revenue

 

West

 

$

42,191

 

16.0%

 

$

39,810

 

15.4%

 

East

 

 

(27,253)

 

(22.2%)

 

 

15,400

 

8.4%

 

Energy

 

 

35,191

 

29.2%

 

 

16,437

 

14.4%

 

Total

 

$

50,129

 

9.9%

 

$

71,647

 

12.9%

 

 

Gross profit by segment for the nine months ended September 30, 2016 and 2015 were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the nine months ended September 30, 

 

 

 

2016

 

2015

 

 

    

 

 

    

% of

    

 

 

    

% of

 

Reportable Segment

 

Gross Profit

 

Revenue

 

Gross Profit

 

Revenue

 

West

 

$

87,390

 

13.4%

 

$

91,718

 

13.4%

 

East

 

 

(15,357)

 

(3.9%)

 

 

33,623

 

7.3%

 

Energy

 

 

60,658

 

17.6%

 

 

30,807

 

10.8%

 

Total

 

$

132,691

 

9.5%

 

$

156,148

 

10.9%

 

 

Segment Goodwill

 

The following presents the amount of goodwill recorded by segment at September 30, 2016 and at December 31, 2015.

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 

 

 

December 31, 

 

Reportable Segment

    

 

2016

    

 

2015

 

West

 

$

45,239

 

$

45,239

 

East

 

 

40,150

 

 

42,866

 

Energy

 

 

38,056

 

 

36,056

 

Total

 

$

123,445

 

$

124,161

 

 

As discussed in Note 20 — “Planned Divestiture of Texas Heavy Civil Business Unit”, during the third quarter 2016, the Company made a decision to divest its Texas heavy civil business unit,  a division of JCG within the East Construction Services segment.  The Company will continue to operate the division while actively seeking a buyer.  Under the provisions of ASC 350, the planned divestiture triggered an analysis of the goodwill amount recorded on the balance sheet of JCG.  The analysis resulted in the Company recording a pretax, non-cash goodwill impairment charge of approximately $2.7 million.

 

Geographic Region — Revenues and Total Assets

 

The Company’s revenues are derived from customers primarily in the United States, with less than 1% generated from sources outside of the United States. At September 30, 2016, approximately 1.0% of total assets were located outside of the United States.

 

 

Note 20—Planned Divestiture of Texas Heavy Civil Business Unit

 

In an October 11, 2016 press release, the Company announced that it planned to divest its Texas heavy civil business unit which operates as a division of JCG.  The Company has engaged a financial advisor to assist in the sale.  The Company will continue to operate the division while actively seeking a buyer. 

 

The Company recorded a charge of $37.3 million during the three months ending September 30, 2016 for the Belton area projects which are part of the Texas heavy civil business that the Company is planning to divest.  This charge

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includes a reduction of the expected profitability of certain projects in the Belton, Texas area for the division and a reduction of costs and estimated earnings in excess of billings and an increase to the reserve for anticipated job losses.  

 

The following table shows the revenues and gross profit of the Texas heavy civil business unit which is included in the revenues and gross profit tables for the East segment in Note 19 – “Reportable Segments”.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 

 

 

 

2016

 

2015

 

 

    

 

 

    

% of

    

 

 

    

% of

 

 

 

 

 

Revenue

 

 

 

Revenue

 

Revenue

 

$

48,441

 

 

 

$

57,545

 

 

 

Gross profit

 

$

(32,438)

 

(67.0%)

 

$

391

 

0.7%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 

 

 

2016

 

2015

 

    

 

 

    

% of

    

 

 

    

% of

 

 

 

 

Revenue

 

 

 

Revenue

Revenue

 

$

178,356

 

 

 

$

143,130

 

 

Gross profit

 

$

(39,966)

 

(22.4%)

 

$

(6,523)

 

(4.6%)

 

At September 30, 2016, the Texas heavy civil balance sheet included property, plant and equipment with a net book value of $50,984.  Additional balance sheet items include the following:  

 

 

 

 

 

 

 

 

 

 

    

September 30, 

    

December 31, 

 

 

 

2016

 

2015

 

Accounts receivable

 

$

27,167

 

$

15,935

 

Costs and estimated earnings in excess of billings

 

$

16,990

 

$

15,302

 

Inventory and uninstalled contract materials

 

$

36,394

 

$

43,360

 

Billings in excess of costs and estimated earnings

 

$

36,855

 

$

45,193

 

Reserve for estimated losses on uncompleted contracts

 

$

13,917

 

$

4,242

 

 

In addition, under the provisions of ASC 350, the planned divestiture triggered an analysis of the goodwill amount recorded on the JCG books.  The analysis resulted in the Company recording a pretax, non-cash goodwill impairment charge of approximately $2.7 million in the third quarter 2016. 

 

There can be no assurance that the Company will enter into a sales transaction for the division nor is it possible to determine at this time the impact on results of operations or cash flow from a potential transaction.

 

 

 

 

 

 

 

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PRIMORIS SERVICES CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS

 

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Forward Looking Statements

 

This Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2016 (“Third Quarter 2016 Report”) contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which are subject to the “safe harbor” created by those sections. Forward-looking statements include information concerning our possible or assumed future results of operations, business strategies, financing plans, competitive position, industry environment, potential growth opportunities, the effects of regulation and the economy, generally. Forward-looking statements include all statements that are not historical facts and can be identified by terms such as “anticipates”, “believes”, “could”, “estimates”, “expects”, “intends”, “may”, “plans”, “potential”, “predicts”, “projects”, “should”, “will”, “would” or similar expressions.

 

Forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. We discuss many of these risks in detail in Part I, Item 1A “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2015 and our other filings with the Securities and Exchange Commission (“SEC”). You should read this Third Quarter 2016 Report, our Annual Report on Form 10-K for the year ended December 31, 2015 and our other filings with the SEC completely and with the understanding that our actual future results may be materially different from what we expect.

 

Given these uncertainties, you should not place undue reliance on these forward-looking statements. Also, forward-looking statements represent our management’s beliefs and assumptions only as of the date of this Third Quarter 2016 Report. We assume no obligation to update these forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in any forward-looking statements, even if new information becomes available.

 

The following discussion and analysis should be read in conjunction with the unaudited financial statements and the accompanying notes included in Part 1, Item 1 of this Third Quarter 2016 Report and our Annual Report on Form 10-K for the year ended December 31, 2015.

 

Introduction

 

Primoris is a holding company of various subsidiaries, which form one of the larger publicly traded specialty contractors and infrastructure companies in the United States. Serving diverse end-markets, we provide a wide range of construction, fabrication, maintenance, replacement, water and wastewater, and engineering services to major public utilities, petrochemical companies, energy companies, municipalities, state departments of transportation and other customers. We install, replace, repair and rehabilitate natural gas, refined product, water and wastewater pipeline systems; large diameter gas and liquid pipeline facilities; and heavy civil projects, earthwork and site development. We also construct mechanical facilities and other structures, including power plants, petrochemical facilities, refineries, water and wastewater treatment facilities and parking structures. Finally, we provide specialized process and product engineering services.

 

We have longstanding customer relationships with major utility, refining, petrochemical, power and engineering companies. We have completed major underground and industrial projects for a number of large natural gas transmission and petrochemical companies in the western United States, as well as significant projects for our engineering customers. We enter into a large number of contracts each year and the projects can vary in length – from several weeks, to as long as 48 months for completion on larger projects. Although we have not been dependent upon any one customer in any year, a small number of customers tend to constitute a substantial portion of our total revenues.

 

We recognize revenues and profitability on our contracts depending on the type of contract. For our fixed price, or lump sum, contracts, we record revenue as the work progresses on a percentage-of-completion basis, which means that we recognize revenue based on the percentage of costs incurred to date in proportion to the total estimated costs expected to complete the contract. Fixed price contracts may include retainage provisions under which customers

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withhold a percentage of the contract price until the project is complete.  For our unit price, time and material, and cost-plus contracts, we recognize revenue as units are completed or services are performed.

 

The Company segregates its business into three operating segments, which include:  The West Construction Services segment (“West segment”), the East Construction Services segment (“East segment”) and the Energy segment.  The following is a brief description of each of our reportable segments and business activities.

 

The West segment includes the underground and industrial operations and construction services performed by ARB, Inc. (“ARB”), ARB Structures, Inc. (“ARB Structures”), Rockford Corporation (“Rockford”), Q3 Contracting, Inc. (“Q3C”), and Vadnais Trenchless Services, Inc. (“Vadnais”).  ARB and ARB Structures perform work primarily in California; while, Rockford operates throughout the United States and Q3C operates in Colorado and the upper Midwest United States. The segment also included two joint venture operations.  The West segment consists of business headquartered primarily in the western United States.

 

The East segment includes the James Construction Group (“JCG”) Heavy Civil division, the JCG Infrastructure and Maintenance division, BW Primoris, LLC and Cardinal Contractors, Inc. construction business, located primarily in the southeastern United States and in the Gulf Coast region of the United States and includes heavy civil construction and infrastructure and maintenance operations.  The Company has announced that it plans to divest the Texas heavy civil business unit, which is included as a part of the East segment.

 

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

 

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

 

 

 

 

 

Subsidiary

    

Reportable Segment

 

ARB, Inc. (“ARB”)

 

West

 

ARB Structures, Inc.

 

West

 

Q3 Contracting, Inc. (“Q3C”)

 

West

 

Rockford Corporation (“Rockford”)

 

West

 

Vadnais Trenchless Services, Inc. (“Vadnais”)

 

West

 

Cardinal Contractors, Inc.

 

East

 

BW Primoris, LLC (“BWP”)

 

East

 

James Construction Group, LLC (“JCG”):

 

East

 

    JCG Heavy Civil Division

 

East

 

    JCG Infrastructure and Maintenance Division

 

East

 

Primoris Energy Services Corporation (“PES”)

 

Energy

 

    PES Pipeline Services

 

Energy

 

    PES Industrial Division

 

Energy

 

OnQuest, Inc.

 

Energy

 

    OnQuest Canada, ULC

 

Energy

 

Primoris Aevenia, Inc. (“Aevenia”); acquired February 28, 2015

 

Energy

 

 

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 project has been completed, the project warranty expired in May 2015 and dissolution of the joint venture was completed in the third quarter 2015.

 

The Company owns a 50% interest in two separate joint ventures, both formed in 2015 to engineer and construct gas-fired power generation facilities: Carlsbad Power Constructors joint venture (“Carlsbad”) and ARB Inc. & B&M Engineering Co. joint venture (“Wilmington”). Both projects are located in the Southern California area. At this time, completion for both projects is expected in 2018.  The joint venture operations are included as part of the West

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segment. As a result of determining that the Company is the primary beneficiary of the two VIE’s, the results of the Carlsbad and Wilmington joint ventures are consolidated in the Company’s financial statements.

 

On February 28, 2015, the Company acquired the net assets of Aevenia, Inc. for $22.3 million in cash, and established a new entity, Primoris Aevenia, Inc. (“Aevenia”), which operates as part of the Company’s Energy segment.  Aevenia is an energy and electrical construction company that 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. On January 29, 2016, Aevenia acquired the net assets of Mueller Concrete Construction Company (“Mueller”) for $4.1 million.

 

For some end markets we perform the same services in each of our West, East and Energy segments, while for other end markets, such as poured-in-place parking structures, only one of our segments currently serves the market. The following table shows the approximate percentage of revenues over three years derived from our major end-markets, with prior periods conformed to the current year market breakdown:

 

 

 

 

 

 

 

 

 

 

    

Twelve Months Ended

    

Twelve Months Ended

    

Twelve Months Ended

 

Market

 

September 2016

 

December 2015

 

September 2015

 

Underground capital projects

 

12%

 

12%

 

14%

 

Utility services

 

35%

 

34%

 

33%

 

Industrial

 

19%

 

16%

 

16%

 

Heavy Civil

 

27%

 

30%

 

29%

 

Engineering

 

2%

 

4%

 

4%

 

Other

 

5%

 

4%

 

4%

 

Total

 

100%

 

100%

 

100%

 

 

Material trends and uncertainties

 

We generate our revenue from both large and small construction and engineering projects. The award of these contracts is dependent on many factors, most of which are not within our control. We depend in part on spending by companies in the energy and oil and gas industries, the gas utility industry, as well as municipal water and wastewater customers. Over the past several years, each segment has benefited from demand for more efficient and more environmentally friendly energy and power facilities, local highway and bridge needs and from the activity level in the oil and gas industry; however, each of these industries and the government agencies periodically are adversely affected by macroeconomic conditions. Economic factors outside of our control may affect the amount and size of contracts we are awarded in any particular period.

 

We closely monitor our customers to assess the effect that changes in economic, market and regulatory conditions may have on them. We have experienced reduced spending by some of our customers over the last several years, which we attribute to negative economic and market conditions, and we anticipate that these negative conditions may continue to affect demand for our services in the near-term.  Major fluctuations in market prices of oil, gas and other fuel sources have affected demand for our services.  The recent significant reduction in the price of oil, gas and liquid natural gas has created uncertainty with respect to demand for our oil and gas pipeline and roustabout services in the near term, with additional uncertainty resulting over the length of time that prices will remain depressed.  We believe that our upstream operations, such as the construction of gathering lines within the oil shale formations will remain at lower levels for an extended period. While there was some improvement in the price of oil in the second and third quarters of 2016, the increase has not resulted in a significant change in the contracting activities of our customers. We believe that over time, the need for pipeline infrastructure for mid-stream and gas utility companies will result in a continuing need for our services, but the impact of the low oil prices and the bankruptcy of some smaller oil and gas producers may delay midstream pipeline opportunities. The continuing changes in the regulatory environment also affects the demand for our services, either by increasing our work or delaying projects.  For example, the regulatory environment in California may result in delays for the construction of gas-fired power plants while regulators continue to search for significant renewable resources, but renewable resources may also create a demand for our construction services.  Finally, we believe that regulated utility customers will continue to invest in our maintenance and replacement services.

 

Seasonality, cyclicality and variability

 

Our results of operations are subject to quarterly variations. Some of the variation is the result of weather, particularly rain, ice and snow, which can impact our ability to perform construction services. While the majority of the

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Company’s work is in the southern half of the United States, these seasonal impacts affect revenues and profitability since gas and other utilities defer routine replacement and repair during their period of peak demand.  Any quarter can be affected either negatively or positively by atypical weather patterns in any part of the country.  In addition, demand for new projects tends to be lower during the early part of the year due to clients’ internal budget cycles.  As a result, the Company usually experiences higher revenues and earnings in the third and fourth quarters of the year as compared to the first two quarters.

 

The Company is also dependent on large construction projects which tend not to be seasonal, but can fluctuate from year to year based on general economic conditions.  Our business may be affected by declines or delays in new projects or by client project schedules.  Because of the cyclical nature of our business, the financial results for any period may fluctuate from prior periods, and the Company’s financial condition and operating results may vary from quarter-to-quarter.  Results from one quarter may not be indicative of its financial condition or operating results for any other quarter or for an entire year.

 

Critical Accounting Policies and Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the financial statements and that affect the amounts of revenues and expenses reported for each period. These estimates and assumptions must be made because certain information that is used in the preparation of our financial statements cannot be calculated with a high degree of precision from data available, is dependent on future events, or is not capable of being readily calculated based on generally accepted methodologies. Often, these estimates are particularly difficult to determine, and we must exercise significant judgment. We use estimates in our assessments of revenue recognition under percentage-of-completion accounting with estimated future job profitability, estimation of any loss provision, the allowance for doubtful accounts, useful lives of property and equipment, fair value assumptions in analyzing goodwill and long-lived asset impairments, self-insured claims liabilities and deferred income taxes. Actual results could differ significantly from our estimates, and our estimates could change if they were made under different assumptions or conditions.

 

As described in our Annual Report on Form 10-K for the year ended December 31, 2015, our critical accounting policies relate primarily to revenue recognition for fixed and unit price contracts, income taxes, goodwill, long-lived assets, reserves for uninsured risks and contingencies. There have been no material changes to our critical accounting policies since December 31, 2015.

 

Results of Operations

 

Consolidated Results

 

Revenues

 

Revenue was $507.8 million for the third quarter of 2016, representing a decrease of $48.1 million, or 8.7%, from the third quarter of 2015.  The decreased revenues were primarily at JCG as revenues at the heavy civil division declined by $33.7 million due to decreases in work for the state departments of transportation, and at PES as reduced work, primarily for midstream customers, reduced revenues by $12.0 million for the Pipeline division project completions in 2015 reduced revenue by $21.1 million at the ARB Industrial and Saxon divisions and at OnQuest.  These declines were partially offset by $27.5 million revenue recognized from the collection of one of the disputed receivables discussed in the “Receivable Collection Actions” paragraph below.

 

For the nine months ended September 30, 2016, revenue decreased by $37.2 million, or 2.6%, to $1,395 million from the same period in 2015.  Revenues at Rockford decreased by $83.3 million, reflecting the impact of completion of pipeline projects in 2015.  Revenues also declined at the JCG heavy civil division by $16.9 million, by $56.3 million at the Industrial and Maintenance division and by $42.8 million at OnQuest, reflecting completion of a micro LNG project in 2015.  These revenue declines were partially offset by increased revenues of $49.4 million at the large petrochemical project in Louisiana, and increases at ARB Underground, ARB Structures and Q3C totaling $54.3 million.  The declines were also partially offset by revenues from the collection of the disputed receivables in the third quarter as discuused in the “Receivable Collection Actions” paragraph below.

 

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Gross Profit

 

Gross profit was $50.1 million for the third quarter of 2016, representing a decrease of $21.5 million, or 30.0% compared to the third quarter of 2015.  Gross profit declined by $33.8 million at the JCG heavy civil division, primarily due to the projects within the Texas heavy civil operations which are planned to be divested.  In addition, declines at the large petrochemical project in Louisiana, a productivity issue on a PES project in Texas and the reduced revenues from PES midstream customers totaled approximately $12.5 million.  These gross profit declines were partially offset by $26.7 million gross profit realized from the collection of one of the disputed receivables discussed in the “Receivable Collection Actions” paragraph below.

 

For the nine months ended September 30, 2016, gross profit decreased by $23.5 million to $132.7 million from the same period in 2015.  The declines in gross profit from the revenue decreases at the JCG Heavy Civil division from the state departments of transportation customers and the impact of the projects in the Texas heavy civil operations which are planned to be divested, as discussed below, were approximately $36.2 million.  The revenue decline at OnQuest and a productivity issue at a PES project in Texas resulted in a gross profit decline of $13.1 million.  These declines were partially offset by gross profit realized from the collection of the disputed receivable in the third quarter, as discussed in the “Receivable Collection Actions” paragraph below.

 

Selling, general and administrative expenses

 

Selling, general and administrative (“SG&A”) expenses of $36.0 million, decreased $2.6 million, or 6.6%, for the three months ended September 30, 2016, compared to $38.6 million for the same period in 2015. The decrease was primarily due to a $1.5 million reduction in payroll related expenses and a reduction in professional fees of $1.2 million.

 

SG&A expense as a percentage of revenue for the three months ended September 30, 2016 increased to 7.1% compared to 6.9% for the corresponding period in 2015 primarily as a result of the decrease in revenues.

 

SG&A expense of $101.2 million decreased $9.7 million, or 8.8%, for the nine months ended September 30, 2016, compared to $110.9 million for the same period in 2015.  The decrease was primarily due to a $5.1 million reduction in professional fees, a decrease of $1.4 million in payroll related expenses and a decrease of $3.2 million in other administrative expenses.

 

SG&A as a percentage of revenue for the nine months ended September 30, 2016 decreased to 7.3% compared to 7.7% for the corresponding period in 2015, primarily as a result of the significant decrease in SG&A expenses between the two periods.

 

Planned JCG Texas Heavy Civil division divestiture

 

In the 2010 to 2011 time frame, the JCG Heavy Civil division was awarded five contracts by the Texas Department of Transportation (“TxDOT”) to perform work with a contract value in excess of $700 million along the I-35 highway corridor between Austin and Waco, Texas.  These jobs were managed by the JCG Belton, TX office.  The jobs have experienced delays from weather, labor shortages and delays in moving utilities.  As of June 30, 2016, for the five jobs JCG had recognized revenue of $414.0 million, costs of $437.5 million and a job loss of $23.5 million.  Billings were $416.0 million.  The net of the costs incurred, job losses and billings was reflected on the balance sheet as a costs and estimated earnings in excess of billings of $22.9 million less billings in excess of cost and estimated earnings of $24.9 million.  In addition, the balance sheet included uninstalled, but billed, materials of $29.4 million and a loss provision of $3.4 million.

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During the third quarter of 2016, Primoris made the strategic decision to divest the JCG Texas Heavy Civil operations through the sale of the division.  The Company has engaged a banker to sell the division; however, the Company intends to continue operating the division during the sales process which the Company plans to begin during the fourth quarter.

 

At the end of the third quarter of 2016, JCG adjusted the estimated revenues and estimated costs for five of the jobs within the Texas heavy civil business.  Combined with the third quarter job activities, the adjustments resulted in revenues of $12.5 million, costs of $39.3 million, an increase to the loss provision of $10.5 million for a total gross loss of $37.3 million for the quarter.  The loss represents a combination of actual costs incurred in the quarter and the impact of eliminating any potential improvements in the current productivity efficiency trends.  This loss includes a reduction of the expected profitability of the five construction projects for the division and a reduction of costs and estimated earnings in excess of billings and an increase to the reserve for anticipated job losses.

 

Additional information for the business unit is found in Note 20 “Planned Divestiture of Texas Heavy Civil Business Unit” of Part I of this Third Quarter 2016 report.

 

There can be no assurance that we will enter into a sales transaction for the division nor is it possible to determine at this time the impact on results of operations or cash flow from a potential transaction.

 

Impairment of goodwill

 

During the third quarter of 2016, the Company determined that the Texas Heavy Civil division would be offered offered for sale.  The unit operates as a division of JCG within the East Construction Services segment.  The Company will continue to operate the division while actively seeking a buyer and has engaged a financial advisor to assist in the sale.   Revenues for this division for the twelve months ending December 31, 2015 were approximately $190 million.

 

Under the provisions of ASC 350, the planned divestiture triggered an analysis of the goodwill amount recorded on the balance sheet of JCG.  The analysis resulted in the Company recording a pretax, non-cash goodwill impairment charge of approximately $2.7 million in the third quarter 2016.  

 

Other income and expense

 

Non-operating income and expense items for the three and nine months ended September 30, 2016 and 2015 were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30, 

 

September 30, 

 

 

    

2016

    

2015

    

2016

    

2015

 

 

 

(Thousands)

 

(Thousands)

 

Foreign exchange gain (loss)

 

$

(92)

 

$

(721)

 

$

288

 

$

(425)

 

Other income (expense)

 

 

(278)

 

 

361

 

 

(278)

 

 

272

 

Interest income

 

 

31

 

 

4

 

 

122

 

 

22

 

Interest expense

 

 

(2,246)

 

 

(1,903)

 

 

(6,754)

 

 

(5,563)

 

Total other income (expense)

 

$

(2,585)

 

$

(2,259)

 

$

(6,622)

 

$

(5,694)

 

 

For the three and nine months ended September 30, 2016, foreign exchange gains and losses reflect currency exchange fluctuations of the United States dollar compared to the Canadian dollar.  Most of our Canadian subsidiary’s contracts are sold based on United States dollars, but a portion of the work is paid for with Canadian dollars creating a positive currency exchange difference when the value of the Canadian dollar is less than the US dollar.

 

Interest income is derived from interest earned on excess cash invested primarily in short term U.S. Treasury bills, backed by the federal government and other investments that may not be backed by the federal government.

 

The increase in interest expense for the three and nine months ended September 30, 2016 is due primarily to a $25 million increase in November 2015 in senior secured notes, an $8 million increase in December 2015 in mortgage notes and a $30 million increase in commercial equipment notes during 2016.

 

 

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Provision for income taxes

 

The Company determines its best current estimate of the annual effective tax rate at each interim period using expected annual pre-tax earnings, statutory tax rates, and available tax planning opportunities. 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 effective tax rate on income attributable to Primoris (excluding noncontrolling interests) was 43.0% for the nine months ended September 30, 2016.  The rate differs from the U.S. federal statutory rate of 35% primarily due to state income taxes, the Domestic Production Activity Deduction, and partially nondeductible meals and incidental per diem expenses common to the construction industry.

 

The Company recorded income tax expense for the three and nine months ended September 30, 2016 of $4.1 million and $9.2 million, respectively, compared to $11.8 million and $15.2 million for corresponding periods of 2015.

 

The effective tax rates for the three and nine months ended September 30, 2016 were 47.5% and 43.0%, respectively, compared to 38.2% and 38.4% for the corresponding periods of 2015. The increase in our estimated annual effective tax rate to 43.0% resulted in an increase in our effective tax rate to 47.5% for the three months ended September 30, 2016.  The estimated annual effective tax rate increased to 43.0% due to projected annual per diem payments remaining relatively constant despite a reduction in annual projected pre-tax earnings.

 

Segment results

 

West Segment

 

Revenue and gross profit for the West segment for the three and nine months ended September 30, 2016 and 2015 were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 

 

 

 

2016

 

2015

 

 

    

 

 

    

% of

    

 

 

    

% of

 

 

 

 

 

 

Segment

 

 

 

 

Segment

 

 

 

(Thousands)

 

Revenue

 

(Thousands)

 

Revenue

 

West Segment

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

264,463

 

 

 

$

258,414

 

 

 

Gross profit

 

$

42,191

 

16.0%

 

$

39,810

 

15.4%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 

 

 

 

2016

 

2015

 

 

    

 

 

    

% of

    

 

 

    

% of

 

 

 

 

 

 

Segment

 

 

 

 

Segment

 

 

 

(Thousands)

 

Revenue

 

(Thousands)

 

Revenue

 

West Segment

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

652,850

 

 

 

$

684,798

 

 

 

Gross profit

 

$

87,390

 

13.4%

 

$

91,718

 

13.4%

 

 

Revenue for the West segment increased by $6.0 million, or 2.3%, for the three months ended September 30, 2016, compared to the same period in 2015. This increase was the result of an increase at ARB Underground of $16.7 million, primarily the result of increased MSA work performed for one of the division’s major utility customers. The increase was partially offset by a decrease of $4.8 million at ARB Structures and $6.4 million at Q3C.

 

Year to date revenues for the West segment decreased by $31.9 million in 2016 compared to the nine months ended September 30, 2015, primarily the result of a decrease in volume at Rockford of $83.3 million reflecting the 2015 completion of a large pipeline project which had contributed $134.7 million in 2015. This decrease was partially offset by increases totaling $54.3 million (which included a $16.0 million increase at ARB Structures, an increase of $9.1 million at Q3C and a $29.2 million increase at ARB Underground).

 

Gross profit for the West segment increased by $2.4 million, or 6.0%, during the three months ended September 30, 2016, compared to the same period in 2015. Gross profit increased by $4.0 million at ARB Underground as a result

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of increased revenue. This increase was offset by a $1.6 million decrease in gross margin at the ARB Industrial division, primarily from a reduction in revenues as well as the lower margin joint venture work being performed in 2016.

 

Gross profit for the West segment decreased by $4.3 million, or 4.7%, during the nine months ended September 30, 2016, compared to the same period in 2015. This decrease was primarily driven by a $4.3 million decrease in gross margin at the ARB Underground division, primarily from a reduction in gross margin for its two largest utility customers, as well as inefficiencies from the delay in expected work for the second quarter 2016. The ARB Industrial division’s margin also decreased by approximately $4.9 million during the same period, primarily due to the substantial completion of an expansion project performed for a major oil and gas customer. The decreases were offset by a $6.8 million increase at Q3C.

 

Gross profit as a percentage of revenue increased slightly to 16.0% during the three months ended September 30, 2016, from 15.4% in the same period in 2015 primarily as a result of the increase profitability at the ARB Underground division. The increase was largely the result of closing out and approval of change order work relating to the division’s pipeline integrity program for a large utility customer.

 

Gross profit as a percentage of revenue during the nine months ended September 30, 2016 was 13.4%, the same as the same period in the prior year.

 

East Segment

 

Revenue and gross profit for the East segment for the three and nine months ended September 30, 2016 and 2015 were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 

 

 

 

2016

 

2015

 

 

    

 

 

    

% of

    

 

 

    

% of

 

 

 

 

 

 

Segment

 

 

 

 

Segment

 

 

 

(Thousands)

 

Revenue

 

(Thousands)

 

Revenue

 

East Segment

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

122,854

 

 

 

$

183,635

 

 

 

Gross profit

 

$

(27,253)

 

(22.2%)

 

$

15,400

 

8.4%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 

 

 

 

2016

 

2015

 

 

    

 

 

    

% of

    

 

 

    

% of

 

 

 

 

 

 

Segment

 

 

 

 

Segment

 

 

 

(Thousands)

 

Revenue

 

(Thousands)

 

Revenue

 

East Segment 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

398,304

 

 

 

$

462,222

 

 

 

Gross profit

 

$

(15,357)

 

(3.9%)

 

$

33,623

 

7.3%

 

 

East segment revenue decreased by $60.8 million, or 33.1% for the three months ended September 30, 2016 compared to the same period in 2015. JCG’s Infrastructure & Maintenance division revenue decreased $27.3 million, due primarily to a large petrochemical project in Louisiana. Revenue at JCG’s Heavy Civil division decreased $33.7 million due primarily to decreases in Texas DOT projects of $18.8 million, Mississippi DOT projects of $19.7 million and Louisiana DOT projects of $8.9 million partially offset by increases in Arkansas DOT projects of $3.3 million and Louisiana and Texas airport projects of $10.6 million.

 

Revenue decreased by $63.9 million, or 13.8%, for the nine months ended September 30, 2016 compared to the same period in 2015.  Revenue at the JCG Infrastructure & Maintenance division decreased by $56.3 million due primarily to the large petrochemical project in Louisiana and decreases in Texas work. JCG’s Heavy Civil division revenue decreased by $16.9 million. JCG Heavy Civil decreases in Louisiana DOT projects of $6.9 million, Mississippi DOT projects of $41.8 million and Texas DOT projects of $2.0 million were offset by increases in Arkansas DOT projects of $3.0 million, Texas municipal projects of $4.3 million and airport projects of $21.7 million.  Revenue at Cardinal Contractors increased $6.0 million as multiple ongoing projects in Texas started late in 2015 and early in 2016.

 

Gross profit decreased by $42.7 million, or 277%, for the three months ended September 30, 2016 compared to the same period in 2015. The gross profit decrease at JCG’s Infrastructure & Maintenance division was $9.6 million due

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to the decreased volume from a large petrochemical project in Louisiana. JCG’s Heavy Civil division experienced a gross profit decrease of $33.8 million related to the delays and productivity issues associated with Texas DOT projects, including a reduction of $37.3 million for the Belton area projects that are included as part of the Texas heavy civil business that is planned for divestiture.

 

Gross profit decreased by $49.0 million, or 146%, for the nine months ended September 30, 2016. The gross profit decrease at JCG’s Infrastructure & Maintenance division was $15.1 million as a result of decreased revenues. Gross profit decreased at JCG’s Heavy Civil division by $36.2 million, mainly related to the delays and productivity issues for the Belton area construction projects that are part of the Texas heavy civil business that is planned to be divested, as well as the the reduced volume on Mississippi DOT projects.

 

Gross profit as a percent of revenue decreased to -22.2% and -3.9% during the three and nine months ended September 30, 2016, respectively, from 8.4% and 7.3% in the prior year periods, respectively, as a result of decreased margins on the Belton area projects within the Texas heavy civil division. 

 

Energy Segment

 

Revenue and gross profit for the Energy segment for the three and nine months ended September 30, 2016 and 2015 were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 

 

 

 

2016

 

2015

 

 

    

 

 

    

% of

    

 

 

    

% of

 

 

 

 

 

 

Segment

 

 

 

 

Segment

 

 

 

(Thousands)

 

Revenue

 

(Thousands)

 

Revenue

 

Energy Segment

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

120,511

 

 

 

$

113,896

 

 

 

Gross profit

 

$

35,191

 

29.2%

 

$

16,437

 

14.4%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 

 

 

 

2016

 

2015

 

 

    

 

 

    

% of

    

 

 

    

% of

 

 

 

 

 

 

Segment

 

 

 

 

Segment

 

 

 

(Thousands)

 

Revenue

 

(Thousands)

 

Revenue

 

Energy Segment

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

343,931

 

 

 

$

285,250

 

 

 

Gross profit

 

$

60,658

 

17.6%

 

$

30,807

 

10.8%

 

 

Revenue for the Energy segment increased by $6.6 million, or 5.8%, for the three months ended September 30, 2016, compared to the same period in 2015. Excluding the effect of the collection of one of the disputed receivables discussed in the “Receivable Collection Actions” paragraph below (the “Collection”), revenue for the third quarter of 2016 was $93.0 million, for a decline of $20.9 million, or 18.3% compared to the same period in 2015. The Industrial division revenues increased by net of $12.1 million as its work at the large petrochemical plant in Louisiana offset reductions from projects completed in 2015.  The increase at the Industrial division was offset by decline of $12.0 million at the Pipeline division primarily from reduced work for oil and gas midstream customers, a reduction of $12.1 million at OnQuest from completion of a micro LNG project and $7.0 million at Saxon primarily as a result of the substantial completion of a project in Pennsylvania during 2015.

 

Revenue increased by $58.7 million, or 20.6%, for the nine months ended September 30, 2016, compared to the same period in 2015. Excluding the impact of the Collection, revenue increased by $30.7 million, or 10.8%.  Revenues were higher by $70.0 million at the PES Industrial division and by $19.4 million at the PES Pipeline division.  For the Industrial division, the increase was primarily due to the petrochemical project in Louisiana, and for the Pipeline division the increase was from several smaller diameter pipeline projects in Texas.  Revenues decreased by $42.8 million at OnQuest and $15.8 million at the PES Saxon division, primarily from completion of prior year projects. 

 

Gross profit for the three months ended September 30, 2016 increased by $18.8 million, or 114.1%, compared to the same period in 2015. Excluding the impact of the Collection, gross profit decreased by $7.9 million, or 48.3%.  Gross profit at the PES Industrial division was reduced by $1.4 million as a result of productivity issues on a project in

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Texas partially offset by the increased margins from the petrochemical project in Louisiana.  OnQuest, Aevenia and PES all experienced reduced profits totaling approximately $3.5 million as a result of their reduced volume.

 

Gross profit for the nine months ended September 30, 2016 increased by $29.9 million, or 97.0%, compared to the same period in 2015. Excluding the impact of the Collection, gross profit increased by $3.6 million, or 11.5%.  Gross profit at the PES Industrial division increased by $11.1 million as a result of increased volume at the petrochemical project in Louisiana partially offset by the productivity issues on a project in Texas and by $8.9 million at OnQuest and PES as a result of reduced volume.

 

Excluding the impact of the Collection, gross profit as a percent of revenue decreased to 9.1% during the three months ended September 30, 2016 from 14.4% for the same period in the prior year. The decrease was due primarily to by the impact of the productivity issues on a Texas project and the completion of projects in the prior year. Excluding the impact of the collection, gross profit as a percent of revenue during the nine months ended September 30, 2016 increased to 10.9% from 10.8% for the same period in the prior year, reflecting primarily the impact of the large petrochemical project.

 

Geographic area financial information

 

The majority of the Company’s revenues are derived from customers in the United States with approximately 1% generated from sources outside of the United States.

 

Backlog

 

For companies in the construction industry, backlog can be an indicator of future revenue streams. Different companies define and calculate backlog in different manners.  For the Company, backlog is defined as a combination of: (1) anticipated revenue from the uncompleted portions of existing contracts for which we have known revenue amounts such as for fixed price and fixed unit price contracts (“Fixed Backlog”), and (2) the estimated revenues on master service agreements (“MSA”) for the next four quarters (“MSA Backlog”).  We normally do not include time-and-equipment, time-and-materials and cost reimbursable plus fee contracts in the calculation of backlog, since their final revenue amount is difficult to estimate in advance. We will include these types of contracts in backlog if the customer specifies an anticipated revenue amount.

 

The two components of backlog, Fixed Backlog and MSA Backlog, are detailed below.

 

Fixed Backlog

 

Fixed Backlog by reportable segment as of December 31, 2015 and September 30, 2016 and the changes in Fixed Backlog for the nine months ended September 30, 2016 (in millions) are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Beginning Fixed

    

 

 

    

 

 

    

Ending Fixed

    

Revenue

    

Total Revenue

 

 

 

Backlog at

 

Contract

 

Revenue

 

Backlog

 

Recognized from

 

for Nine Months

 

 

 

December 31, 

 

Additions to

 

Recognized from

 

at September 30, 

 

Non-Fixed Backlog

 

ended September 30, 

 

Reportable Segment

 

2015

 

Fixed Backlog

 

Fixed Backlog

 

2016

 

Projects

 

2016

 

West

 

$

577.1

 

$

961.5

 

$

274.9

 

$

1,263.7

 

$

378.0

 

$

652.9

 

East

 

 

752.3

 

 

282.4

 

 

386.5

 

 

648.2

 

 

11.8

 

 

398.3

 

Energy

 

 

187.8

 

 

350.3

 

 

317.3

 

 

220.8

 

 

26.6

 

 

343.9

 

Total

 

$

1,517.2

 

$

1,594.2

 

$

978.7

 

$

2,132.7

 

$

416.4

 

$

1,395.1

 

 

Revenues recognized from non-Fixed Backlog projects shown above are generated by projects completed under time-and-equipment, time-and-materials and cost-reimbursable-plus-fee contracts or are revenue from the sale of construction materials, such as rock or asphalt to outside third parties.

 

As of September 30, 2016, our total Fixed Backlog was $2.13 billion, representing an increase of $615.5 million, or 40.6%, compared to $1.52 billion as of December 31, 2015. For the quarter ended September 30, 2016, fixed backlog grew by $752 million. We expect that approximately 52% of the total Fixed Backlog at September 30, 2016 will be recognized as revenue over the next four quarters, with approximately $493 million expected for the West segment, $409 million for the East segment and $204 million for the Energy segment.

 

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During the third quarter of 2016, Spring Ridge Constructors, LLC (“Spring Ridge”), a joint venture of which Rockford is a 25% partner, signed a contract with Atlantic Coast Pipeline, LLC for an approximately 600 mile pipeline in Virginia and North Carolina.  While Rockford has not completed its contracts with Spring Ridge, an estimated amount of $625 million has been included in the fixed backlog amount.  Rockford is not expected to start construction for this contract during the next twelve months.

 

At the end of the third quarter 2016, backlog for the JCG Texas heavy civil division totaling $395 million was included in the total Fixed Backlog.

 

MSA Backlog

 

The following table outlines historical MSA revenues for the past seven quarters ($ in millions):

 

 

 

 

 

 

 

 

 

 

Quarterly MSA Revenues

 

 

    

2015

2016

    

First Quarter

 

90.7

 

$

105.2

 

Second Quarter

 

134.1

 

 

142.2

 

Third Quarter

 

175.6

 

 

160.2

 

Fourth Quarter

 

164.7

 

 

 

 

 

MSA Backlog includes anticipated MSA revenues for the next twelve months. We estimate MSA revenues based on historical trends, anticipated seasonal impacts and estimates of customer demand based on information from our customers.

 

The following table shows our estimated MSA Backlog at September 30, 2016 by reportable segment (in millions):

 

 

 

 

 

 

 

 

MSA Backlog

 

 

 

at September 30, 

 

Reportable Segment:

    

2016

 

West

 

$

521.7

 

East

 

 

4.0

 

Energy

 

 

36.6

 

Total

 

$

562.3

 

 

Total Backlog

 

The following table shows total backlog (Fixed Backlog plus MSA Backlog), by reportable segment as of the quarter-end dates shown below (in millions):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reportable Segment:

    

June 30, 2015

    

September 30, 2015

    

December 31, 2015

    

March 31, 2016

    

June 30, 2016

 

September 30, 2016

 

West

 

$

972.7

 

$

949.3

 

$

1,077.3

 

$

1,283.8

 

$

1,159.9

 

$

1,785.4

 

East

 

 

935.7

 

 

810.9

 

 

756.3

 

 

724.2

 

 

645.1

 

 

652.2

 

Energy

 

 

290.6

 

 

289.6

 

 

254.3

 

 

186.7

 

 

107.9

 

 

257.4

 

Total

 

$

2,199.0

 

$

2,049.8

 

$

2,087.9

 

$

2,194.7

 

$

1,912.9

 

$

2,695.0

 

 

 

Backlog should not be considered a comprehensive indicator of future revenues, as a percentage of our revenues are derived from projects that are not part of a backlog calculation. The backlog estimates include amounts from estimated MSA revenues, but our customers are not contractually obligated to purchase an amount of services from us under the MSAs. Any of our contracts, MSA, fixed price or fixed unit price, may be terminated by our customers on relatively short notice. In the event of a project cancellation, we may be reimbursed for certain costs, but typically we have no contractual right to the total revenues reflected in backlog. Projects may remain in backlog for extended periods of time as a result of customer delays, regulatory requirements or project specific issues. Future revenues from projects completed under time-and-equipment, time-and-materials and cost-reimbursable-plus-fee contracts may not be included in our estimated backlog amount.

 

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Liquidity and Capital Resources

 

Cash Needs

 

Liquidity represents our ability to pay our liabilities when they become due, fund business operations and meet our contractual obligations and execute our business plan.  Our primary sources of liquidity are our cash balances at the beginning of each period and our net cash flow.  If needed, we have availability under our lines of credit to augment liquidity needs.  In order to maintain sufficient liquidity, we evaluate our working capital requirements on a regular basis.  We may elect to raise additional capital by issuing common stock, convertible notes, term debt or increasing our credit facility as necessary to fund our operations or to fund the acquisition of new businesses.

 

Our cash and cash equivalents totaled $148.7 million at September 30, 2016 compared to $161.1 million at December 31, 2015. The primary reason for the decrease was to fund purchases of equipment, acquisitions and dividend payments.  We anticipate that our cash and investments on hand, existing borrowing capacity under our credit facility and our future cash flows from operations will provide sufficient funds to enable us to meet our operating needs, our planned capital expenditures and our ability to grow for at least the next twelve months.

 

The construction industry is capital intensive, and we expect to continue to make capital expenditures to meet anticipated needs for our services. Historically, we have invested an amount that approximated the sum of depreciation and amortization expenses plus proceeds from equipment sales. During the nine months ended September 30, 2016, capital expenditures were approximately $52.1 million, while the amount of depreciation, amortization and equipment sales during this period was approximately $59.2 million.  Purchases as of September 30, 2016 included the purchase of $13.4 million of specialty directional drilling/tunneling equipment from Pipe Jacking Unlimited, Inc. in June 2016.  Excluding the Pipe Jacking equipment purchases, capital expenditures are expected to total $40 million to $45 million for the 2016 year.

 

Cash Flows

 

Cash flows during the nine months ended September 30, 2016 and 2015 are summarized as follows:

 

 

 

 

 

 

 

 

 

 

 

Nine months ended

 

 

 

September 30, 

 

 

    

2016

    

2015

 

 

 

(Thousands)

 

Change in cash:

 

 

 

 

 

 

 

Net cash provided by (used in) operating activities

 

$

50,617

 

$

(16,701)

 

Net cash used in investing activities

 

 

(48,482)

 

 

(37,611)

 

Net cash provided by (used in) financing activities

 

 

(14,590)

 

 

4,271

 

Net change in cash and cash equivalents

 

$

(12,455)

 

$

(50,041)

 

 

Operating Activities

 

The source of our cash flow from operating activities and the use of that cash in our operations for the nine months ended September 30, 2016 and 2015 were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended

 

 

 

 

 

 

September 30, 

 

 

 

 

 

    

2016

    

2015

    

Change

 

 

 

(Thousands)

 

 

 

Operating Activities:

 

 

 

 

 

 

 

 

 

 

Operating income

 

$

28,825

 

$

45,296

 

$

(16,471)

 

Depreciation and amortization

 

 

51,445

 

 

48,534

 

 

2,911

 

Stock-based compensation expense

 

 

1,169

 

 

787

 

 

382

 

Loss (gain) on sale of property and equipment

 

 

(3,361)

 

 

(901)

 

 

(2,460)

 

Impairment of goodwill

 

 

2,716

 

 

 —

 

 

2,716

 

Changes in assets and liabilities

 

 

(14,311)

 

 

(89,564)

 

 

75,253

 

Net other expense and tax provision

 

 

(15,866)

 

 

(20,853)

 

 

4,987

 

Net cash (used by) provided by operating activities

 

$

50,617

 

$

(16,701)

 

$

67,318

 

 

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The net change in assets and liabilities during the nine months ended September 30, 2016 resulted in a net use of cash of $14.3 million, compared to a net use of $89.6 million in the nine months of the prior year, an improvement in cash flow of $75.3 million. The primary reason for the improvement was an improvement of $73.1 million in accounts receivable for the current year compared to 2015.  This improvement was the result of a reduction in retainage of $21.8 million, primarily at Rockford, and a reduction of $38.5 million in accounts receivable at PES reflecting successful collection efforts including collection of one of the disputed receivables discussed in the “Receivable Collection Actions” paragraph below.

 

For the nine months ended September 30, 2016, the use of cash for changes in assets in liabilities was $14.3 million.  The more significant changes are outlined as follows:

 

·

Accounts receivable decreased by $27.1 million, reflecting both the collection of one of the disputed receivables discussed in the “Receivable Collection Actions” paragraph below and successful collection efforts. For non-disputed receivables, our days sales outstanding declined from 46.5 days at December 31, 2015 to 38.3 days at September 30, 2016.  In addition to maintaining an excellent collection history, we have certain lien rights that can provide additional security for collections. At September 30, 2016 accounts receivable represented 26.2% of our total assets compared to 28.3% at the end of 2015; 

 

·

Costs and estimated earnings in excess of billings (“CIE”) increased by $39.9 million. CIE results primarily from either time lags between revenue recognition and contractual billing terms or the billing lag at the end of each month. The increase during the nine months ended September 30, 2016 was approximately $22.6 million for Rockford, for its new Florida work, and month-end billing lags of $9.9 million for ARB and $7.3 million for Q3C;

 

·

Billings in excess of costs and estimated earnings decreased by $41.6, million primarily reflecting the completion of work paid for in advance, such as a reduction of $6.5 million at ARB and $13.4 million for JCG’s TxDOT work as well as a $7.6 million reduction as a result of the resolution of one of the disputed receivables;

 

·

Uninstalled inventory decreased by $13.9 million at September 30, 2016;  and

 

·

Accounts payable increased by $10.0 million and accrued expenses and other current liabilities increased by $18.6 million at September 30, 2016.

 

Investing activities

 

During the nine months ended September 30, 2016, we purchased property and equipment for $52.1 million in cash compared to $52.4 million during the same period in the prior year.  This amount included a $13.4 million purchase of specialty directional drilling/tunneling equipment from Pipe Jacking Unlimited, Inc. in June 2016.  We believe that ownership of equipment is generally preferable to renting equipment on a project-by-project basis, as ownership helps to ensure the equipment is available for our workloads when needed. Over the past years, ownership has resulted in lower overall equipment costs.

 

We periodically sell and acquire equipment, typically to update our fleet. We received proceeds from the sale of used equipment of $7.8 million during the nine months ending September 30, 2016 and $6.1 million during the same period in 2015.

 

On January 29, 2016, we purchased the net assets of Mueller for $4.1 million in cash and in the prior year, on February 28, 2015, we purchased the net assets of Aevenia for $22.3 million in cash.

 

Financing activities

 

Financing activities used cash of $14.6 million for the nine months ended September 30, 2016, which was net of several transactions, which included:

 

·

$30.0 million in proceeds from the issuance of debt secured by our equipment;

 

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·

$36.9 million in repayment of long-term debt and the repayment of $0.6 million in capital leases;

 

·

Dividend payments of $8.5 million to our stockholders during the nine months ended September 30, 2016; and

 

·

$1.4 million in proceeds from the issuance of 85,907 shares of common stock purchased by the participants in the Primoris Long-term Retention Plan.

 

Debt Activities

 

For a description of our credit agreements, see Note 10 — “Credit Arrangements” in Item 1, Financial Statements of this Third Quarter 2016 Report.

 

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, 2016 and 2015, the Company paid $0.64 million and $0.62 million, respectively, in lease payments to SIGI for the use of these properties.

 

Primoris leases a property from Roger Newnham, a former owner and current employee of our subsidiary, OnQuest Canada, ULC. The property is located in Calgary, Canada. During the nine months ended September 30, 2016 and 2015, Primoris paid $0.190 million and $0.193 million, respectively, in lease payments. The current term of the lease is through December 31, 2017.

 

Primoris leased 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, 2016 and 2015, Primoris paid $0.023 million and $0.068 million, respectively, in lease payments. The lease was terminated early at March 31, 2016.

 

Primoris leases a property from Quality RE Partners, owned by three of the Q3C selling shareholders, of whom one is a current employee, Jay Osborn, an operations president in the West segment.  The property is located in Little Canada, Minnesota. During the nine months ended September 30, 2016 and 2015, the Company paid $0.2 million in both periods, in lease payments to Quality RE Partners. The lease expires in October 2022.

 

Primoris leases property from the sellers of the Mueller acquisition, which commenced January 29, 2016.  The property is located in Iowa. During the nine months ended September 30, 2016, the Company paid $0.018 million in lease payments to the sellers.

 

Common stock

 

For a discussion of items affecting our common stock, please see Note 17 — “Stockholders’ Equity” in Item 1, Financial Statements of this Third Quarter 2016 Report.

 

Contractual Obligations

 

As of September 30, 2016, we had $267.8 million of outstanding long-term debt and capital lease obligations and there were no short-term borrowings.

 

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A summary of contractual obligations as of September 30, 2016 was as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Total

    

1 Year

    

2 - 3 Years

    

4 - 5 Years

    

After 5 Years

 

 

 

(In Thousands)

 

Long-term debt and capital lease obligations

 

$

267,791

 

$

57,713

 

$

101,808

 

$

63,497

 

$

44,773

 

Interest on long-term debt (1)

 

 

26,290

 

 

7,049

 

 

10,119

 

 

5,297

 

 

3,825

 

Equipment operating leases

 

 

33,096

 

 

9,809

 

 

15,836

 

 

7,433

 

 

18

 

Real property leases

 

 

9,599

 

 

3,674

 

 

4,965

 

 

960

 

 

 —

 

Real property leases—related parties

 

 

6,789

 

 

1,508

 

 

2,321

 

 

1,710

 

 

1,250

 

 

 

$

343,565

 

$

79,753

 

$

135,049

 

$

78,897

 

$

49,866

 

Letters of credit

 

$

17,118

 

$

12,118

 

$

5,000

 

$

 —

 

$

 —

 


(1)

The interest amount represents interest payments for our fixed rate debt assuming that principal payments are made as originally scheduled.

 

The table does not include obligations under multi-employer pension plans in which some of our employees participate.  Our multi-employer pension plan contribution rates are generally specified in our collective bargaining agreements, and contributions are made to the plans based on employee payrolls. Our obligations for future periods cannot be determined because we cannot predict the number of employees that we will employ at any given time nor the plans in which they may participate.

 

We may also be required to make additional contributions to multi-employer pension plans if they become underfunded, and these contributions will be determined based on our union payroll. The Pension Protection Act of 2006 added special funding and operational rules for multi-employer plans that are classified as “endangered,” “seriously endangered” or “critical” status.  Plans in these classifications must adopt measures to improve their funded status through a funding improvement or rehabilitation plan, which may require additional contributions from employers.  The amounts of additional funds that we may be obligated to contribute cannot be reasonably estimated and is not included in the table above.

 

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.  During the first quarter of 2016, the Company received a final payment schedule.  Based on this schedule, the liability recorded as of September 30, 2016 was $5,926.  The Company has no plans to withdraw from any other agreements.

 

We have also excluded from the table any interest and fees associated with letters of credit and commitment fees under our credit facility since these amounts are variable.

 

Off-balance sheet transactions

 

As is common in our industry, we enter into certain off-balance sheet arrangements in the ordinary course of business that result in risks not directly reflected on our balance sheet. We have no off-balance sheet financing arrangement with variable interest entities.  The following represent transactions, obligations or relationships that could be considered material off-balance sheet arrangements.

 

·

Letters of credit issued under our lines of credit. At September 30, 2016, we had letters of credit outstanding of $17.1 million, for international project engineering jobs in our Energy segment and for providing security to our insurance carriers.  These letters of credit are used by some of our vendors to ensure reimbursement for amounts that they are disbursing on our behalf, such as beneficiaries under our self-funded insurance program.  In addition, from time to time, certain customers require us to post a letter of credit to ensure payments to our subcontractors or guarantee performance under our contracts. Letters of credit reduce our borrowing availability under our Credit Agreement and Canadian Credit Facility.  If these letters of credit were drawn on by the beneficiary, we would be required to reimburse the issuer of the letter of credit, and we may be required to record a charge to earnings for the reimbursement. As of the date of this Third Quarter 2016 Report, we do not believe that it is likely that any material claims will be made under a letter of credit;

 

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·

We enter into non-cancellable operating leases for some of our facilities, equipment and vehicles, including leases with related parties. At September 30, 2016, equipment operating lease commitments were $33.1 million and facility rental commitments were $16.4 million;    

 

·

In the ordinary course of our business, we may be required by our customers to post surety bid or completion bonds in connection with services that we provide. At September 30, 2016, we had $1.54 billion in outstanding bonds.  As of the date of this Third Quarter 2016 Report, we do not anticipate that we would have to fund material claims under our surety arrangements;

 

·

Certain of our subsidiaries are parties to collective bargaining agreements with unions which may create future obligations not recorded on our balance sheet;

 

·

Other guarantees that we make from time to time, such as guaranteeing the obligations of our subsidiaries; and

 

·

Employment agreements with executive officers or with executives from acquired companies may create obligations.

 

Receivable Collection Actions

 

The Company has been engaged in dispute resolution to collect money it believes it is owed for two construction projects completed  in 2014.  Because of uncertainties associated with the projects, including uncertainty of the amounts that would be collected, for both projects, the Company used a zero profit margin approach to recording revenues during the construction period. 

 

For one project, a cost reimbursable contract, the Company has recorded a receivable of $32.9 million with a reserve of approximately $18.3 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 dispute resolution for the $32.9 million receivable initially required international arbitration; however, in the first half of 2016, the owner sought bankruptcy protection in U.S. bankruptcy court. The Company has initiated litigation against the sureties who have provided lien and stop payment release bonds for the total amount owed.

 

For the second project, the Company had recorded a receivable of $17.9 million. During the third quarter 2016, the Company settled the dispute with an exchange of general releases and receipt of $38 million in cash.  The Company has changed its zero estimate of profit and has accounted for the settlement as a change in accounting estimate which resulted in recognizing revenues of approximately $27.5 million and gross profit of approximately $26.7 million in the third quarter of 2016.

 

Effects of Inflation and Changing Prices

 

Our operations are affected by increases in prices, whether caused by inflation or other economic factors. We attempt to recover anticipated increases in the cost of labor, equipment, fuel and materials through price escalation provisions in certain major contracts or by considering the estimated effect of such increases when bidding or pricing new work or by entering into back-to-back contracts with suppliers and subcontractors.

 

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

 

In the ordinary course of business, we are exposed to risks related to market conditions. These risks primarily include fluctuations in foreign currency exchange rates, interest rates and commodity prices. We may seek to manage these risks through the use of financial derivative instruments. These instruments may include foreign currency exchange contracts and interest rate swaps.

 

We do not execute transactions or use financial derivative instruments for trading or speculative purposes. We enter into transactions with counter parties that are generally financial institutions in a matter to limit significant exposure with any one party.

 

At September 30, 2016, we had no derivative financial instruments.

 

The carrying amounts for cash and cash equivalents, accounts receivable, short-term debt, accounts payable and accrued liabilities shown in the consolidated balance sheets approximate fair value at September 30, 2016 and

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December 31, 2015, due to the generally short maturities of these items. At September 30, 2016, we held no short term investments. In the periods where we have, we generally invest in in U.S. Treasury bills with various financial institutions that are backed by the federal government. We expect to hold our investments to maturity.

 

At September 30, 2016, all of our long-term debt was subject to fixed interest rates.

 

Item 4.  Controls and Procedures

 

Disclosure Controls and Procedures

 

As of September 30, 2016, we carried out an evaluation, under the supervision and with the participation of our management, including our chief executive officer (“CEO”) and chief financial officer (“CFO”), of the effectiveness of the design and operation of our “disclosure controls and procedures”, as such term is defined under Exchange Act Rules 13a-15(e) and 15d-15(e).

 

Based on this evaluation, our CEO and CFO concluded that, at September 30, 2016, the disclosure controls and procedures were effective at the reasonable assurance level to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.

 

In designing and evaluating the disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In reaching a reasonable level of assurance, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.  The Company’s disclosure controls and procedures are designed to provide reasonable assurance of achieving their stated objectives. We anticipate continuing enhancement of our controls, especially as we complete the process of integrating our financial and operations information systems onto a common platform.

 

Changes in Internal Control Over Financial Reporting

 

During the quarter ended September 30, 2016, the Company successfully completed the implementation of an integrated financial system in the West segment, excluding the Q3C operations.  With the completion of the conversion from the previous system, virtually all of the Company’s operations use the same information platform allowing the Company to establish more consistent financial and operational controls.  The Company has started planning for the conversion of the legacy Q3C systems to the common platform, but at this time, no specific time frame for implementation has been established.

 

Other than the conversion of the financial system in the West segment, there were no changes to our internal control over financial reporting practices or processes that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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Part II. Other Information

 

Item 1.  Legal Proceedings

 

The Company has been engaged in dispute resolution to collect money it believes it is owed for two construction projects completed  in 2014.  Because of uncertainties associated with the projects, including uncertainty of the amounts that would be collected, for both projects, the Company used a zero profit margin approach to recording revenues during the construction period. 

 

For one project, a cost reimbursable contract, the Company has recorded a receivable of $32.9 million with a reserve of approximately $18.3 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 dispute resolution for the $32.9 million receivable initially required international arbitration; however, in the first half of 2016, the owner sought bankruptcy protection in U.S. bankruptcy court. The Company has initiated litigation against the sureties who have provided lien and stop payment release bonds for the total amount owed.

 

For the second project, the Company had recorded a receivable of $17.9 million. During the third quarter 2016, the Company settled the dispute with an exchange of general releases and receipt of $38 million in cash.  The Company has changed its zero estimate of profit and has accounted for the settlement as a change in accounting estimate which resulted in recognizing revenues of approximately $27.5 million and gross profit of approximately $26.7 million in the third quarter of 2016.

 

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.

 

SEC Inquiry – Beginning in October 2014, we have been cooperating with an inquiry by the staff of the Securities and Exchange Commission which appears to be focused on certain percentage-of-completion contract revenue recognition practices of the Company during the time period 2013 and 2014.  We are continuing to respond to the staff’s inquiries in connection with this matter.  At this stage, we are unable to predict when the staff’s inquiry will conclude or the outcome.

 

 

Item 1A.  Risk Factors.

 

In addition to the information set forth in this Report, you should carefully consider the factors discussed in the section entitled “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2015, which to our knowledge have not materially changed. Those risks, which could materially affect our business, financial condition or future results, are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

 

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds.

 

None

 

Item 3.  Defaults Upon Senior Securities.

 

None.

 

Item 4.  (Removed and Reserved).

 

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Item 5.  Other Information.

 

None.

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Item 6.  Exhibits.

 

The following exhibits are filed as part of this Quarterly Report on Form 10-Q.

 

Exhibit
Number

    

Description

31.1

 

Rule 13a-14(a)/15d-14(a) Certification by the Registrant’s Chief Executive Officer (*)

31.2

 

Rule 13a-14(a)/15d-14(a) Certification by the Registrant’s Chief Financial Officer (*)

32.1

 

Section 1350 Certification by the Registrant’s Chief Executive Officer (*)

32.2

 

Section 1350 Certification by the Registrant’s Chief Financial Officer (*)

101 INS

 

XBRL Instance Document (*)

101 SCH

 

XBRL Taxonomy Extension Schema Document (*)

101 CAL

 

XBRL Taxonomy Extension Calculation Linkbase Document (*)

101 LAB

 

XBRL Taxonomy Extension Label Linkbase Document (*)

101 PRE

 

XBRL Taxonomy Extension Presentation Linkbase Document (*)

101 DEF

 

XBRL Taxonomy Extension Definition Linkbase Document (*)


(*)Filed herewith

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

PRIMORIS SERVICES CORPORATION

 

 

Date:  November 8, 2016

/s/ PETER J. MOERBEEK

 

Peter J. Moerbeek

 

Executive Vice President, Chief Financial Officer (Principal Financial and Accounting Officer)

 

 

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EXHIBITS ATTACHED TO THIS QUARTERLY REPORT ON FORM 10-Q

 

Exhibit
Number

    

Description

31.1

 

Rule 13a-14(a)/15d-14(a) Certification by the Registrant’s Chief Executive Officer (*)

31.2

 

Rule 13a-14(a)/15d-14(a) Certification by the Registrant’s Chief Financial Officer (*)

32.1

 

Section 1350 Certification by the Registrant’s Chief Executive Officer (*)

32.2

 

Section 1350 Certification by the Registrant’s Chief Financial Officer (*)

101 INS

 

XBRL Instance Document (*)

101 SCH

 

XBRL Taxonomy Extension Schema Document (*)

101 CAL

 

XBRL Taxonomy Extension Calculation Linkbase Document (*)

101 LAB

 

XBRL Taxonomy Extension Label Linkbase Document (*)

101 PRE

 

XBRL Taxonomy Extension Presentation Linkbase Document (*)

101 DEF

 

XBRL Taxonomy Extension Definition Linkbase Document (*)


(*)Filed herewith

 

47